Condo Hotels: Should You Own a Hotel Room?

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. October 14, 2008

DECEMBER 12, 2005. Condo-hotel units offer convenience, luxurious amenities, and tax breaks. But whether they're solid investments is still an uncertainty.

Every summer, Joseph Lepani drives with his wife and young daughter from his home in Brooklyn, N.Y., to the Jersey Shore for a week-long vacation. He knows he can rent a modest hotel room for $150 a night during peak season, but the idea of owning a vacation property by the sea grew on him. Alas, the time, effort, and cost of upkeep of such a home did not.

So, Lepani has started looking at condo hotels in the area. He hasn't found one yet. Still, having a maintenance-free place that's his for vacationing whenever he wants and that he can rent out is appealing to him. His wife still worries about the cost, but for now, Lepani is sold on a condo hotel as a wise investment. "I wouldn't have to pay a nightly fee to visit, and I could even make money by renting the room out to others when I'm not using it," he says.

NO PREDICTIONS. Vacationers shouldn't take the purchase of a condo hotel unit lightly. It's a major investment with an unproven track record. But for Lepani and others, it's become a popular option and worth a hard look.

The advantages? The hotel maintains the room for you. You get access to fabulous amenities. And you reap investing tax breaks. Of course, there's also the allure of owning a piece of a world-famous property, such as the Plaza Hotel in New York or the Fountainbleau in Miami Beach.

The U.S. Securities & Exchange Commission prohibits hotels and real estate firms from making predictions about returns, so it's important to know what types of properties have the greatest chances of appreciating.

CHOOSE WISELY. According to financial planner Alan Locke of Locke Financial Services in Palatine, Ill., the hotel's amenities could be a good barometer for appreciation. "It's better to invest in a hotel that offers something valuable and long-lasting, like a great ocean view or a PGA championship golf course," says Locke. "For the same reason, getting a place right on the Las Vegas strip is a good idea because that strip is always going to have the best casinos."

Choosing a premium property managed by a recognizable brand can also improve a unit's chances of increasing in value. Hotel chains such as W, Trump, and Ritz-Carlton are all getting into the condo-hotel business.

Since many condo hotels are managed by these luxury brands, they offer top-notch amenities, including spas, fitness centers, pools, restaurants, and bars. These are, of course, a benefit for unit owners, but having such amenities also keeps room rents high.

"HASSLE-FREE." Even though some hotels charge a monthly maintenance fee or take a portion of the rent garnered, all owners earn a percentage, if not all, of the rent acquired from guests using the room when the owner isn't. The rent collected may even cover the cost of maintenance fees, but to ensure they won't have to pay out of pocket, potential buyers should strongly consider units in desirable vacation spots like Florida, Las Vegas, Chicago, and ski towns.

Even compared to those owning second homes in desirable vacation spots, condo-hotel unit owners have it easy. "Hotels are skilled in marketing," says Joel Greene, president of the Condo Hotel Center, a real estate firm based in North Miami, Fla. "Unit owners never have to worry about getting people to rent their rooms because the hotel takes care of that."

Greene points out that hotels are also responsible for maintaining the rooms and collecting the rents. "It's completely hassle-free for owners," he adds.

SEASONAL STAYS. Just as with most real estate, condo-hotel unit owners enjoy tax benefits. You're able to write off the mortgage interest and the monthly maintenance fee. Locke says you may also take one or two inspection trips each year to check on your property, and you may write off the expenses for that trip.

There are pitfalls, however. Some hotels don't allow you to use your room whenever you want, as Lepani learned about one Jersey Shore property. Since it operates only from April to October each year, as is fairly common with Northeast beachfront properties, owners can visit it -- and earn rental revenue -- only during those months.

Other drawbacks include having to pay to replace items in the room, such as a chair or a TV set, that get damaged. Some hotels even require unit owners to pay to replace the furniture every few years, a cost that a seller might not mention. And if you use your room for more than two weeks a year, you're not entitled to the full tax benefits.

NOT ENOUGH HISTORY. For these reasons, it's crucial to examine all the different types of arrangements and know what you're getting before you sign. "The real devil is the details," says Jim Butler, a real estate attorney in Los Angeles. Since disagreements can arise about everything from the payout the hotel gives you for renting the room to when you need to pay to replace hotel furniture, it's essential to be sure the deal works for you.

Short-term investors should be especially wary. With condo and co-op sales dropping off in the last few months, unit owners may see a quick bump up in value only if the property gets especially hot. Real estate skeptics aren't sure that a second generation of hotel-condo unit buyers will even exist.

As Peter Keim of PKF Consulting, a firm that specializes in researching hotel trends, notes: "There really hasn't been enough history to demonstrate there's an active secondary market." So if you're only interested in making money from selling your unit, it may not work out as you hope.

DAUGHTER'S ROOM. In fact, Locke advises people who are solely concerned with returns against buying a condo-hotel unit. When the tourism industry slacks off, he says, rental revenue can decrease. As he learned first-hand from owning a condo-hotel unit, it can take many years before you see any returns.

"Focus on the location and amenities rather than the revenue stream," suggests Locke. "Having a condo-hotel unit in a vacation destination will encourage you to take more trips there. It's the value of those vacations that will be a significant part of your return."

If you'll enjoy visiting your condo-hotel unit and you can afford a second mortgage, then it might be a good purchase. Although Lepani didn't buy last summer, he's going to see what's available this coming year when he takes his annual trip to the shore. Even if he doesn't make a significant profit, he thinks it could be a great gift for his daughter. "She'll appreciate having a room waiting for her whenever she wants it," he says. Now, if only he could convince his wife.

Source: BusinessWeek Online