A number of hotels located in premium resort locations are making their guests a unique proposition these days: You can buy this room as a condo unit and we’ll rent it out while you’re gone. The idea is that you can stay in the condo anytime you want, build equity over time, and receive rental income while you are gone. In fact, some hotels even suggest that your rental income will be more than enough to cover the mortgage payment!
This proposal may sound like a pretty sweet deal for you, but the facts show that it’s even sweeter for real estate developers. These hotels embark on these projects because they can cash in on the immediate proceeds from the sale of condo units, shift all the risk to consumers, and still receive 40-60 percent of the rental income in the future. The deal is so sweet to these developers that they often massage the numbers to make them seem better to you.
The Promises and The Facts
“Rentals cover most of your mortgage!”
Rental rates and occupancy rates are often overstated in order to make the sales pitch much easier- after all, who could refuse to buy something that is essentially free? In reality, rental income slips from time to time and mortgage payments can increase month to month. It is important to look at the facts behind the data to see if the numbers in the sales literature match with reality.
“You can vacation as long as you want!”
Buyers are allowed to stay in their condo as long as they want and aren’t even required to rent it out at all. However, condo management fees still apply and without rental income you’ll be responsible for the entire mortgage payment. It is important to look at other potential options for vacation rentals to see if the added costs of condo-hotels can be justified.
The Bottom Line
The bottom line is that buyers need to do some homework before they take the plunge into the hospitality business. Take a close look at rental rates and occupancy rates to determine if renting covers all costs, because that is rarely (if ever) the case. Rental income can also fluctuate greatly with the economy in general, so buyers should never count on that income to subsidize the majority of the condo’s costs. Finally, condo-hotels can often be one of the best second-home purchases available thanks to their unique nature, but be a cautious buyer.