Over the course of the past two decades, a growing portion of Americans has begun exploring the benefits that come with owning a rental property. By investing in a rental property, you can potentially generate supplementary income and move closer to achieving your long-term financial goals.
There are many different ways to become a rental property investor. One of the most popular, especially recently, has been becoming the owner of a so-called “condotel.” As the name might suggest, a condotel is essentially a hybrid of a condo and a hotel, offering the general benefits of both to those that stay there and those who rent them.
Of course, becoming a rental property owner is a major investment. Naturally, you’ll want to do quite a bit of research before making any sort of serious commitment. In this guide, we will discuss some important things you need to know about becoming the owner of a condotel, including the pros and cons of owning a condotel, how to finance a condotel, and more.
What Defines a Condotel?
Condotels are sometimes referred to as a “condo-hotel unit.” As you might guess, they are somewhat of a hybrid between a condo (a property with multiple units that are each owned by an individual) and a hotel (a property with multiple units that typically focuses on short-term renting).
A condotel offers many of the common benefits associated with condo ownership, such as shared amenities and access to basic services. But it also differs from a condo in the sense that the units are usually rented on a short-term basis. This means that most of the people who are staying at a condotel will likely be occupying their unit for one month or less.
Most people who own a condotel will use it as a source of generating a secondary income. When compared to a traditional condo, it is typically easier to rent the condotel out on a short-term basis, but there will also be a limited amount of flexibility when it comes to things such as changing the interior or making it truly a place of your own.
If you are currently considering investing in a condotel, there are a lot of different factors that you’ll want to consider. First, you’ll want to make sure you want to fully commit to condotel ownership—this means you’ll probably want to choose a property that you will visit a few times per year but will generally rent out for the remainder of the year. You’ll also want to consider other factors, such as the terms and conditions offered by the condotel, your ability to secure financing, the location of the condotel (which will directly affect your ability to rent it), and more.
Examples of a Condotel
Investing in a condotel can generate a significant level of income, especially if the condotel is in a very desirable location. Let’s take a closer look at how a condotel actually works.
Most condotels—which are especially common in warmer states like California, Texas, and Florida—will typically have the “look and feel” of a hotel to anyone who just walked in. In fact, many people who are staying at a condotel might not even realize that the unit they are living in is owned by an individual, rather than any sort of hotel organization.
When you first enter a condotel, you will likely discover a basic concierge service, someone working at the front desk, and other amenities that can be accessed by anyone who is staying there (pool, gym, tennis court, conference area, etc.).
People who are staying at a condotel will be given a room key, will have access to regular housekeeping services, and will be able to access other resources throughout their stay. Again, this entire experience is likely to be very similar to an experience you’d have at a traditional hotel, but each unit will be owned independently. The financing of the basic services offered by the condotel will come from the owners of each unit.
Pros and Cons of a Condotel
As you will find with owning any sort of rental property—or making any sort of major investment, for that matter—owning a condotel will present a variety of pros and cons. As suggested, condotel ownership can be very beneficial.
The most obvious reason people choose to invest in a condotel is that it can create a potential source of additional (or even primary) income.
Additionally, owning a condotel will give you a place that you can stay throughout the year. Even if you choose to stay at the condotel for a full two months each year, you can still potentially manage to find a condotel that has cash flows when rented out for the rest of the year. Many condotel owners consider their unit to be their vacation home, which is certainly a great thing to have access to.
On the other hand, there are still a few potential drawbacks that you want to keep in mind. You’ll need to be paying a fixed rate every month in order to own the condotel; if you are unable to rent the property out for some reason, that means you’ll likely end up paying steep monthly fees for an investment that isn’t generating any money. Considering the location of the unit and looking at rental rates of other property owners, for example, can help you find a more desirable property.
Additionally, the condotel ownership process can sometimes be rather complex. Lenders will usually require quite a bit of documentation (tax returns, bank statements, proof of income, etc.) before they will give out the capital that you need. You might also need to apply for ownership to the condo board itself. But if you can navigate these details, owning a condotel can potentially be very profitable.
Can I Live in a Condotel?
If you are the owner of a condotel unit, there is nothing stopping you from living in the unit full-time. However, if you are looking for a primary source of residence, buying a traditional condo or renting an apartment might likely be a more practical option.
When comparing different condotels, you should seriously consider how much time you plan to spend staying there each year. While some people will live in their condotel full-time, some people will never actually visit their unit. Most owners stay at their condotel for a few weeks per year and will rent it out at all other times.
Are Condotels Good Investments?
A condotel can be a good investment. As indicated, a condotel that is in a desirable location can generate a monthly income that is a good fit for your financial goals. Keeping scalability in mind, the more condotel units that you own in a given location or area, the more money you can potentially make.
However, it is important to keep in mind that your monthly income will never be guaranteed. If you are unable to find renters—a common occurence—you could end up losing money. Choosing the right location, developing realistic expectations, and creating a solid marketing strategy will all benefit you.
Can You Finance a Condotel Unit?
Depending on the type of financing you need, lenders may need to pre-approve the project or building in order to allow certain terms on the loan. Condo hotels are particularly common to urban, popular tourist destinations, so buying a unit in those kinds of locations is typically more common.
Condotel buyers are typically required to put a minimum of 20% down payment although a higher down payment could be required on a larger purchase price. For example, a lender would offer 80% LTV (loan to value) up to a $350,000 loan amount and $437,5000 maximum purchase price; and a 75% LTV up to a $650,000 loan amount and $867,000 maximum purchase price. These numbers are illustrative as each lender's requirements vary.
Conclusion
There are quite a few reasons why the existence of the “condotel” has significantly expanded over the past few years. When managed correctly, these properties can offer a great experience for short-term guests, along with potential profitability for owners. If you are considering becoming a condotel investor, just be sure to do your due diligence to make sure that it's a good fit for your needs and circumstances.
