Are Condo Hotels a Good Financial Investment?

Condo hotels offer a unique real estate investment opportunity, merging residential ownership with a hotel’s operational model. Individuals own a unit within a hotel complex, managed by a professional operator, providing both personal use and potential income. This article explores condo hotel ownership for potential investors.

Understanding Condo Hotels

A condo hotel, often called a “condotel,” combines elements of a traditional condominium with a hotel. Owners acquire individual, fully furnished units within a hotel building, integrated into its operational system. Unlike traditional condominiums, these units are individually deeded real estate, not typically for long-term residency.

Owners possess their unit’s interior and share ownership of common areas and amenities with other unit owners. These properties offer full-service hotel amenities like a front desk, concierge, housekeeping, and spas, providing hotel-style convenience and maintenance.

Financial Structure and Returns

Investing in a condo hotel involves understanding several financial components, including potential income streams, recurring expenses, financing considerations, and tax implications. Unit owners primarily earn income from rental revenue when their unit is occupied by hotel guests. A rental program, managed by the hotel operator, handles marketing, bookings, and guest services. Owners receive a portion of this rental income, with the remainder going to the management company.

The revenue-sharing model between the unit owner and the hotel management company can vary, often ranging from 40% to 75% for the owner, with common splits around 50%-50% or 60%-40% in favor of the owner. Beyond rental income, owners may also see potential capital appreciation, though this is not guaranteed and can be influenced by market trends.

Owners incur several expenses, including property taxes. Homeowner association (HOA) fees are generally higher than for traditional condominiums due to extensive amenities, typically ranging from $0.50 to $2.00 per square foot. These fees cover common area maintenance, shared utilities, building insurance, and reserve funds. Other significant expenses include management fees (a percentage of rental income), maintenance, repairs, and individual unit utilities.

Obtaining financing for a condo hotel unit can be more challenging than for a traditional residential property. Lenders often classify condo hotel units as commercial properties rather than residential, which can lead to stricter eligibility criteria, higher down payment requirements, and potentially higher interest rates. Some lenders consider condotel units “non-warrantable,” meaning they do not meet standard conventional mortgage underwriting criteria, often requiring alternative lending solutions such as non-qualified mortgage (Non-QM) loans. Lenders may also impose restrictions if a high percentage of units are investor-owned or if the property includes significant commercial space.

From a tax perspective, condo hotel ownership comes with specific considerations. Rental income and expenses are generally reported on IRS Schedule E. Owners can typically deduct ordinary and necessary expenses related to the rental activity, including HOA fees, property taxes, management fees, maintenance costs, and utilities. Depreciation is a substantial tax benefit, allowing owners to deduct a portion of the building’s value (excluding land) over its useful life, which for residential rental property is generally 27.5 years using the Modified Accelerated Cost Recovery System (MACRS).

The Internal Revenue Service (IRS) generally classifies rental activities, including condo hotel rentals, as passive activities. This means that losses from these activities can typically only be used to offset income from other passive activities. However, individuals who “actively participate” in their rental real estate activities may deduct up to $25,000 of passive losses against non-passive income, subject to Modified Adjusted Gross Income (MAGI) phase-out rules. If personal use of the unit exceeds certain thresholds, the property may be subject to “vacation home rules,” which can limit deductible expenses.

Operational and Usage Considerations

The hotel management company primarily oversees daily operations, distinguishing this investment from traditional rental properties. The management model dictates how units are rented and revenue distributed. Common approaches include a mandatory rental pool, where income is shared equitably based on unit factors, or individual unit management by the hotel operator, sometimes allowing independent rental agencies if aligned with property covenants.

Owner usage is subject to restrictions in the rental management agreement, often limiting personal use to 30-60 days annually. Blackout periods during peak seasons may restrict owner occupancy to maximize rental income. Owners typically follow specific booking procedures through the hotel’s reservation system for personal stays.

The hotel management company handles maintenance, repairs, and refurbishment cycles. Owners contribute to a furniture, fixtures, and equipment (FF&E) reserve fund, often a percentage of rental revenue, for periodic renovations and replacements. This ensures units meet hotel standards and maintain value. The management company decides the timing and scope of refurbishments to align with the hotel brand.

The hotel management company comprehensively operates the condo hotel. Responsibilities include marketing, reservations, front desk services, guest interactions, housekeeping, laundry, and property upkeep for units in the rental program and common areas. This professional management provides a hands-off ownership experience, ensuring hotel-quality standards.

Evaluating a Condo Hotel Opportunity

Assessing a condo hotel investment requires examining several factors. Location is a primary determinant of income potential and appreciation. Desirable locations include established tourist destinations, urban centers, or areas near attractions, which have consistent demand. Analyzing historical occupancy rates, average daily rates (ADR), and revenue per available room (RevPAR) is crucial for understanding earning capacity.

Reviewing the hotel brand and management company is essential. Investors should research the reputation, experience, and track record of the management entity. A strong brand attracts guests and commands higher rates, while an experienced team optimizes efficiency and guest satisfaction. Understanding their performance in similar properties provides insight into potential returns.

Thorough legal and contractual review is paramount. This includes scrutinizing the condominium declaration, HOA bylaws, and the rental management agreement. The rental management agreement details terms like revenue-sharing, management fees, owner usage restrictions, and expense allocation. Understanding these documents clarifies owner rights, responsibilities, and financial obligations.

Prospective buyers should analyze detailed financial projections and historical performance data for the property. Projections should be realistic and supported by market data. Understanding ongoing and planned capital expenditures is important, as these can impact future assessments or reserve contributions.

A comprehensive due diligence checklist includes obtaining a property condition report. Reviewing insurance coverage for common areas and individual units is also necessary. Investors should investigate any existing or pending litigation involving the HOA or developer, as this could signal underlying issues or financial liabilities.