Are Condotels a Good Investment? What Investors Should Know

A condotel represents a unique real estate investment, blending the individual ownership of a condominium with the operational structure of a hotel unit. These properties are typically sold to individual investors, yet they function as part of a larger hotel operation, allowing owners to potentially generate rental income.

Understanding Condotels

A condotel, also known as a condo hotel, is a condominium unit situated within a hotel property. Owners hold a deed to their specific unit, much like a traditional condominium. These units are operated as part of the hotel’s overall business. However, the units are typically furnished and decorated to meet the established standards of the hotel brand.

This hybrid model combines personal real estate ownership with commercial hotel operations, allowing for potential personal use by the owner and the opportunity for the unit to be rented out to guests. Condotels are frequently found in popular tourist destinations, major urban centers, or resort areas, often offering extensive shared amenities such as pools, spas, fitness centers, and concierge services.

Operational Framework

Owners of condotel units typically enter into a mandatory rental management agreement with the hotel operator. This agreement outlines how the unit is rented, maintained, and how revenue is shared between the owner and the management company. This arrangement ensures professional management, unlike traditional rental properties.

Many condotels operate through a rental pool program, where income and expenses are shared among participating owners. In this system, units are often rotated for rental to ensure a fair distribution of bookings. Some properties may also allow for individual rental arrangements outside the main program, though this often forfeits the benefits of hotel marketing and centralized management.

Owner usage of their condotel unit is typically subject to specific limitations outlined in the management agreement. These restrictions often include blackout dates or a cap on the number of days an owner can personally use the unit each year, commonly ranging from 30 to 90 days. These limitations maximize the unit’s availability for rental and optimize income generation. The hotel management team is generally responsible for all maintenance, housekeeping, and repairs within the unit and common areas. Costs for these services are typically passed on to the owner or covered through the rental pool system.

Financial Landscape

The financial appeal of condotel ownership primarily stems from potential rental revenue generated through the hotel’s operations. Income is influenced by factors such as occupancy rates and the Average Daily Rate (ADR) achieved by the hotel. Revenue-sharing models vary, but owners commonly receive a percentage of the gross rental income, often ranging from 40% to 60%. Some agreements may offer different splits, such as 92% to the unit owner and 8% to the operator, or conversely, 30% to the owner and 70% to the operator.

Condotel ownership involves several significant expenses. Homeowners Association (HOA) fees are typically higher than those for traditional condominiums, reflecting the extensive hotel amenities and services provided. Management fees charged by the hotel operator can range from 25% to 50% of the rental income, depending on the services included. Owners are also responsible for standard property taxes applicable to their unit.

While the hotel manages upkeep, unit owners often bear the cost of unit-specific repairs and contribute to furniture replacement reserves, which may be 2% to 4% of revenues. Utilities may be included in HOA fees or billed separately. Additionally, marketing and booking fees are typically deducted from rental income to cover the hotel’s efforts in securing guests.

Obtaining traditional mortgages for condotels can be challenging due to their classification as commercial properties, which are often considered non-warrantable by conventional lenders like Fannie Mae or Freddie Mac. This often necessitates specialized lenders offering Non-Qualified Mortgage (Non-QM) loans, which may have higher interest rates and require a larger down payment, typically ranging from 25% to 40% of the purchase price. Lenders may also assess a borrower’s income without factoring in potential rental income for qualification purposes.

Key Due Diligence for Investors

Before investing in a condotel, potential buyers should review the rental management agreement. This document outlines critical terms, including revenue splits, management fees, owner usage policies, and termination clauses. These terms directly impact potential returns and personal use.

Analyze the property’s historical financial statements, seeking information on past rental income, occupancy rates, and operating expenses, focusing on net income from similar units. Also, review the Homeowners Association’s (HOA) financial health, examining reserves, budgets, and any history of special assessments.

Research the hotel brand and management company’s reputation, experience, and track record. An efficient management company influences profitability and operational quality. Conduct market research on the local tourism industry, including seasonality, competitive landscape, and future development plans, for insights into the unit’s income potential. Consult an attorney experienced in real estate and hospitality law to review contracts and ensure regulatory compliance.