Can You Own a Hotel Room?

Many individuals consider owning a hotel room, often envisioning a vacation property that also generates income. While acquiring a financial interest in a hotel unit is possible, it differs significantly from traditional homeownership. Instead of a standalone residence, it typically involves a unit within a larger hotel operation, subject to specific agreements and management structures. This ownership combines real estate investment with the hospitality industry. Various models for hotel room ownership come with distinct legal frameworks, operational requirements, and financial implications. This article clarifies the structures for hotel room ownership, outlining associated rights, responsibilities, and financial considerations. Understanding these nuances is important for anyone exploring this unique investment.

Understanding Hotel Room Ownership Structures

Owning a hotel room typically involves specific structures differing from traditional real estate. These arrangements grant various levels of property interest and usage rights.

Condo-hotels

Condo-hotels, also known as condotels, represent a common form of hotel room ownership. In this structure, individual units within a hotel property are sold to separate owners, each holding a deed for their specific unit, similar to a condominium. These units often operate as part of a hotel’s rental program, managed by the hotel brand. Owners can use their unit for a limited period, and when not in use, it is placed into a rental pool to generate income.

Fractional Ownership

Fractional ownership provides a deeded share of a property, granting usage rights for a specific period each year. This model is often found in luxury resorts, where multiple individuals co-own a single hotel room or suite. Owners share the costs and potential profits, and professional management typically handles the property’s operations. This arrangement allows access to high-value assets with a lower individual investment barrier.

Timeshares

Timeshares offer the right to use a property for a specified period annually, but the nature of ownership varies. A deeded timeshare grants an actual, recorded property interest, allowing the owner to sell, rent, or transfer their specific interval. Conversely, a right-to-use timeshare involves purchasing usage rights for a set number of years, typically 10 to 99, without acquiring real estate ownership. While timeshares provide vacation usage, they are generally not considered an investment in the same sense as condo-hotels or fractional ownership, as they often lack significant resale value.

Rights and Responsibilities of Ownership

Ownership of a hotel room, especially in a condo-hotel or fractional model, comes with specific usage rights and responsibilities for property management and fees. These are often governed by detailed agreements and association rules.

Usage Rights

Owners typically have the right to use their unit for personal enjoyment, though often with restrictions. Many condo-hotel agreements limit annual owner occupancy, sometimes with blackout dates during peak seasons. These limitations ensure the unit remains available for the hotel’s rental program, maximizing income for all participants.

Rental Programs

Income generation often involves participation in a rental pool, where units are collectively managed by the hotel operator. Rental income from pooled properties is distributed among owners based on a predetermined formula, often factoring unit type or size, after deducting management fees and other expenses. While often optional, some agreements may require or incentivize participation, with the hotel managing bookings, collections, and cleaning.

Maintenance and Upkeep

Unit maintenance and upkeep are primarily handled by hotel management or a designated management company. Owners contribute through regular fees covering general building maintenance, utilities, and common area insurance. These fees also fund building reserves for major renovations and unforeseen expenses. Special assessments may be levied if reserves are insufficient to cover unexpected costs or shortfalls.

Fees and Regulations

Owners are responsible for homeowners association (HOA) or management fees. These monthly charges, typically $0.50 to $2.00 per square foot or $200 to over $1,000 monthly for luxury properties, cover services like electricity, water, gas, and air conditioning for units and common areas. These fees also contribute to landscaping, security, and administrative services. Owners must adhere to covenants, conditions, and restrictions (CC&Rs) or bylaws governing the property, which can include limitations on unit modifications, decor, or external rental arrangements.

Financial Aspects of Owning a Hotel Room

Acquiring a hotel room involves an initial purchase price varying significantly by location, brand, and ownership structure. Units typically range from $300,000 to over $1,500,000. For properties sold in pre-construction phases, developers may require substantial deposits, sometimes up to 50% of the purchase price, paid in installments during construction.

Rental Income

Potential rental income, generated when the unit is placed into a hotel’s rental program, is a primary financial consideration. Income is not guaranteed and fluctuates with occupancy rates, seasonal demand, and management agreement terms. The hotel operator typically takes 30% to 60% of gross rental revenue to cover services like marketing and reservations. Owners generally receive a share of profits based on the rental pool’s overall performance, not solely on their unit’s individual occupancy.

Operating Expenses

Operating expenses are ongoing costs beyond the acquisition price. These include property taxes, insurance premiums, and HOA or management fees. Monthly maintenance fees, ranging from $1.00 to $1.50 per square foot or $200 to $1,000 monthly depending on amenities, cover utilities, common area maintenance, and building reserves. Owners may also be responsible for costs associated with furniture, fixtures, and equipment within their unit.

Financing

Financing options for condo-hotel units differ from traditional residential mortgages. These loans are often considered “non-warrantable” by conventional lenders like Fannie Mae or Freddie Mac due to their hotel operational aspect. As a result, financing may require larger down payments, typically 20% or more, and might come from specialty lenders at slightly higher interest rates. Lenders often evaluate these as investment properties and may not count potential rental income for qualifying purposes.

Tax Implications

Tax implications are important for owners generating rental income. The Internal Revenue Service (IRS) considers rental income taxable, allowing deductions for ordinary and necessary operating expenses like mortgage interest, property taxes, insurance, and maintenance. Owners can also depreciate the building portion of the property, typically over 27.5 years for residential rental properties, reducing taxable income. This depreciation must be reported on Schedule E of the tax return. Rental activities are generally subject to passive activity rules, which can limit loss deductibility against other income types.

Resale Value and Liquidity

Resale value and liquidity for hotel room units can be less predictable than traditional residential real estate. The market for these specialized properties depends on factors like the hotel’s reputation, occupancy rates, and overall tourism trends. While some units may appreciate, their unique nature can make them less liquid, potentially requiring a longer time to sell compared to conventional homes.