I started my real estate investment career in rental pooled condos, buying four; two of which I still own to this day.
Around the same time in the mid- to late 90’s I also started looking into hotel condo projects, which on paper can offer higher cash-flow.
I stayed at the 1 King West hotel on (guess what) 1 King West @ Younge in Toronto recently, reminding me of this hotel condo investment heavily advertised about 10 or so years ago.
I decided to not buy any hotel condo, not 1 King West, nor any of the many Trump hotel projects, nor in Canmore where our company is headquartered, nor in Whistler where they were marketed heavily in the 2004-2007 real estate boom.
Why ?
Compared to rental pooled condos, most condo hotel projects are a risky investment as occupancy levels, room rates, vacancies and especially expenses are very hard to predict. They allow the individual investor almost no control over these 4 important variables. At least in a normal rental pooled condo project you can force the board out and turn around an asset with new management, if needed. This is usually impossible in a hotel investment project, as the hotel management can decide in their sole discretion to increase salaries, alter management fees or renovate the lobby, the pool or the elevators at any time and levy a portion to the condo owners. In fact the main reason for selling time-share or hotel condos in the first place is the right to defray operating costs to other owners while keeping the lucrative low risk high monthly management fee, be it Hilton or Trump or Sheraton or any 3rd party.
In addition to unpredictable and fluctuating revenue, the following expenses are far higher than other real estate investment projects:
a) Property taxes are usually far higher, up to four-fold as hotel condos are classified as commercial as opposed to residential in most cities
b) Financing is also far tougher, and far more expensive, to get on these condos, often double a residential rate dipping deeply into your cash-flow
c) Management fees can be as high as 30-55% of collected revenue, whereas in an apartment building it is 4-6% or in a single townhouse or house 10-12% only
d) Vacancies are usually far higher – as a 15-20% vacant hotel is considered well run, and even 35% to 40% is not unheard of – rather rare for apartment buildings or single houses
This lawsuit against Trump tower in Toronto linked here is ludicrous in my opinion as the financial disclosure documents probably indicated that nothing is guaranteed, neither rent nor vacancies nor expenses, and people now want out as condo prices in Toronto, specifically in this project, have dropped compared to their purchase price.
Better investments exist, with lower expenses, taxes and mortgage rates, with more consistent income and equity upside, namely whole hotels, REITs, apartment buildings, rental pooled condos, townhouses or small single family houses – especially in growth markets with diversified economic activities and strong in-migration & low taxes.
In my opinion: stay away from any hotel condo project – unless you can buy the whole hotel, or if you can buy all cash with no mortgage and have reasons to use the condo hotel room yourself frequently on business (say 100+ days a year)
Thomas