Condotel: Understanding the Basics

Condotels are all the rage these days. But what are they and are they actually a good investment? Here’s everything you need to know about investing in condotels:

What Is a Condotel?

A condotel is a condo unit that is operated as a hotel. These units are designed for short-term rentals and offer amenities that rival those offered by five-star hotels. All of these amenities are managed and operated directly by the complex — usually a reputable hotel chain. Condotels make great investments in touristy areas where they can be used as vacation rentals that feel like individual apartments but with all the perks of a hotel.

Potential Advantages and Disadvantages of Investing in a Condotel

There are advantages and disadvantages to every investment opportunity which is why it’s important to weigh all factors — good and bad — to make a smart financial decision. Here’s what you need to know about the pros and cons of investing in a condotel:

Advantages

Hassle-free investing. If you’re looking to take a hands-off approach to investing, then condotels could be the perfect fit. Condotels can be completely managed by management companies that handle everything from maintenance, upkeep, bookings, and operation.
High-quality properties. Condotels are designed to be high-end with countless amenities. Not only does this attract potential renters, but it can also help cut down on maintenance and upkeep costs since most of these buildings are brand new.
Great locations. Condotels are often built in prime locations that are tourism hubs. As a result, you can generally expect a steady stream of booking from tourists in the area. Furthermore, you can charge premium rates for not only the amenities — but also the location of the property.
Ownership. Finally, condotels offer a unique opportunity to actually own a property with all the amenities of timeshares but more freedom to do with the property as you wish since you’re the full owner. For instance, you can choose when you want to occupy the property and when you want to rent it out. You can also usually choose your management company or choose to self-manage if you want to take a more hands-on approach.

Disadvantages

Timeframes. The timeframe of purchasing a condotel unit could put you at a disadvantage. This is because most condotel units are put up for sale during the pre-construction process. In the event that construction doesn’t go forward as planned or there are substantial delays, your investment could be impacted. Furthermore, this extended timeframe leaves room for market changes that could also negatively impact your investment if the market takes an unexpected dip.
Fees cut into profits. While condotels can generate substantial profits, there are also a lot of fees involved that can quickly cut into these profits. For instance, you may be required to pay maintenance fees to the building. In addition, you may choose to hire a management company to handle bookings, cleaning, issues, etc. Not only do these companies charge fees, but they will also split booking revenue with you as well.
No guarantee. While investments are never guaranteed, condotels can be affected by changes in the tourism industry and the real estate industry. Tourism could unexpectedly decrease in the area and affect profitability. On the other hand, the market could become too saturated with similar units that can affect booking rates and revenue. These are things to think about before investing in a condotel.

Tips for Investing in Condotels

While there are certainly risks to investing in condotels, you can help mitigate some of these risks with the right strategic approach. Here are some tips that you can follow to make a profitable investment in condotels:

Choose your location carefully. Location is everything when it comes to condotels. The right location could ensure a successful investment while the wrong location could lead to a failed investment. Make sure to carefully research both the tourism and real estate industries for any potential investment properties.

Consider any and all fees. To ensure that your potential investment will actually be profitable, you need to consider any and all fees required for the condotel unit. For instance, you may be required to pay HOA fees and follow restrictions that could cut into your profits. Additionally, you will likely have to use a property management company that can charge up to 50% of your booking revenue in fees for their services. At the end of the day, make sure to run your numbers to ensure that it’s actually a good investment opportunity.
Consider taxes. You also need to consider taxes to make sure that investing in a condotel makes financial sense. Oftentimes, income from condotels is assessed at commercial rates. Some localities may also require additional taxes to be paid both on a nightly basis from your bookings and on an annual basis from your revenue. These are all things that you need to look into and consider before moving forward with a specific property.

How to Finance a Condotel Purchase?

Once you have found the perfect condotel unit to invest in, you need to figure out how to actually finance this investment. Unfortunately, financing condotels can be challenging since they don’t qualify for conventional loans. However, there are still beneficial financing options available if you know where to look! Here’s what you need to know:

1. Types of Loans Available for Condotels

Even though condotels don’t qualify for conventional loans, they qualify for other types of loans, including bridge loans, home equity loans, and hard money loans.

Bridge loans are short-term loans that are designed to quickly get you the financing you need to close on your investment opportunity. During the term of a bridge loan, you may only be required to make payments on the interest of the loan before having to make a “balloon payment” on the remaining balance at the end of the term. Terms for bridge loans are typically one year and interest rates can range from 6 to 10%.

Home equity loans allow you to access the equity in your current home and put that money towards a condotel investment. You can access up to 80% of your home equity through a home equity loan if you have at least 20% equity in your home. From there, you can use these funds at your discretion so long as you’re comfortable with using your current home as collateral. Home equity loans come with favorable interest rates that can range from 3 to 12% with an average rate of 5.82% for a 15-year fixed-rate loan.

Hard money loans are used to provide quick and easy financing to investors. These loans don’t usually come with many qualification requirements since hard money lenders aren’t really concerned with getting their money back through payments. Instead, they know that they can simply repossess the property in question and sell it to get their money back. Since these loans are riskier, they come with high interest rates of up to 15%.

2. How to Find a Condotel Lender

Once you have determined which type of loan you want for your investment, you need to find a lender. However, not all of these loans are offered by every lender. Instead, you will likely need to look for lenders that specifically offer that type of loan.

For instance, if you’re looking to use a bridge loan for your condotel purchase, you should work with Vaster — a premier bridge lender that specializes in South Florida commercial real estate. Vaster’s experts can help guide you through the entire process so that you can make the most out of your investment.

3. How to Apply for a Condotel Loan

After you’ve found the right lender, it’s time to actually apply for the loan. While application requirements vary by lender, you should be prepared to hand over a whole host of documentation to help the lender make a decision. You will likely need to provide your income tax returns, income documents like W-2s or 1099s, bank statements, investment statements, and information about any debts.

The lender will also check your credit history for any red flags like late payments, defaults, or bankruptcies. The good news is that with flexible lenders like Vaster, low credit scores or a lack of financial documentation aren’t necessarily deal-breakers. Instead, they are willing to work with you to get you the money you need.

Final Thoughts on Condotel Investing

With the right property and the right financing, investing in condotels can be extremely beneficial. Plus, you can choose to enjoy these high-end units yourself so it’s really a win-win scenario. Reach out to Vaster today to secure financing for these profitable units before they sell out!

Sources:

Understanding Condotels | Investopedia

What, Exactly, Is a Condotel? | NBC News

Dreaming of a US Vacation Home? Here Are the 10 Best Places to Invest | CNBC