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Condotels 101 Updated
Dated: August 22 2019
As a top real estate broker(and specifically the top selling oceanfront condo agent last year) in one of the most popular tourist destinations in the country, I sell A LOT of what may call “condotels”.
I figured I would go ahead and put together a simple breakdown to help those inquiring about these types of properties, to get a better understanding, in basic terms, with what exact a condotel is.
Therefore, welcome to a basic guide to figuring out just exactly what a “condotel” (aka condo hotel, contel) is, with a little emphasis on how they look specifically in our market,Myrtle Beach, South Carolina. These types of properties dominate our oceanfront market, with 30-35K permanent residents in the City of MB, we get 15-18 million visitors each year, and they need somewhere to stay! Which in turn creates an investment vehicle for those looking at the real estate aspect of the vacation rental market.
Dictionary.com actually does not recognize condotel as a real word, the Wikipedia.com brief definition looks like this:
“A condo hotel, also known as a hotel-condo or a Condotel, is a building, which is legally a condominium but which is operated as a hotel, offering short term rentals, and which maintains a Front Desk.
Condo hotels are typically high-rise buildings developed and operated as luxury hotels, usually in major cities and resorts. These hotels have condominium units which allow someone to own a full-service vacation home. When they are not using this home, they can leverage the marketing and management done by the hotel chain to rent and manage the condo unit as it would any other hotel room.”
That actually is not a bad short description, while I am an expert in selling these types of properties and condominiums, my layman’s definition would be:
Condotels, and thus individually owned properties, typically make up a resort or development that look and feel like a resort, if you were coming on vacation and not thinking about the real estate aspect of the property, you would have the perception that you were staying at a hotel. While the developments can range from small(20 condominiums) to large(well over 500), in most cases the interior furnishings and finishes have an almost identical look and feel. Condotels give the owner a unique ability to not only use the property as much as they would like, but also to utilize the ability to rent the property on a short term basis, and generate income. (More on ownership & rental income later.)
Purchasing and owning a condotel is virtually no different than what you may be familiar with when you think of any other type of real estate. Ownership is classified as “fee – simple”, where you have a recorded deed exactly like you would own your primary residence. Technically you could live in a condotel year round, and many people do, there are no restrictions to owner usage, you could have it as just your own second home where you come and go as you please, or like many condotel owners, you can use the property as much or little as you’d like, and then utilize the onsite(or off site) rental management company to handle the day to day operations, check in/out, maid services, front desk etc.
The key item to understand is that owning a condotel is NOT like a timeshare or fractional ownership, you own the property out right, and can do as you choose with owner usage.
Many individuals and investors have looked to purchase condotels, that can show consistent and long term rental histories and add them to their portfolio of investments to capitalize on annual revenue, as well as long term appreciation potential.
How would a condotel fit into your investment holdings?
HOAs – Home Owners Association:
Much like all condominium projects, a home owners association(HOA) is in charge of the long term and short term operations of a condotel properties common areas. The HOA’s are run by an elected Board of home owners, who make decisions for the good of the property. In most cases each condo, small or large, carries one vote in the election process. Most condotels have a large commercial area that is also individually owned, consisting of the front desk, possibly restaurants or dining areas, small shops etc. the owner of this commercial area could have multiple votes for the size and sq footage of the area owned, but also paying a proportional HOA fee.
An annual budget is determined and typically HOA dues are paid on a monthly basis. In most cases budgets and expenses for a condotel are more comprehensive than a typical condo project. Whereas almost all utilities(even interior), insurance and all costs are included in the monthly HOA dues.With normally minimal owner usage, but high renter occupancy, this eliminates the concern for fluctuating electric and water bills, as all of these are covered by the master budget. The annual and consequently monthly HOA dues assessed are most commonly calculated on the size of the condo. i.e. a 1BR would pay less than a 2BR, a 2BR less than a 3BR etc.
HOA’s and the rules that establish their power, voting rules and regulations that the HOA enforces are all detailed out by the master deed and recorded bylaws that coincide with every individual Resort.
If you have questions about HOA’s, would like to review master deeds and annual budgets in more detail, they can and should be made available for you as a prospective buyer.
Rentals, Income & Management Fees:
The main dynamic that really differentiates a traditional condo from a condotel is the focus and setup for short term rentals. As stated before, your typical condotel is going to look, on the outside of the building and inside of the condo itself, and feel like a hotel, or at least a property that you could rent on a short term basis, a week, weekend, one night etc. The presence of a true front desk check in/out facility, daily maid services in most cases, central phone system, key systems that are electronically programmed, and even the furnishings, linens and towels will frequently be the same products from condo to condo in the same resort.
In the best resorts and properties, it is these systems that can produce rental properties with occupancy rates that exceed 80% annually, and produce significant rental proceeds for the owners.
In many ways it does not financially make sense to own a condotel, and not maximize the rental potential. HOA fees are typically budgeted and setup as an all inclusive manner, where owners do not pay for individual varying utilities. The interior electric, water/sewer, cable, internet, insurances and more, are all covered in your monthly condo/HOA fee. If you never used the property, or had it booked year round, you would pay the same monthly fee.
The options an owner has for rental management options has changed greatly over the years. You’ve got “onsite” management options that typically charge 40% management fees, “offsite” management options avg management fees are 20%+/- and the world of vrbo.com, Airbnb.com etc. have increased the viability of self-managed options for owners. Those 3 options required much more analysis based on an owners needs, time and investment goals.
Financing in today’s much more restrictive lending world does create some more challenges for buyers looking to obtain financing or a mortgage on the property itself. While financing certainly exists, and the options change on a regular basis, at this point condotels are not Fannie Mae approved properties, they are what the lenders will term as “non-warrantable”. Meaning, your typical mortgage broker or lender cannot provide you with a loan today, and then go sell it tomorrow to a government backed entity like Fannie Mae, and thus limiting the overall options.
As you read within the introduction to this explanation of condotels, the definition from a lenders perspective will vary widely as well. Some lenders will actually have approved lists of buildings, resorts or properties where they can provide traditional condo financing. However, just because one lender or institution has a given building on their approved list, doesn’t mean another lender will give the same approval. On basic terms, most lenders will tell you that if the project has a front desk and the ability to be rented on a short term or nightly basis, the project is a condotel.
To fill the void in the open market for financing, many banks and lending institutions, typical smaller, local banks that exist in the markets where condotels are more prevalent, have created specific programs and terms for these types of properties. Loan options where the bank will portfolio the loan or “keep it in house” and not sell the loan to another entity. Rates, down payment options, the length of the loan itself, will vary widely from bank to bank. In general, 20-25% down payments are required, terms that are between 15-25yrs.
In summary, financing exists, the options are not as competitive as what you would find on a single family home, or even a typical condominium, but if you work with the right real estate broker, one who understand the market, you will have financing options if you are seeking to purchase a condotel.
Is a Condotel right for you?
Is a condotel right for you, right for your investment portfolio, or right for your family? This is a question that really is dictated by a number of questions. There are plenty of individuals that have made and lost a lot of money on the appreciation and speculation of condotels, just like all types of real estate. There are many that include them in their investment portfolio for the annual cashflows and never use them. Then again, many that do not rent them at all, and just utilize them for personal use for family and friends.
The beauty of a condotel, is that in most cases, you do not have to be involved in the day to day operations, the upkeep and maintenance, you can own one, collect the rent, and forget about it, if that is what you would choose to do. On the other hand, if you are looking for a quiet, private second home, a condotel probably isn’t right for you, they are designed for rentals, for occupancy and it is those characteristics, that are going to define the condotel itself.
If you would like to know more about condotels, or if you are thinking about buying one, you absolutely must work with a real estate professional that understand the in’s and out’s of the market. Contact us today and we can continue the education and find the right property for you.
If you’d like to check out my video library of “The Five Steps to Find the Perfect Beach Investment Property” to get you started.
Brian Piercy, Broker/Owner
Real Estate Modo
Only 1% of all real estate agents in the US sell more than 50 properties in a year. In 2020, Brian sold 118. In the top 1% of all agents in the area, Brian has been a local resident of Myrtle Beach an....