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Owning a nicely maintained unit in a hotel-style building, conveniently rented out when you’re not there but available to you when you want it: For a lot of people with retirement on the horizon or a favorite vacation spot where they want to buy a place, this is the dream. If you’re one of them, a condotel might be the right second-home investment for you
What is a condotel?
In brief, a condotel is a portmanteau, condo-hotel, that describes a condominium building operated as a hotel. It allows short-term rentals, has some hotel services (i.e., a snack bar, housekeeping) and a check-in desk. Before Airbnb, condotels were where people looked to rent vacation lodgings that were cozier -- and better for an extended stay -- than a hotel. But condotels fit nicely into a post-Airbnb/VRBO world. Whether they’re part of the building’s rental pool and rented out by the building management or under outside management chosen by the owner, they essentially offer the best of both worlds: hotel amenities and the space of a full apartment.
How is a condotel different from a condo?
The key difference between a condotel and a condo in terms of rentals is that a condo doesn’t allow short-term stays. As far as amenities, condotels typically have several more hotel-style amenities, such as housekeeping service and a registration desk in the lobby.
If you’re looking to buy, you’ll discover other differences within the loan and purchase process, many of which may be an unpleasant surprise.
Getting a loan
Condotels are categorized as non-warrantable condos by Fannie Mae and Freddie Mac, so government-backed conventional mortgage loans are not available. Typically it doesn’t matter whether the building’s financials are healthy, whether many units are owner-occupied, or whether the building is in good condition. If a building is considered more hotel than condo, it’s not going to qualify as a primary home; rather, at best it's classified as a second home and possibly an investment property. Far fewer banks offer these loans, and a 20% down payment is the norm.
The upshot of this is you’ll probably have to look harder and jump through more hoops to get a loan on a condotel unit. If your finances are in good shape and you’ve got a connection to a good lender who offers these loans, it should not cost you more than half a percentage point higher interest than a conventional loan. However, the lender will look on these as non-primary homes, meaning a considerably higher-risk loan especially in a downturn -- and the lender will underwrite and set terms accordingly.
Taxes and fees
Once you do purchase a condotel unit, prepare for extra fees that are comparable to a luxury condo or golf course home. Steep HOA fees may then have additional maintenance fees tacked on, since such a property gets more wear and tear than a typical condo. Taxes on income from the property are typically assessed at commercial rates. And the cost to buy in a condotel may be (but isn’t always) substantially higher than in a comparable long-term or no-rental condominium complex.
Condotel unit as an income property
If you put your condo into the rental pool, whoever handles vacation bookings for the property will add your unit to the inventory of available units, market it through their normal methods, and manage the guest stay process. This seems convenient -- and it is. However, the management company will set the rates, cleaning fees, and terms. The manager may also charge a management fee up front. Additionally, they’ll take up to 50% of the revenue from bookings. Not only does going into the rental pool remove a lot of control from the owner, but it also ensures your unit will be far less likely to generate a profit for you.
For this reason, many condotel owners in buildings where it’s allowed will hire their own vacation-rental management company and let that entity or individual handle marketing, bookings, and guest communications. This way, owners can set their own rates, negotiate with interested parties, and pay less of a fee, perhaps 25%-30% of bookings instead of 50%.
Regardless how you rent out the property, the conventional wisdom says that condotel units are not a great investment from a revenue-generating standpoint. Most people hope simply that income from bookings can offset the cost of their mortgage and fees. There are, however, proactive and savvy owners who buy in perennially popular destinations, stay on top of marketing and CRM, and manage to generate significant revenue from their condotel units. It’s not a passive income stream though, since it takes supervision on the operations and marketing fronts.
Just to add one more layer of caution to all this, many buildings will have rules that owners actually cannot stay in their unit during peak rental season, because the building wants to rent out every unit at the highest possible rates. This is at odds with many people’s dream of buying a hotel-away-from-home that they just use for the holidays.
The bottom line
Buying a condotel unit -- or multiple -- probably won’t make you wealthy. For many people, it’s more of a reward for achieving a certain amount of wealth. Whether you look at it as a high-touch investment property or a permanent hotel haven that pays for itself, owning property in a condotel is definitely a signal you’ve reached a place in life where you can be on permanent vacation if you want to.
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