Condo Hotels

[puffpuff]

I notice some in the group own land based condo-hotels. I am thinking about such a venture

What are the top properties for condo-hotel that is still a buy at this time and do they pencil out on a cash on cash basis to generate better than a CD return if not used at all ?

All comments appreciated. I am not a promotor of condo hotels, have no condo hotel units at this time. Just trying to learn more about it.

 

[Steamboat Bill]

We have beat this topic into the ground in the past and you can search for threads on this topic.

http://tugbbs.com/forums/showthread.php?t=42241

To sum it up:

1. I own three condo hotels in Whistler and I am 100% unimpressed with the ROI. I would have been better off simply buying CDs. I have also visited several of them in pre-construction in South Florida and passed on all of them as over-inflated ripoffs for the buyer. Condo Hotels are only good for the developers. I have posted a condo-hotel challenge that has not been met yet....."Show me one person or one property that is actually making money (postiive cash flow) for someone that only puts a 30-50% downpayment"....not a promise from Donald Trump with some marketing...just the facts such as a 2006 revenue report.

2. PerryM is very bullish on condo-hotels in Maui as he feels the real estate appreciation will pay off in 3-5 years. Realize that this may be a UNIQUE property and he was LUCKY to even be able to buy one. Other than that, I think he has one in Daytona Beach, that he likes for family vacations, but I am not sure it actually makes money or if he is even saving money as compared to using WM credits to rent a similar unit.

3. Condo hotels are very much "Buyer beware" and I STRONGLY reccomed avoiding them unless you can successfully answer my challenge.

4. Full ownership condos, fractional ownership, timeshares, and destination clubs are far better buys (IMHO) than condo hotels.

 

[PerryM]

Trump this..

Trump is the king of condo-hotels (CH). One can argue whether Trump is the winner or his clients, or both.

A condo hotel is yet another way to own real estate and participate in its appreciation that inevitably follows. But if you buy a CH to become a Trump you are buying for the wrong reason.

Buy a CH, if it should make sense, because you actually want to use it. If you do that and plan to hold it for 5 years and all your numbers make sense then it’s a possible buy for you.

There are many items to consider, like how much time you can use it per year, and the management company is very important but these decisions are no different than buying a normal condo.

When the real estate market takes off again, (I’m guessing by the end of the year or 1 year from now at the max) CHs will once be the darlings of the real estate market – folks will be standing in lines for 24 hours in order to get the privilege of putting down $20k for a chance at buying one. Just wait.

P.S.
The real "Secret" to CHs is the 3 year Build Cycle. You put down 20%, pay nothing more for 3 years, while your CH is being built. If you happen to luck out when the real estate market is hot you get 3 years of appreciation on a very expensive condo for just 20% down. Then you buy it and use it for 5 years. Or, if the real estate gods have been kind, flip it.

 

[T_R_Oglodyte]

A condo hotel is yet another way to own real estate and participate in its appreciation that inevitably follows. But if you buy a CH to become a Trump you are buying for the wrong reason..

I suspect that most of those people buying CH because they want to be TRumps are actually CHumps.

 

[PerryM]

"Wink" "Wink"

I love the way real estate folks “wink”.

When you talk to a CH salesrep they can’t talk about the condo as an investment – that’s when the “Winking” starts.

“I can’t tell you that we expect to be 90% occupied, just like the resort across the street”. “Wink” “Wink”.

I can’t tell you about the $600 per night that we expect, just like the resort across the street”. “Wink” “Wink”.

This is similar to the timeshare salesreps who say “Look at that resort over there – a 2BR condo goes for $2 M if you want to buy all 52 weeks”. “Wink” “Wink”.

By the time the CH salesrep gets done talking with you your left eye is uncontrollably “Winking”. No wonder folks stand in line for 24 hours with a cashier's check for $20k.

 

[BocaBum99]

The best time to buy a real asset is when everyone hates it. Not when everyone loves it.

When people are in love with a concept, you get an imbalance in supply and demand tilted heavily toward the buy side. Then, prices go up and if you get in at that time, you overpay.

When people hate the concept, the opposite occurs. The key is to know how to value an investment. This is where many non-professionals get killed.

For me, the concept of a condo hotel is a very good one.... as long as you are not the one financing the project and taking on all the risk of hotel management. That is the reality of how condo hotels have been offered to date.

To invest properly in condo hotels, you need to create a valuation model. The model I would choose is this. For a particular vacation spot, determine the occupancy rate and average rentals for equivalent hotels during the last travel recession. Use that number as your expected rental revenue. Subtract out all expenses including hotel rental fees, maintenance fees, taxes, utilities, housekeeping, etc to get a gross profit estimate. If that number is NOT negative, you have a winner.

Why? Because rental rates in a recession have bottomed. When the local economy turns around, occupancy rates and rental rates will rise thereby increasing your return. In addition, after a recession, these investment vehicles will be depressed in value.

Sell the asset when the area booms again or when the next real estate boom occurs. It will. And, you can last out any up and down turns because you bought at a price that allows no negative cash flow.

The key to making money in real estate in buying at the right price. Your fate is determined at the time of initial purchase.

 

[T_R_Oglodyte]

Yep. And that's true for all investing, not just real estate.

The best time to buy a real asset is when everyone hates it. Not when everyone loves it.

When people are in love with a concept, you get an imbalance in supply and demand tilted heavily toward the buy side. Then, prices go up and if you get in at that time, you overpay.

When people hate the concept, the opposite occurs. The key is to know how to value an investment. This is where many non-professionals get killed.

For me, the concept of a condo hotel is a very good one.... as long as you are not the one financing the project and taking on all the risk of hotel management. That is the reality of how condo hotels have been offered to date.

To invest properly in condo hotels, you need to create a valuation model. The model I would choose is this. For a particular vacation spot, determine the occupancy rate and average rentals for equivalent hotels during the last travel recession. Use that number as your expected rental revenue. Subtract out all expenses including hotel rental fees, maintenance fees, taxes, utilities, housekeeping, etc to get a gross profit estimate. If that number is NOT negative, you have a winner.

Why? Because rental rates in a recession have bottomed. When the local economy turns around, occupancy rates and rental rates will rise thereby increasing your return. In addition, after a recession, these investment vehicles will be depressed in value.

Sell the asset when the area booms again or when the next real estate boom occurs. It will. And, you can last out any up and down turns because you bought at a price that allows no negative cash flow.

The key to making money in real estate in buying at the right price. Your fate is determined at the time of initial purchase.

 

[PerryM]

Buy hi and sell higher?

This very second the DOW is at record highs - 13,537; I’m expecting the DOW to double in 3 years, maybe 2.5 years – so, do you buy or do you sell? I expect a DOW of 20,000 before the Talking Heads on cable TV can plug their newest book. I'm just as bullish on real estate.

Timing is a very hard thing to do. I like to look at averages and find a situation where the average is due for a “Hell of a recovery”.

Take the DOW; since 1933 the DOW has averaged 13.16% Since the Internet Bubble of 2000 the DOW has averaged 4.19%. Take 13% times 7 years and you get 91% - 4% = 87% lag in the average.

Does this mean I should sell the house and put it into a Margin account and buy the DOW now? NO – you need other things to guide you.

Real estate is no different: there is a natural buoyancy for real estate to increase in price (has to do with no new land being created and more babies being created each year). So use Zillow to help you with the trend of an area and look for an average just waiting to spring back and make up for lost time.

Why am I so bullish? The averages tell me so.

 

[T_R_Oglodyte]

This very second the DOW is at record highs - 13,537; I’m expecting the DOW to double in 3 years, maybe 2.5 years – so, do you buy or do you sell? I expect a DOW of 20,000 before the Talking Heads on cable TV can plug their newest book. I'm just as bullish on real estate.

Timing is a very hard thing to do. I like to look at averages and find a situation where the average is due for a “Hell of a recovery”.

Take the DOW; since 1933 the DOW has averaged 13.16% Since the Internet Bubble of 2000 the DOW has averaged 4.19%. Take 13% times 7 years and you get 91% - 4% = 87% lag in the average.

Does this mean I should sell the house and put it into a Margin account and buy the DOW now? NO – you need other things to guide you.

Real estate is no different: there is a natural buoyancy for real estate to increase in price (has to do with no new land being created and more babies being created each year). So use Zillow to help you with the trend of an area and look for an average just waiting to spring back and make up for lost time.

Why am I so bullish? The averages tell me so.

I don't worry too much about where the Dow is. I stay fully invested almost all of the time.

I do put my money into those sectors of the stock market that are currently disdained, and avoid whatever is currently hot. You can't time the whole market, but by following that strategy you can time the individual sectors. But "timing" in this context means holding a position for up to several years (as long as the fundamentals of the companies you are invested in haven't soured since your initial investment) as you wait for sentiment to turn. The fact is that most investors can't do that; if a position hasn't turned the corner in six months, they become convinced the position is a dud, sell, and move on. Or, if the person trying to do this is a fund manager, the owners of the fund cash out and move the money to whatever fund currently has a hot rating. If all investors could exercise discipline and not get swayed by emotion, the strategy wouldn't work.

The whole approach is well-documented and discussed in any of David Dreman's book It is one of the few stock market strategies that is amply documented as consistently beating the market, now with about 75 years of record to back it up.

 

[puffpuff]

I am thinking about the Trump Baja. About $ 350000 for a studio. HOA $ 2 / ft. Size about 500 sq. feet. They sold out the first of three towers in 2 days about six months ago. They will be releasing the second building for purchase next month. Both buildings are to be build together and scheduled for completeion in end 2008. The same studio in first building was advertised at high 200,00s but only a handful of units were at that price and the majority sold at low 300,000s. So there is about a 10% bump up since.

Its about 20 minutes south of San Diego, but the border crossing is notorious. Lots of people are going down there for the weekend - cheap food and drinks.

I am not sure about condo hotels in the West Coast.

Should I buy?

I am not going to be spending time there.

 

[PerryM]

Steve:
Is this the book?

Puff:
If you have to ask you already know the answer.

 

[T_R_Oglodyte]

Steve:
Is this the book?

Puff:
If you have to ask you already know the answer.

That was his very first effort, in 1977. I got started on this a subsequent book he published in 1982, The New Contrarian Investment Strategy. His most recent update is Contrarian Investment Strategies in the Next Generation. I haven't read that latest one, but based on the 1982 version I can certainly recommend it.

Funny to read the reviews - the EMH proponents still can't accept that there is a fundamental efficiency in the stock market. One reviewer, in particular, notes that EMH allows for efficiencies in the short run. Dreman's data, though, shows that following his approaches beats the market averages for at least 70 years, and that accounts for transaction costs.

*****

One of the things I most appreciated about the book was his discussion of the psychology of crowds and why putting a bunch of experts together to analyze a problem is almost guaranteed to produce an incorrect result. When I read that, I understood a number of situations I had been involved in - professionally, not investment related - where we got it all wrong.

IOW - Dreman's value to me went far beyond investment.

*****

Dreman has been a regular columnist for Forbes for at least 25 years now, though he doesn't appear as often as he formerly did. But via Forbes you can stay abreast of his current observations and recommendations.

 

[Steamboat Bill]

Lots of great advice on this thread and NOT a single example of a hotel-condo that passes the mustard as far as a good investment is concerned.

As PerryM says....the borkers will wink a lot....but the hard data of successful projects is RARER than a Ivory-billed Woodpecker.

Puff....take your money and buy a nice CD, annunity, or SPY index stock....and let Donald take other people money.

 

[Steamboat Bill]

One of the things I most appreciated about the book was his discussion of the psychology of crowds and why putting a bunch of experts together to analyze a problem is almost guaranteed to produce an incorrect result. When I read that, I understood a number of situations I had been involved in - professionally, not investment related - where we got it all wrong.

This is OPPOSITE the advice in found at

http://en.wikipedia.org/wiki/The_Wisdom_of_Crowds

unless you limit your crowds to be the "talking head stock experts on TV"....booohyaaaa

 

[T_R_Oglodyte]

A big problem I have with CH is a similar issue as with timeshare.

Timeshare salesman like to talk about how buyers can make money renting their unit when they don't use it. But if there was that kind of money to be made, why is the developer selling the unit instead of reaping all of that potential income for themselves??

 

[PerryM]

Lots of great advice on this thread and NOT a single example of a hotel-condo that passes the mustard as far as a good investment is concerned.

As PerryM says....the borkers will wink a lot....but the hard data of successful projects is RARER than a Ivory-billed Woodpecker.
<snip>

I would say that there is little difference between buying a CH versus a regular condo. In Hawaii there is NO difference. In Florida there are 2 types of CHs; 1) same as a normal condo 2) ownership is "from the paint inwards". We own one of each type.

If you buy a CH as something to use and when not in use to put into the rental pool there are thousands of regular condo owners who do the same thing. What's the difference? The CH normally requires the insides of the condo to be all identical - the regular condo owner can paint the walls purple if they wish.

If the developer understands what he is doing you will find it tough to make a killing on your CH. Each project is unique and each comes online into the real estate market during various cycles of up and down and thus its hard to compare one project against another.

 

[T_R_Oglodyte]

This is OPPOSITE the advice in found at

http://en.wikipedia.org/wiki/The_Wisdom_of_Crowds

unless you limit your crowds to be the "talking head stock experts on TV"....booohyaaaa

Actually there's no conflict at all.

The key concept in the Wisdom of Crowds is that each person provides their input independently of other people (as in the case of guessing the weight of the ox at the fair). Dreman discusses how the situation changes when you allow the people to interact together.

IOW - at the county fair, if everyone writes their guess on the slip and walks away, you get a good answer.

Alternatively, you could ask everyone who wants to submit a guess to go in a room with everyone else, talk it over, and then submit their guesses. If you do that, the accuracy of the estimate goes way down. It has everything to do with the dynamics of groups and our social human nature.

One of the critical aspects of The Delphi Method, for example, is never allowing the experts you've assembled to ever interact, ensuring that the participants are anonymous, and sanitizing information provided between sessions so that no one knows what information was provided by any other participants.

*****

The stock market is inefficient because people look to experts instead of deciding independently.

*****

When you want to solve a problem, the last thing you should ever do is put a bunch of experts in a room and have them come up with a recommendation. Doing something such as that on global warming guarantees two things; you will get good publicity and the resulting conclusions and recommendations will almost assuredly have serious errors.

Getting back to real estate, for example, the time to buy real estate is when all of the pundits are saying that real estate is the worst possible place to put your money. The time to sell is when everyone thinks the sky is the limit for real estate. If you blindly follow the crowd, trusting in its wisdom, you will end up buying high and selling low.

 

[Steamboat Bill]

Getting back to real estate, for example, the time to buy real estate is when all of the pundits are saying that real estate is the worst possible place to put your money. The time to sell is when everyone thinks the sky is the limit for real estate. If you blindly follow the crowd, trusting in its wisdom, you will end up buying high and selling low.

I agree as I bought lots of Florida real estate during 2000-2003 and sold them all in early 2005....yes, I was a speculator...and got out early. I still think Florida has a LONG way to go before we see people lining up at midnight to bid on an overpiced condo or hotel-condo project.

 

[Iowa Rod]

Bill,
I enjoy your posts and like reading them. I am thinking you still have young children. You own 3 condo hotels, dvc, marriott and other timeshares and high country club. What I am really thinking is what do you do for a living? I have owned an insurance agency for 19 yrs now and your my hero!!! Maybe I should have a new career.
Rod

 

[BocaBum99]

I agree as I bought lots of Florida real estate during 2000-2003 and sold them all in early 2005....yes, I was a speculator...and got out early. I still think Florida has a LONG way to go before we see people lining up at midnight to bid on an overpiced condo or hotel-condo project.

It's more likely that the condo market completely collapses in Florida and takes the condo hotel market with it. Then, there will be bargains.

Buy high and sell higher is exactly why bubbles get created and people lose their shirts.

This happened in 2000 in the stock market and in 2006 in the real estate market.

You can make a ton of money in the "who's the greater fool" game. And, you can lose your shirt as well.

Bill, there will be opportunities in condo hotels in Florida. Those deals will coincide with the time when most people say that Florida real estate is dead and will be dead for years to come. Believe it or not, it's getting close.

 

[Steamboat Bill]

Without posting too many details of my life....I have two kids less than 11yo and I am in my low-mid 40s. I have had several jobs and started several businesses including: physician (semi-retired), professor (part-time graduate school), and made most of my net worth from an educational software company that I started specializing in test-prep that I sold. My income from being a doctor contributed very little to my current net worth.

I think we are still 1-2 years away from the bottom of the Florida real estate market. I see LOTS for sale and the prices have only dropped 10% or so since the peak in Summer 2005. Once the interest only adjustible rate mortgages get reset....there will be a lot of homes getting foreclosed. Then there may be a rush of people to sell before they foreclose. Thus, the only homes that will sell are the lowest prices. That is why I think the prices will continue DOWN for the next few years.

 

[Jestjoan]

beware Trump

As the feud between Rosie and the Donald cools, the Chicago Tribune reports a new brouhaha involving the billionaire. This time, it seems that Mr. Trump is trying to renege on preconstruction discounts he offered to get friends and family to buy in early at the forthcoming Trump International Hotel and Tower project in Chicago. This is the project that 2004 Apprentice winner Bill Rancic was overseeing.

At the time of these early sales, some insiders paid as little as $500 a square foot for their units. Now that units are selling as high as $1300 a square foot, Mr. Trump apparently feels he offered too great a discount to the early buyers. So, starting a few months ago, Trump’s lawyer began notifying the buyers that their deals are null and void “in accordance with our rights under the contract, including, without limitation, paragraph 12 (b)”

 

[Steamboat Bill]

The real question people should ask themselves is....."Why do I WANT to buy a condo hotel?"

The reasons will probably be:

1. To make money (usually the most important factor) on resale
2. To get a monthly positive cash flow from an investment (this is MUCH harder to do than it sounds)
3. To stay there for free (althought this is not really true as you are out of the rental pool)
4. Because you love the location (fine...but why buy instead or rent?)
5. To let family and friends stay there (again...why buy?)

Is there anything I am missing?

Either way....the most important reasons for buying a condo-hotel are that people either hope to make money by selling it for more than they bought it for and/or the monthly rental dividends. Unfortunatley, I can't seem to find anyone (other than the developers) that has made it work for them.

 

[PerryM]

Bell shaped curves...

I think the some of the confusion associated with CHs is that there are many varieties and they serve different functions.

A student of mine bought a IntraWest (Playground) in Orlando which has been branded as a “W”. He goes to the Orlando Convention Center, which is just a short walk across a bridge from the W 4 to 6 times a year. He bought it for the 4 – 6 weeks he spends there, for the vacations with the kids, and to make money.

His CH is a 1BR and has a mini-kitchen – this is just right for his business needs, vacation needs, and renting needs. His spreadsheet shows a positive cash flow scheduled with just 20% down and a great 30 year traditional mortgage. The mortgage firm he has locked in a rate with (1.5 years still to completion) and the drawing power of a “W” 300’ from the Orlando Convention Center is just going to be a flat out cash cow. The Orlando Convention Center is booked out 25 years and this is the closest 5-star hotel to it - and you can walk to it.

This is but one example of how you can find CHs that suit your needs and make a profit too. Is it typical of CHs? Probably not, there is a bell shaped curve to everything, but I found this great deal for him and his friends – we are owners at the Maui IntraWest and hope to do just as well.

 

[TomCayman]

A big problem I have with CH is a similar issue as with timeshare.

Timeshare salesman like to talk about how buyers can make money renting their unit when they don't use it. But if there was that kind of money to be made, why is the developer selling the unit instead of reaping all of that potential income for themselves??

Easy answer (and I'm speaking as a developer). Just as venture capital // private equity isn't invested to be tied up for the long term, then property developers have a business model that does not involved staying around to manage the property or earn income returns, they prefer to move from one project to the next.

Now of course whether the developer sets up the project to ensure sustainable income depends on a) their abilities, and b) how long term they are thinking. The long term thinkers will ensure that the project works long term long past their departure date, as they want to make sure they build their reputation as they move on to the next project, as happy investors make for the best marketing on the next project... word of mouth.