With an ongoing debate over what does or doesn’t make a sound real estate investment these days, the discussion over condo hotels seems to have been reignited. Essentially an operating hotel with staff, concierge and the usual amenities, strata hotels also have condo units they sell to private buyers.
In theory, if the owner has purchased in the hotel’s pool of units, their home is managed and rented out by the hotel. But some buildings have the hotel and strata completely separate, although there is often still an overlap of some services and use of amenities.
If having someone else manage and maintain your condo sounds too good to be true, then let's look at a few of the realities of owning – and getting financing for – a condo-hotel suite or simply a condo in a combined hotel and residential strata building.
In Vancouver, luxury hotels like the Fairmont Pacific Rim, Shangri-La, Rosewood Hotel Georgia, Wall Centre and L’Hermitage Vancouver all sell condo units in their respective buildings. Some buildings have the facilities and management completely separated and some use the shared services.
For prospective owners of any type of hotel unit, the benefits seem fairly obvious: housekeeping services, fitness centres, world class spas and dining, concierge, pool, valet parking, and 24-hour assistance should you need it. Usually these hotels allow you to use the unit for a period of the time in the year and the remaining time your unit would be rotated and rented by management.
Here’s where it can get tricky. The hotel’s rental program is not renting your suite out of the goodness of its heart; this is a business, after all. This means that your gross revenue is shared, often 50:50, although that number could be higher or lower. Your monthly maintenance fee is also generally quite high.
As a post on Wealth Daily points out, as an owner you gain a lot of leverage from the hotel’s name, reputation, and affiliates – not to mention their advertising and management expertise. For people who want to enjoy the benefits of a place and location without the hassles of daily management, it seems like an ideal situation. But does this shared profit mean less ROI for the owner?
There are a few things to factor into the equation. Rents on the units are often lower than anticipated and vulnerable to factors such as bad weather, bad publicity, market trends and other unforeseen circumstances that tend to curtail tourism. Generally speaking, you can expect about 50% of the rental income of your unit.
If your strata unit is separate from the hotel, you essentially have the flexibility to live in the unit or rent it out as a landlord, no different from any other condo. Now, rental income is only partially considered, as lenders do not want heavy reliance on rental income.
In addition, if you’re thinking about relying on short-term rental rates to qualify for a mortgage, few lenders fund this type of unit for all the reasons mentioned here and more. An interesting (and ironically appropriate) example of how few lenders will get involved in these properties was a few years back when the Trump Tower in Toronto first began trying to sell units. In this particular case, buyers were also able to buy units for a permanent living residence. The high commercial property tax rates meant no lender would come near them, leading one mortgage broker to remark “The only [lender] I could find that was willing to finance was HSBC...some units that had $20,000 annual property taxes for an $800,000...unit, because it was zoned commercial. Lenders wouldn’t touch it.”
My experience so far has been that only B lender, as well as Canadian Western Bank, will finance these units. Higher rates and fees do apply, although only if the owner is living there. Commercial lenders are a possibility, but come with their own obstacles.
So all in all, this type of investment must be carefully thought through to see if the potential buyer will actually reap more than a pile of bills and red tape.