Hotel-Condos As Investment Properties

My thoughts on the new “luxury” hotel-condos like Trump Towers, Shangri-La, and Four Seasons have been well documented.

But what about more affordable units in the $250,000 price point that are viable investment options?  Let’s explore…

I’m not hating on “luxury.”

I just don’t see the point.  Or the value.  Or the point.  Wait, I think I said that already…

Comedian David Cross does this great routine on how the ultra-rich in New York will pay $1,600 for dessert with pure gold flakes on top.  That’s right – if you’re so rich that you have no clue what to do with your money, you can actually EAT gold!

So is that luxury?  Or is that just a waste?

By the same token, is it “luxurious” to pay four times the going rate for a condo just to say you own in “Trump Towers?”

Is that luxury?  What is luxury?

Whoever first decided that Toronto “needed” more luxury hotel-condos is sure eating their words now.  Trump Towers, Shangri-La, and Four Seasons are three giant black eyes on Toronto, in my opinion, and if popular opinion counts for anything, I believe I’ve been backed up on this one.

But what bothers me even more than the idea of “luxury” in all this nonsense is the idea of any of these properties as an “investment.”

They were sold and marketed as some sort of “investment,” when all they really are is a way to bleed money until the owner says, “no mas.”

Hotel-condos, or Condotels as Wikipedia explains, are sold with the promise (or in some cases – an actual contract) of renting out the unit when the owner isn’t present.  Theoretically, the return on investment could be fantastic, since the nightly rate for a hotel room is far greater than, comparatively, 1/30th of a month’s rent for a condo.

But unless you can guarantee that the unit is going to be rented out x-number of nights, and you can guarantee what that rent or fee is going to be, then how could this be considered anything but a shot in the dark?

The problems at Trump Towers have been well documented.  Investors were promised that room rates would average over $600 per night, but in reality, they’re $300.  The hotel itself is only 10 to 50% occupied on a given night; a far cry from what investors were expecting.

But let’s take a step back from the “Big Three” for a moment, and focus on something smaller in scale.

I’ve been asked a few times this year, and once recent enough to give me the idea for this blog, about smaller hotel-condo units as investment properties.

Again, I joke about Trump Towers being an “investment,” since “investing” does not mean borrowing from your mother’s RRSP and mortgaging your home so you can afford the downpayment on a pre-construction condo for which you now can’t get financing (true story!), but let’s look at smaller, more affordable options as investments.

Let’s look at “The Cosmopoliton” at 8 Colborne Street, and let’s compare it to a similarly-priced unit at 255 Richmond Street, which is a condo.

A 1-bedroom, 1-bathroom unit at 8 Colborne Street costs $229,000.

Monthly maintenance fees are $415, plus hydro (estimate $60), plus rental equipment (estimate $60).

Yearly taxes are a whopping $4,652.

Let’s assume that an investor purchased this unit with 20% down.

What are the expenses?

The mortgage would carry for $866.05 per month.

Maintenance fees, property taxes, and utilities are an additional $922.67 per month.

All in, this unit costs $1,788.72 per month to run.

Now let’s look at a unit at 255 Richmond Street, which is the same size, although technically it’s a bachelor unit.  The price is identical – $229,000.

Maintenance fees are $263.57 per month, including all utilities.

Property taxes are $1,164.51.

The mortgage cost would be the same as with 8 Colborne Street – $866.05, but instead of paying $922.67 per month in maintenance/taxes/utils, the unit at 255 Richmond Street costs only $360.61.

8 Colborne Street – $922.67
255 Richmond Street – $360.61

So the obvious question becomes this: how much can you rent out 8 Colborne Street for each month if you’re part of a “pool” of hotel-condo owners?

Straight up, the location at 8 Colborne Street is far better than 255 Richmond for renters, so the monthly rents might be $1500 and $1300 respectively.

But how much MORE can you get for the hotel-condo unit?  Can you get $200 per night for ten nights?  That’s $2,000!  What about $200 for 15 nights?  At $3,000, we’re on to something here!

Whatever the case may be, you need to make up for that whopping difference in taxes/maintenance/utils; $922.67 compared to $360.61.  If you rented these two units monthly, there’s only a $200 advantage to Colborne, which does not come even close to offsetting that $562 deficit.

So can you guarantee that you’ll end up with $562 per month more at Colborne Street?

The question wasn’t meant to be rhetorical.

Some people love these hotel-condo properties as investment, but I don’t.  I don’t like them at all.

Just the property tax alone makes me want to puke; almost $5,000 per year for a tiny 1-bedroom condo?  I have a million-dollar listing in the west end right now where the taxes are just over $5K.

And if you want to go back to the “luxury” hotel-condos for a moment here, it gets worse.  Many of those units come with yearly taxes approaching $50,000, and maintenance fees up to $5,000 per month.

So I ask again: do these “investments” make any sense?

Or are they just a better way to bleed money every month?

The bottom line as I see it: the property at 255 Richmond Street would be cash flow positive, whereas the unit at 8 Colborne Street wouldn’t, UNLESS you could bank on a higher than usual amount of rent via the hotel rental pool.

But personally, as an investor, I like to be in control.  I like to be the master of my own destiny, and I wouldn’t want to rely on somebody else, as well as circumstance, in order to maximize my return.

7 Comments

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  2. edsin says:

    sounds great! but where to do you get your mortgage? all the big banks doesn’t lend for condo-hotels

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  4. AsianSensation says:

    David, are there additional income tax implications for owning/renting a condo ‘income property’? If a condo is being paid off by a temporary renter which is the service the hotel is providing, does that mean you have to declare that rent as income?

  5. ABB says:

    You forgot about the hotel management fee — that’s another big hit to the expenses in condo-hotels such as Trump or One King West (the photo at top).

    And, to my knowledge, only Trump sold the hotel units to speculators/investors. At the Four Seasons, Shangri-la and Ritz Carlton, the hotels are independently owned by the developer or the hotel company. They have nothing to do with individual owners.

    1. Ralph Cramdown says:

      And every few years, you’ll likely be told you need to refurbish/redecorate to their standards, or be booted out of the rental pool.

      Fundamentally, if these units had good economics, they’d be owned by the large international hotel chains, not sold retail. I think if a small investor wants to make money in the hospitality industry, he should either buy a small property and manage it himself, or buy shares in the large players in the industry (with or without casino gaming attached). INNvest REIT is a Canadian player in the field. Reading these outfits’ annual reports is a quick way of gaining insight into the industry and its economics.

      1. JC says:

        Agreed with both ABB and Ralph. Don’t forget about Torontos double land transfer tax that makes it even less attractive.

        I was looking into “condotels” in Honolulu this past December. Yes, I know it’s a different market but there are some similarities. By the time the hotel management takes their fee, over 50% in this case, plus an installment for “improvements” to whittle away at, in this instance, a $17,000 special assessment, I was left wondering: “for a 2% return, why would anyone bother?”

        That rather inexpensive $180,000 asking price suddenly didn’t look so attractive. The unit generates close to 4 grand in revenue per month and you get next to nothing.

        The listing agent was a joke. “You don’t buy here for return on your dollar, you buy to have a piece of Honolulu to call your own and use while you’re here on vacation.” Neglecting to mention that any time you use your own property you’re further cutting into your meagre profits. I’d rather rent for much less, with zero headaches and invested in REITs that at least pay a monthly divy.

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