How effective are hotel condos for investment properties?
"I agree with Joe Taxpayer that a lot of details are missing to really evaluate it as an investment... for context, I own a few investment properties including a 'small'  10+ unit apartment complex. My answer might be more than you really want/need, (it kind of turned into Real Estate Investing 101), but to be fair you're really asking 3 different questions here: your headline asks ""how effective are Condo/Hotel developments as investments?"" An answer to that is... sometimes, very. These are a way for you-the investor-to get higher rents per sq. ft. as an owner, and for the hotel to limit its risks and access additional development funding. By your description, it sounds like this particular company is taking a substantial cut of rents. I don't know this property segment specifically, but I can give you my insight for longer-term apartment rentals... the numbers are the same at heart. The other two questions you're implying are ""How effective is THIS condo/hotel development?"" and ""Should you buy into it?"" If you have the funds and the financial wherewithal to honestly consider this, then I am sure that you don't need your hand held for the investment pros/cons warnings of the last question.  But let me give you some of my insight as far as the way to evaluate an investment property, and a few other questions you might ask yourself before you make the decision to buy or perhaps to invest somewhere else.  The finance side of real estate can be simple, or complicated. It sounds like you have a good start evaluating it, but here's what I would do: Start with figuring out how much revenue you will actually 'see': Gross Potential Income: 365 days x Average Rent for the Room = GPI (minus) Vacancy... you'll have to figure this out... you'll actually do the math as (Vacancy Rate %) x GPI (equals) Effective Potential Income = EPI Then find out how much you will actually pocket at the end of the day as operating income: Take EPI (minus) Operating expenses ... Utilities ... Maintenace ... HOA ... Marketing if you do this yourself (minus) Management Expenses ... 40% of EPI ... any other 'fees' they may charge if you manage it yourself. ... Extra tax help? (minus) Debt Service ... Mortgage payment ... include Insurances (property, PMI, etc) == Net Operating Income (NOI) Now NOI (minus) Taxes == Net Income Net Income (add back) Depreciation (add back) sometimes Mortgage Interest == After-tax Cash Flows There are two ""quickie"" numbers real estate investors can spout off. One is the NOI, the other is the Cap Rate.  In order to answer ""How effective is THIS development?"" you'll have to run the numbers yourself and decide. The NOI will be based on any assumptions you choose to make for vacancy rates, actual revenue from hotel room bookings, etc. But it will show you how much you should bring in before taxes each year. If you divide the NOI by the asking price of your unit (and then multiply by 100), you'll get the ""Cap Rate"". This is a rough estimate of the rate of return you can expect for your unit... if you buy in.  If you come back and say ""well I found out it has a XX% cap rate"", we won't really be qualified to help you out. Well established mega investment properties (think shopping centers, office buildings, etc.) can be as low as 3-5 cap rates, and as high as 10-12. The more risky the property, the higher your return should be. But if it's something you like, and the chance to make a 6% return feels right, then that's your choice. Or if you have something like a 15% cap rate... that's not necessarily outstanding given the level of risk (uncertain vacancies) involved in a hotel.  Some other questions you should ask yourself include:  How much competition is there in the area for short-term lodging? This could drive vacancies up or down... and rents up or down as well How 'liquid' will the property (room) be as an asset? If you can just break even on operating expense, then it might still make sense as an investment if you think that it might appreciate in value AND you would be able to sell the unit to someone else.  How much experience does this property management company have... (a) in general, (b) running hotels, and (c) running these kinds of condo-hotel combination projects? I would be especially interested in what exactly you're getting in return for paying them 40% of every booking. Seasonality? This will play into Joe Taxpayer's question about Vacancy Rates. Your profile says you're from TX... which hints that you probably aren't looking at a condo on ski slopes or anything, but if you're looking at something that's a spring break-esque destination, then you might still have a great run of high o during March/April/May/June, but be nearly empty during October/November/December.  I hope that helps. There is plenty of room to make a more ""exact"" model of what your cash flows might look like, but that will be based on assumptions and research you're probably not making at this time."
Looks like Cracked is taking money form the Hotel lobby which has been out to kill AirBnB for a long time. This is perfect example of a native advertisement concealed  as hit piece. Cracked should be ashamed of themselves. Do you know how many dead bodies have been found in Hotel Rooms? Do you know how much crazy sh-- happens in hotel rooms? And you're going to fault AirBnB for a few cases that aren't their fault anyway? For ---- sake!   AirBnB has made it possible for millions to travel the globe without having to pay expensive hotel rates. I love AirBnB. Use it all year round.   F--- hotels, and ---- native ads disguised as hipster journalism. "It's a little unusual, but I don't think the financial terms are completely unreasonable on their face. What you describe is similar to an interest-only loan, where you make payments that only cover the interest due each month, and the entire principal is due as a single ""balloon payment"" on a specified date (in this case, the date on which the condo is sold).  Your monthly payment of $500 on a principal of $115K is equivalent to an annual interest rate of 5.22%, which at least is not completely usurious.  With a traditional mortgage you might pay a rate as low as 3%, if you had sufficient income and excellent credit - but I don't know, from what you've said, whether that's the case.  Did you make the current arrangement because you were unable to get a loan from a bank? The main difference here is that instead of the balloon payment being a fixed $115K, it's ""75% of the gross proceeds of the sale"".  If the condo eventually sells for $155K, that would be $116,250, so that's slightly advantageous to them (assuming that ""gross proceeds"" means ""before deducting commissions for either the buyers' or sellers' realtors or any other costs of the sale""), and thus slightly disadvantageous to you.  If the condo appreciates in value, that's more of a win for them and more of a relative loss for you.  But it's also possible that the value of the condo goes down, in which case this arrangement is better for you than a fixed balloon payment.  So this deal does prevent you from getting a larger share of any gains in the value of the property, but it also helps insulate you from any losses.  That's important to keep in mind. There's also the issue of needing their consent to sell.  That's potentially problematic - usually in a joint ownership scheme, either owner has the right to demand to be bought out or to force a sale.  I guess it depends on whether you think your parents would be likely to consent under reasonable circumstances, or to insist on holding the property against your best interests. It's true that you aren't building equity with this arrangement, and if you thought you were, you are mistaken or misled.  But let's compare it with other options. If you would qualify for a traditional 30-year fixed mortgage at 3%, your monthly payment would be slightly lower ($484), and you would be building some equity because your payments would reduce the principal as well as paying the interest.  But a 30-year loan builds equity very slowly at first - after 7 years you'd have only about $20,000 in principal paid down. If we assume that 5.2% represents the interest rate you'd otherwise pay based on your creditworthiness, then your monthly payment would be $631.  So compared to that, you have an extra $130 per month that you can save or invest in whatever you want - you're not forced to invest it in your house. Note that in either case you'd still be paying the condo fees, property taxes, insurance, and maintenance yourself.  So we might as well eliminate those from consideration.   It might be a good idea to find out what other options you would have - perhaps try to get an interest rate quote on a traditional mortgage from a bank, based on your income and credit history.  Then you can decide what to do, taking into account: your financial situation; how much of a monthly payment could you afford? your relationship with your parents; are they likely to be reasonable about renegotiating?  Do they in general tend to respect your wishes?  Would it harm your relationship if you tried to get out of the deal, and how important is that to you? To what extent do you actually want to pay for equity in this property? Do you really believe it's a good investment, and have evidence to support that?   Your options include: Try to renegotiate the terms of the loan from your parents Try to ""refinance"" the loan, by getting a loan from a bank and paying off some agreed-upon amount of principal to your parents Try to force the sale of the condo and move to another house, financing it some other way Consult a lawyer as to whether your agreement with your parents is legally enforceable.  For instance, do they have a lien on the property?" yes, i am incorporating monte carlo return scenarios for both equity and real estate.  yeah there is a lot to consider in the case of the property being a condo where you have to account for property taxes as well as condo fees.   the two projects have entirely different considerations and it's not like the money that is injected to one is similar to the other (very different) which is why i figured there should be differing discount rates.  in any case, thanks for the discussion and suggestions. "Living in one unit of a multi-family while renting out the others, although not without its risks, can be a viable (if gradual) way to build wealth. It's been rebranded recently as ""house hacking"", but the underlying mechanics have been around for many years (many cities in the Northeast in particular remain chock full of neighborhoods of 3-family homes built and used for exactly that purpose for decades, though now frequently sub-divided into condos).  It's true you'd need to borrow money, but there are a number of reasons why it's certainly at least worth exploring (which is what you seem to be asking -- should you bother doing the homework -- tl;dr: yes): And yes, you would be relying on tenants to meet your monthly expenses, including a mortgage bill that will arrive whether the other units are vacant or not. But in most markets, rental prices are far less volatile than home prices (from the San Francisco Federal Reserve): The main result from this decomposition is that the behavior of the   price-rent ratio for housing mirrors that of the price-dividend ratio   for stocks. The majority of the movement of the price-rent ratio comes   from future returns, not rental growth rates. (Emphasis added) It's also important to remember that rental income must do more than just cover your mortgage -- there's lots of other expenses associated with a rental property, including insurance, taxes, maintenance, vacancy (an allowance for the periods when the property will be empty in between tenants), reserves for capital improvements, and more. As with any investment, it's all about whether the numbers work. (You mentioned not being interested in the ""upkeep work"", so that's another 8-10% off the top to pay for a property manager.) If you can find a property at an attractive price, secure financing on attractive terms, and can be reasonably confident that it will rent in the ballpark of 1.5-2% of the purchase price, then it might be a fine choice for you, assuming you are willing and able to handle the work of being a landlord -- something worth at least as much of your research time as the investment itself.  It sounds like you're still a ways away from having enough for even an FHA down payment, which gives you a great opportunity to find and talk with some local folks who already manage rental properties in your area (for example, you might look for a local chapter of the national Real Estate Investment Association), to get a sense of what's really involved." "All other factors being equal, owning your primary residence is almost always a good investment over the long haul. Why? Because you have to live somewhere, and rentals, especially long-term leases that are important when you have kids in school, etc.,  are generally in the same ballpark as a mortgage in most markets. Giving $1,500 to a landlord gets me 30 days of living somewhere. Giving $1,500 to the bank gets me a place to live and equity in an asset which requires maintenance, but always has intrinsic value.  Detroit is one extreme, Manhattan or Silicon Valley is another real estate extreme... everywhere else is somewhere in the middle. What isn't always a good investment is speculating in highly elastic ""investment property"" like vacation condos as an amateur. It's a cyclical market, but our attention spans are too short to realize that. As most of the other answers to this question indicate, people tend to be down in the dumps and see all of the problems with real estate when the market is not very good. Conversely people only see the upside and are oblivious to problems when the market is high." I owned and managed a few residential properties.  At one time the net cash flow was on the order of $1000 per month.  But it was work.  Lots of work.  I was managing about 7 units. This does not count the gains in capital appreciation which were significant.   Using a management company would have put the cash flow at 0 or in the negative and would have lowered the quality of management IMO.   Nothing comes for free... When purchasing a condo in a university town, it is almost guaranteed that the prices will be inflated as a result.  This is because you are competing not only with single-home, primary residence homeowners, but also with a multitude of investment buyers and landlords who want to purchase a rental property.  Universities are popular rental markets due to their stability (there will always be students looking for a place to live), and as a result the areas attract investors more than other markets. This can work in your favor, however.  If you don't mind sharing your residence with other students, and you don't mind the part time work that being a landlord requires, you can live much cheaper and even make money over the next few years as your roommates pay your bills.  Owning a primary residence rental property also brings a lot of tax benefits because you can claim expenses and depreciation against your income.  This could benefit your father who could be a co-owner and would certainly benefit from the write-offs against his higher tax bracket. The real trick that makes or breaks the experience is finding mature, responsible roommates who will cause the minimum amount of headache.  If this part of the equation is missing, it can lead to distractions from school and even legal worries when you have to think about things like unpaid rent and/or evictions. Disclaimer: I’m not an expert.  This is my basic understanding, which I’m sure someone will be glad to tell is horribly wrong...  You need an LLC.  Many people in my area create an LLC management company, then create individual LLCs for each investment property.  Laws vary by state.  YMMV  Then you start researching properties.  Commercial loans typically require a higher equity position than home ownership.   Assume minimum 30%.  For ease of this conversation let’s say you’re making the horribly poor decision to put that towards a single property.   You’d be looking for a property in the 175-200k value range, because you’ll need to account for settlement expenses (attorney, broker, consultants) and a cash reserve.  You’d be also be looking for what the average cap rate is for your market.  In simplistic terms cap rate is the expected rate of return after expenses.  So if the average market cap rate in that region for comparable properties is 5%, you can expect around 5% return on your investment, after you pay fees, maintenance, taxes, insurance, interest, etc.  Buy a property and hold that property for a few years, making money every year, and claiming deductions on your earnings for something called depreciation.  Fast forward 5 years and you’re ready to sell, the value of your property went up because you made improvements along the way, brought in some better tenants who are paying higher rents, and now you can offer a better cap rate than your competitors.  You sell in the blink of an eye, and double your investment.  Say you have $500k now sitting in the bank in you LLC’s name, in cash.  You can either choose to cash out 100% and pay capital gains tax on your earnings above your basis (at 15% I think?)... OR you can quickly find a new property with that $500k, purchase it, and file a 1031, which says you don’t have to pay ANY capital gains on those earnings.  You just increased income significantly without ever paying taxes on the underlying increase in value of your assets.  Rinse and repeat for 25 years, develop a portfolio of properties, create a management company so you can stop paying others a percentage of your earnings, and you too can have the problem of too much money.  I welcome anyone with actual knowledge of the topic to please expound on, or correct me.