What’s that giant red flag? 5 reasons why you should NEVER buy a condo hotel

by barbfischer on November 12, 2009

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From the Lessons Learned Department: 5 reasons why you should NEVER buy a condo hotel

Four years ago it sounded like a good idea… I ran all the numbers available. Today it’s worth far less than I paid, but I can live with that because I bought for the long term. But the onsite Property Management chokehold is a financial killer.

I paid $335K for my studio condo-hotel at the Signature at the MGM Grande, plopped down $90K for down payment upfront, waited almost a year for completion, was totally jazzed because the prices were now up into the low $500Ks and they were already starting on two more towers. In fact, I thought my neighbor was an absolute loon for selling his unit for $505K only a month after escrow closed.

Well….

We all know what happened to Las Vegas property values. And room rates on the Strip.

The Signature really is a lovely building and I really appreciate that’s it non-smoking, too. But now buyers must pay cash-only, as nobody will lend on it anymore. My unit, with its designer furnishings and delightful strip view, is worth about $125K.

I can weather that, but the deal breaker for me is the intolerable fees and regulations the onsite management company keeps slapping on. For the past several months, I’ve netted between $96 and $256 per month, while the Signature has reaped around $857 a month. I still have to pay the electric bill (seriously) of about $42 a month. And this is with the unit being rented at least 15 days per month. And you wonder why there’s a major lawsuit brewing….

Oh, but of course they allow you to rent out your own unit. Most of the owners are like me and live out of town, so it simply isn’t practical. A few PM companies have sprung up to handle all the disgruntled owners, but they have a tough time making the numbers work.

Here’s what to watch for, and why I would never recommend a condo hotel to any buyer:

1. They won’t share the rental numbers. They won’t tell you approximately how many days it will be rented. There is an owner website where they post the average room rates by the month, lowest to highest , but they won’t reveal a track record of rental history for another similar unit.

2. They won’t tell you how they handle reservations- so you won’t know if they will be overflow from the regular hotel or a sister hotel, or, if you own a lower floor unit, if they will try as hard to rent that out as the more requested higher floor units.

3. On many condo-hotels, no more loans are being made—they are cash-only now. That’s a giant red flag.

4. The fees are high and many. FFE (the Signature recently dropped this due to continued outrage), the regular monthly Transient Rental Fee of $200, the Shared Component Assessments of approximately $545 on a studio, and the maintenance service fee of $84. Plus, you get to pay your own electric bill.

5. If you opt-out of the onsite rental program, be prepared for a slew of “penalties” . If I rent it out before my 60 days notice, I would have to pay a $500 penalty for each and every night the hotel was sold out, and a $500 penalty for every already booked reservation, even if there was another room available. I just found out today that I would also have to get a business license if I want to rent out my own unit. And I would have to hire an outside cleaning company on a daily basis—even if my tenant kept it clean and/or didn’t want such frequent cleaning. The way I figured it, at $1800 a month rent, the fees would gobble that right up and I’d be in the hole for far more than that.

Like any condo arrangement, you will always have very little control over the HOAs. But this is so much more severe. Watch out! Even with a complete fee breakdown, there are too many unknowns to make this anywhere near a good investment for the average person.