Investing in condo hotels and timeshares

 Gordon van Eeden

Investing in condo hotels and timeshares

Timeshares, a concept created in the 1960s, are a form of ownership or right to use a property. A more recent trend in real estate investing is condo hotels, which in many ways are simply a new angle on the old concept of timeshares. A condo hotel looks and operates just like any other first-class hotel, with the difference that each room is separately owned. The guests have no idea who owns their room.

Both timeshares and condo-hotels typically involve luxury resort locations with amenities such as golf or spas. The difference between the traditional timeshare and condo hotel is the interval that the unit is the available condo
hotels are operated on a day-to-day availability, and timeshares typically rent in fixed intervals such as weeks.

Some of the most popular projects have been branded condo-hotels such as Ritz Carlton, Four Seasons, Trump, W, Westin, and Hilton located in the high profile vacation destinations like Hawaii, Las Vegas, New York, Chicago,
and Miami. You can also find many foreign condo-hotel properties in the Caribbean and Mexico, and the concept is expanding to Europe, the Middle East, and Asia.

Two types of individuals are attracted to investing in condo hotels and timeshares.

One group is investors who believe that the property will appreciate like any other investment. The other group is people who use the condo hotel or timeshare for personal use and offset some of their costs.

From an investment standpoint, the fundamental problem with timeshares is that they’re overpriced, and like a condominium, you own no land (which is what generally appreciates well over time). For example, suppose that a
particular unit would cost $150,000 to buy. When this unit is carved up into weekly ownership units, the total cost of all those units can easily approach four to five times that amount!

To add insult to injury, investors find that another problem with timeshares is the high maintenance or annual service fees. Is it worth buying a slice of real estate at a 400 to 500 percent premium to its fair market value and pay
high fees on top of that? We don’t think so.

Many owners of timeshares find that they want to vacation at a different location or time of year than what they originally purchased. To meet this need, several companies offer to a broker or sell timeshare slots. However,
timeshare availability and desirability have so many variables including location, time of year, and quality of the particular resort that it has been difficult to fairly value and trade timeshares. As a result, resort rating systems
have been developed (Resorts Condominiums International and Interval International are two of the most well known) to compare resort location, amenities, and quality.

The developers and operators of condo hotels love the concept because one of the most consistently successful principles of real estate is increasing value by fractionalizing interests in real estate. As with timeshares, the developers are able to sell each individual hotel room for much more than they could get for the entire project.

Condo hotel operators are able to generate additional revenue from service and maintenance fees to cover their costs of operations. Often the owners’ use of their own rooms doesn’t negatively impact the overall revenues of the
property because the rooms would have sometimes been vacant anyway.
Condo hotels allow their owners to stay in their units but often impose limits on the amount of personal usage.

Still interested in a timeshare? Read on.

Timeshares are packaged in a multitude of ways some resorts offer fixed units where you vacation at the exact same unit every year either on set dates or set numbered weeks (though the actual calendar date may vary.
Some timeshares are available as a biennial (every other year) so you can have some variety.

Some offer fixed weeks, where you have the same week every year but maybe in a different unit.
Timeshares aren’t just a one-time purchase; they also have monthly or annual service or maintenance fees. These funds are established each year by the homeowner’s association or resort management company.

There are different types of ownership for timeshare interests, with fee simple, right of use, and leasehold being the primary options:

Investing in condo hotels and timeshares

Fee simple ownership is an estate in real estate that provides the absolute ownership subject to state and local laws and government powers such as taxation, eminent domain, police power, and so on.

Right-to-use is occupancy rights for a given number of years but no actual ownership interest in the property. Some states and many foreign countries don’t allow the fee simple ownership of timeshares so they offer long-term lease or right-to-use agreements that can be from 20 to 99 years.

The actual fee simple title of the real estate remains with the resort developer or management company.
The day-to-day operations of timeshares are typically handled by the homeowner’s association or a resort management company.

Leasehold is an agreement between the lessee (tenant) and the lessor (owner or landlord) specifying the lessee’s right to use the leased property for a given purpose and given time at a specified rental payment.
If you’re interested in buying a timeshare, you can talk with the developer directly; this method may make sense if you’re looking for a particular time of the year in the high season.
The timeshare industry typically uses a color-coded pricing system to denote the seasonal demand for a particular timeshare property.

Although the concept is pretty consistent, the designation of particular colors can vary from one resort to another. In general, the demand is broken down into three categories:

Red for the prime or high demand
Yellow or white for intermediate or medium season
Green or blue for off-season or low demand

If you’re looking for a week in the green or blue season, you can often find much better pricing from reputable resellers. The reputable is a key and elusive term here. Among companies to consider for reselling timeshares are
RCI, Interval International, and Trading Places International

The purchaser of the condo-hotel unit sees this type of investment as an option to direct ownership of a second home and likes the ability to generate income. Professional management is another one of the attractions to investors. The owners don’t pay a management fee to the hotel operator unless their room is rented, and then the collected revenue is split.

These properties are often hyped, and the expectations of the condo-hotel investor are often much greater than the reality. Investors are lured to condo hotels by the potential for appreciation and cash flow as well as professional
management. Many investors find themselves being pressured into pre-sale offering presentations even before the units are built. These events can be tempting, but savvy investors need to do their own due diligence. So when
you hear a sales pitch indicating that your proposed investment in a condo-hotel unit will provide significant income from hotel rentals and cover most or all of your mortgage and carrying costs, that’s the time to grab your wallet
and find the nearest exit.

Many investors’ first experiences with timeshares are tempting offers of a free meal, a great discount offer to a theme park, or even a free one or two-night stay at the resort, with the catch that they have to spend some time
listening to an informational presentation. These offers usually come from individuals contacting you in known tourist locations or when you check into a hotel that just happens to offer condos as well. Robert remembers his first
exposure to timeshares was as a child in the early ‘70s on a family vacation to Florida when his parents got a free camera just for attending a seminar on timeshares near Orlando. Even as a teenager, Robert didn’t like the obvious
pressure sales tactics he observed.

However, timeshares may make sense for you if you like to vacation at the same resort around the same time every year and if the annual service or maintenance fees compare favorably to the cost of simply staying in a comparable
resort. Remember, though, that if the deal seems too good to be true, it is too good to be true. As with timeshares, the only folks who generally make money with condo hotels are the developers, not the folks who buy specific days of ownership.