What Is A Condotel?
A Condotel is also known as a condo hotel or a contel in some markets. A Condotel is a building which is legally a condominium but operated as a hotel with registration desk, cleaning service, and often includes other services and amenities found in a traditional hotel. A Condotel can usually be used as a legal short-term rental or as a vacation home.
It’s important to understand that when searching in the typical condotel price bands in Hawaii, you will also come across leasehold properties. This is a form of property ownership that is fairly unique to Hawaii and similar to a long term lease. You can read more about leasehold ownership as well as the pros and cons and what to look for when viewing listings by clicking below.
Why Invest In A Condotel?
As Airbnb type businesses have expanded over the years, illegal short-term vacation rentals have become an issue in Hawaii. In 2019 local county governments started enforcing zoning and land use ordinances that restrict short-term vacation rentals in residential buildings and neighborhoods not zoned for short-term rentals. Most Condotels meet short-term rental requirements because they are located in areas zoned for short-term vacation rentals or have been grandfathered in due to specific characteristics and/or a long history of hotel type operations. Most Condotels will more than likely remain legal short-term vacation rentals, but the Association of a traditional condominium may choose to establish minimum rental periods such as 30, 60, or 90 days.
Other reasons Condotels are attractive:
- Management flexibility – can be self-managed, managed by other property management company, or added to hotel rental pool.
- Flexibility to use when vacationing in Hawaii. Most have flexible owner use rules.
- Carefree ownership – buying the cash flow from a hotel room.
- No need to worry about marketing, tenants, etc.
- No need to worry about cleaning after every rental.
Is A Condotel A Good Investment?
Some investors like Condotels because they typically provide better return than other property types. Most rental condominiums in Hawaii have a 3 to 4% cap rate. Condotels typically provide a better return with 5 to 7% cap rate. The downsides to Condotels are that rental revenue depends on healthy tourism which can be risky, and Condotel appreciation is lower than most other types of real estate. If you are focused on cash flow, ease of management, and flexibility of use, Condotels are a good option. If you’re focused on minimizing risk and maximizing overall yield, Condotels may not be the best investment option.
How Does A Condotel Work?
In general, Condotels can be self-managed, third party managed, or placed in a managed rental pool. Self-managed units involve a lot more work with advertising, booking, and guest concerns as well as a lot more coordination with cleaners and other service providers in between bookings. But the income from rentals is not split with the building/hotel operation.
Rental pool properties are hands off and worry free. The building/hotel operation manages all aspects of keeping the unit occupied, clean, and operating. There is a price to that carefree ownership and, depending on the Condotel, there are often options for owners of the unit. In some Condotels the management company will have a couple common options:
- 50-50 Split – The owner and operator split the rental revenue.
- Guaranteed Income – The Condotel operator will guarantee the owner a certain amount of income no matter what the occupancy or vacancy rate may be.
Which management option is best will depend on an individual investors risk tolerance and whether they are a pessimist or optimist. When tourism is firing on all cylinders and occupancy is at 90%, the 50-50 split provides a great return. When there’s a pandemic, 50% of zero is not a great return, and the guaranteed income option would have been the better choice.
So What’s The Best Condotel?
Which Condotel is best really depends on each individual investor’s criteria and preferences. The most important criteria is budget. At the time of writing this page, current listings in buildings that allow short term vacation rentals range from $130,000 for a 386 square foot studio at the edge of Waikiki to $15M for a 4,000 square foot 3-bedroom 4-bath unit in the Ritz-Carleton. The lower the budget, the Condotel will be just a hotel room. The larger the budget, the Condotel will be “normal” condominium that can be rented for short or long term uses at much higher rental rates.
The old addage Location, Location, Location is also an important criteria. Some investors prefer historically popular tourist areas such as Waikiki where most tourists are drawn by the activity and public amenities. Other investors prefer areas such as Ko’olina or Kuilima, near Turtle Bay, that are more remote and away from all of the noise and congestion of Waikiki. There will be tenant demographic differences that impact potential daily rates in each of these areas.
Personal use is an important consideration. Some investors are looking for a pure investment and have no plans to use the properties. Others are investing specifically because they want a place to stay while visiting Hawaii and want some income while not using the property. It’s important to be clear on this point when considering a Condotel investment. I’ve worked with investors who had a hard time deciding on a property because they weren’t clear if their primary focus was investment or vacation property. If the intended use is strictly investment, then it’s just a matter of analyzing the numbers. Looking for an investment that’s also a comfortable place to stay adds a lot variables and makes it a much harder decision.
I hope this information has been helpful. If you’re interested in a Condotel and ready to start looking, you can access the listings below. I’ve set up a search for the Condotels and “normal” condominiums that are currently legal short-term vacation rentals. As I mentioned above, condominium Associations can choose to have rules that are more restrictive than current zoning and land use ordinances. Some of the properties that show up on the list may have recently changed or could change in the future.