A condotel, short for condominium hotel, is a multi-family building where all of the units can legally be used as short-term rentals. Essentially, it combines the features of a traditional condominium with the amenities and services typically found in a hotel. This setup appeals to both vacationers and investors looking to capitalize on the short term rental market.
Considerations When Buying a Condotel
Investing in a condotel comes with its own set of considerations that differ from traditional short term rental real estate investments:
Financing Challenges: One of the primary hurdles investors face when buying a condotel is financing. Lenders often view condotels as commercial properties, requiring a minimum down payment of 20% or more. Interest rates can also be higher for individuals purchasing a unit in a condotel. This stricter financing criteria can limit accessibility to financing options and affect overall investment viability.
Competition in the Market: With every unit in the building available for STR use, investors must consider how they will differentiate their unit among others in the same building. Factors such as interior design, amenities, management, and pricing strategy play crucial roles in attracting guests and maximizing rental income.
Revenue Potential: While condotels offer the potential for high rental income due to their popularity among travelers, revenue can be depressed in condotels based on simple market economics. Condotels produce a high supply in a dense area. If the market doesn’t support the demand, all owners will work against each other driving ADR down.
Legality: One of the main reasons investors are attracted to condotel projects is due to the favorable regulatory landscape. In many cities, STRs are regulated by municipalities. For example in Austin, traditional condos are only allocated a limited number of STR permits (3% of units if the condo is in a residentially zoned area and 25% in a commercially zoned building). In condotels, 100% of the units can be used as full-time vacation rentals.
Austin Condotels:
In late 2021, Austin, Texas, welcomed its first condotel project, Natiivo, located in the popular Rainey Street district. Offering luxurious amenities and a prime location, Natiivo set a precedent for condotel developments in the area. However, before Natiivo even broke ground, I saw the writing on the wall. The prices seemed steep compared to the revenue potential, and I worried about the competition especially since Natiivo was sold fully furnished, and every unit essentially looked exactly the same too. Most who purchased in Natiivo as a pure cash-flow investment strategy are now disappointed.
Holly House recently emerged as another condotel project in Austin, albeit with a slightly different approach. Featuring smaller units and fewer amenities than Natiivo, Holly House offers incredibly affordable units in an amazing location for those looking to enter the Austin STR market. While the units are small (350-450 sqft), I think there is a greater opportunity among Holly House investors to maximize their investment. Primarily because the price point is so affordable. Savvy investors will be able to distinguish their listings and with only 30 units there is less-competition.
To Buy or Not to Buy a Unit in an Austin Condotel?
Investing in a condotel can be an enticing opportunity for investors seeking to enter the short term rental market, and they can be a great strategy for those looking to personally utilize their STR investment. However, if you are looking for a purely financial move, it's essential to carefully weigh the lending challenges, competition in the market, and revenue potential before diving into this type of investment.
As condotels continue to gain popularity in destinations like Austin and beyond, staying informed about market trends and property-specific factors is key to making sound decisions in this evolving real estate niche.
