Brian Brady's morning blog prompted me to write on Las Vegas Condotels and the challenges and risks that the average buyer must face.
Now let's say Joe Tourist walks in to a condotel sales development office to learn how he can buy a little piece of Las Vegas and maybe turn a profit. He is told about Las Vegas average room rates and occupancy (currently hovering at $118/night/90.6%) and the sales agent shows them a little math which brings him to a great number with incoming rents totaling around $3300/month. Joe Tourist now believes that he can buy this property and make positive cash flow so easily, he wants to make this work!
Joe goes home and ponders over his beautiful glossy brochures and has thoughts of tapping his home's equity to put a sizable down on his new easy money making investment. He goes to sleep dreaming of sugar plums and scantily clad showgirls dancing in his head.
What Joe may or may not know is that Las Vegas has a couple of dirty little secrets. No Really?!?!?! Tell me more!
Incoming Transportation Issues:
- The 1-15 South is a nightmare with Californians pouring in and out on Friday and Sunday. There have been ideas about constructing a bullet train between Baker and Anaheim, but those are just ideas.
- McCarran International Airport traffic is nearing it's Capacity. There is a proposal to build another airport in Ivanpah valley but that faces it's challenges. It would also cause more strain on the 1-15 south traffic as it is located near the Nevada/Cali stateline.
- The drive to and from Phoenix is a 2 and 4 lane dangerous nightmare that they have been working on for over a decade + and it is slightly improved, the hoover dam bypass will be finished soon, but still!
Substantial Increase of Hotel Rooms from now until 2010:
- Las Vegas Currently has approximately 133,000 rooms and that number is expected to jump to 175,000 rooms by 2010. That is approximately 42,000 new rooms.
- When you look at it in a historical perspective between the years 2001-2005, there were only 6500 new rooms added to the city.
- The historical visitor volume growth is not adding up with the proposed growth of hotel rooms.
The hotels are fully aware of the transportation and visitor volume issues and that is one reason why they are creatively transferring risk on to individual owners!
- They are still making money on their units in the form of astronomical monthly association fees
- They charge an average of 50% management fees to rent out your property
- When they are connected to a casino: they have the ability to cut their nightly rates substantially as volume through their casinos, shops and restaurants will make up for dollars lost.
- For the most part: the main hotel will be sold out before the condo units are rented out
What Joe Needs to Know:
- You cannot get a regular insurance policy on one of these units. You will need to find a
boutique insurance specialist to provide the insurance. - You cannot get a regular loan on one of these units, you will, again, be faced with finding a lender who can specialize in these types of loans.
- You cannot just buy and flip. You are not original in this thinking! You and 25-75% of the owners are thinking the same thing. Most often than not the whole building will close at the same time and then your little market will be flooded with inventory.
- Expect a negative cash flow/low ROI for a while until transportation issues are rectified, visitor volume is normalized with supply and inventory issues are worked out.
- Be prepared to hold for a minimum of a decade!
- Past performance is not indicative of future gains!
Feel free to post related blogs and posts in the comments section as long as they are related to the topic at hand!
Please put this in my economics group, Renee.
This is the exact information I needed for Vegas. What I should have said was that a "condo" on the Strip is perfect to own as opposed to a condotel.
The point I was trying to make was that Vegas luxury condos on the Strip will never be "an affordability risk" as they will be in high demand from the rich and famous for years to come.
Renee has corrected my "very grave miscalculation". I stand by my "call" that the Strip is the right place to be but will amend the "property type"
Renee:
Comment #2: The transportation issues are key, I'll admit. However, I believe the buyers of the "luxury-Strip" real estate in the next decade will be exempt from those transortation concerns. I think Eminem, Kid Rock, and Matt Heaton (the presumed internet billionaire of 2015) will arrive on private planes.
I am further intrigued that you know "Joe". I wrote him a letter about 6 weeks ago but I guess he called you!
I'm going to have to say that great minds think alike here. Renee.
Your article was timely and thought provoking regarding my area, -the Mississippi Gulf Coast. thank you.
Great post.
I have owned resort property in Florida and unfortunately, like many others I discovered the Real Math after I was in. It is difficult to know the real estate market if you are only there a short period of time. You are in the "high" of your visit. I am selling my Florida property at a profit, but not without cost.
I always tell people, "If the room is empty, the mortgage is still due".
Thanks Renee.
Renee, I am dead set against condotels. I have clients that are buying them in Hawaii with the same "stars in their eyes" that you describe. I wish I'd had your critique to show them.
A condo that you can put on the weekly rental market makes so much more sense than a condotel. You are absolutely right that the only time the hotel will rent out your unit is when theirs are all occupied.
This is very good information and again I think that you should re-write it today as an up-dated version.
Bill Roberts