The truth behind resort condo's
As a professional in the resort real estate industry, one of the areas of discussion that we have to deal with time and time again is the false expectation created by many developers' sales and marketing teams that an investment unit is going to cash flow positively.
Typically in most resort environements, real estate is selling upwards of $250 per square foot. Some exceptions exist, but lets use this example for illustration. The challenge for the buyer is walking into a sales presentation with a pre-conceived notion that they are going to buy a unit and never have to put any cash into it because after all the folks at the presentation told me I could make a 20% return on my money!
First of all, lets be honest, if a developer could make a 20% return on his money with ongoing cash flow, why is he selling it to you? Secondly, who showed you what figures? In some of the most mature hotel markets in the world, occupancies are running around 60%, often a far cry from the 90% occupancy rate some slick sales person told you in that emerging resort market place with one hotel!
The truth is that on average, condo rental programs rarely deliver much more than twelve to fifteen weeks of rental anually because of the conflict presented by owner's personal use and booking terms surrounding that use. Then we need to look at the average daily rate in the area since with yield management programs in the hotel industry, your very luxurious and large condo may only rent for the same as a one bedroom unit in the local hotel because occupancy rates aren't there!
So in what way is buying a resort condo a good investment?
There are several very good and profitable reasons to buy a resort condo/home:
1. The resort market places you are contemplating buying in are some of the most pressured and heated real estate markets you can find, and will likely remain that way for the next ten to fifteen years.
2. The opportunity to benefit from first phase pricing allows you as a buyer to develop a "lift" from the pre-programmed price increases that a developer will often work into their programs.
3. The rental revenue can contribute greatly to your costs of ownership and financing, which means you can build your asset base faster with less effort.
4. Buying overseas can allow you to make timely exchange rate profits too, albeit very carefully.
5. By leveraging your purchase you could stand to make very serious short term ROIs - for instance, if a buyer purchased a $400,000 unit at the early phase pricing and put down $100,000 as a deposit, financing the rest, the developer increase in price list and the market dynamics could perhaps allow that investor to sell the unit in twelve months time for $500,000, this would be $100,000 in and $200,000 out with some carrying costs in the intervening time frame that would have largely been covered by the rental program.
Now if your stock broker offered us that kind of a stock play in the markets, you would be all over it. The challenge with real estate is that the due diligence required is significant (in fact in recent years the same is true of stock market investments) and requires a trusted relationship with some form of brokerage that you allow to do that homework for you.
The bottom line is that while the opportunity to profit is great, the place you need to look for profit is often not where that slick sales person may be taking you!
Typically in most resort environements, real estate is selling upwards of $250 per square foot. Some exceptions exist, but lets use this example for illustration. The challenge for the buyer is walking into a sales presentation with a pre-conceived notion that they are going to buy a unit and never have to put any cash into it because after all the folks at the presentation told me I could make a 20% return on my money!
First of all, lets be honest, if a developer could make a 20% return on his money with ongoing cash flow, why is he selling it to you? Secondly, who showed you what figures? In some of the most mature hotel markets in the world, occupancies are running around 60%, often a far cry from the 90% occupancy rate some slick sales person told you in that emerging resort market place with one hotel!
The truth is that on average, condo rental programs rarely deliver much more than twelve to fifteen weeks of rental anually because of the conflict presented by owner's personal use and booking terms surrounding that use. Then we need to look at the average daily rate in the area since with yield management programs in the hotel industry, your very luxurious and large condo may only rent for the same as a one bedroom unit in the local hotel because occupancy rates aren't there!
So in what way is buying a resort condo a good investment?
There are several very good and profitable reasons to buy a resort condo/home:
1. The resort market places you are contemplating buying in are some of the most pressured and heated real estate markets you can find, and will likely remain that way for the next ten to fifteen years.
2. The opportunity to benefit from first phase pricing allows you as a buyer to develop a "lift" from the pre-programmed price increases that a developer will often work into their programs.
3. The rental revenue can contribute greatly to your costs of ownership and financing, which means you can build your asset base faster with less effort.
4. Buying overseas can allow you to make timely exchange rate profits too, albeit very carefully.
5. By leveraging your purchase you could stand to make very serious short term ROIs - for instance, if a buyer purchased a $400,000 unit at the early phase pricing and put down $100,000 as a deposit, financing the rest, the developer increase in price list and the market dynamics could perhaps allow that investor to sell the unit in twelve months time for $500,000, this would be $100,000 in and $200,000 out with some carrying costs in the intervening time frame that would have largely been covered by the rental program.
Now if your stock broker offered us that kind of a stock play in the markets, you would be all over it. The challenge with real estate is that the due diligence required is significant (in fact in recent years the same is true of stock market investments) and requires a trusted relationship with some form of brokerage that you allow to do that homework for you.
The bottom line is that while the opportunity to profit is great, the place you need to look for profit is often not where that slick sales person may be taking you!
posted by BCResortHomes.com at 2:12 PM
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