Condo hotel buyers face tax shock

[Mike in TO]

Intrawest is having similar assessment difficulties with thier condo/hotel units up in Collingwood at Blue Mountain. Many of the investors have become very worried about both cash flow and the impact on the value of thier units.

 

[urbanto]

No offence intended to forum members. However, anyone will basic real estate investment experience and knowledge would have instantly red flagged this entire project as suspect. The revenue assumptions were high and the operating expenses were outrageously low. Even if taxed at the residential rate I fail to see how an investment of this kind would ever yield positive cash flow.

 

[sdoody]

There's a difference between an apartment and a hotel. If I own a condo and rent it to a tenant who signs a lease it's clearly a residential use, just like any apartment building. Do condo corps even allow an owner to rent units like a hotel?

You may have a point and although I have no idea what many condo corporations allow (my own condo corporation doesn't have any restriction on rental lengths) I also have no idea what this has to do with tax assessments (which as far as I know have nothing to do with condo corporation rules). It still doesn't really explain why the condos are valued at the residential rate but taxed at the commercial rate.

And to say that the units wouldn't ever yield positive cash flow even at the residential rate is just silly...at a monthly average rent of $1500-2000 (say $1750), you could carry a $900 mortgage, a $500 condo fee, and a $300 property tax bill and still earn a positive cash flow...even if it didn't fully pay for all of these fees as long as it's coming close to paying the mortgage it's still doing all right. I suspect that urbanto doesn't quite have the 'basic real estate investment experience' that he claims.

 

[InaneHuman]

I think that some of the large hotel chains were making alot of noise to City Hall about this issue, describing codo-hotels as unfair competition and it was an effort on their part to influence the authorities to squash any competition. The issue had never surfaced with property management companies renting condo suites to short term (less than 30 days) tennants before. Now that the Ritz, Four Seasons, ShangriLa, TT, et al are coming in, voila, they need to silence the small guy renting out his one unit.

 

[urbanto]

even if it didn't fully pay for all of these fees as long as it's coming close to paying the mortgage it's still doing all right.

There's your failed logic. You are not 'doing all right' by barely covering the mortgage. A stabilized real estate investment should always yield positive leverage. If you believe otherwise then you clearly have no experience in this realm.

The reason? You rightfully deserve to be compensated for the risk that at some time in the future you'll have to shell out big money for some unforseen cap ex item or in the event that your revenue stream is weaker than projected. (a virtually certainty in the case of a 1KW condo suite) Look at any form of investment real estate- multi-res, office, retail, industrial and even in very strong markets- like today for example, you find going-in returns greater than the cost of capital. That's fundamental investing basics. In fact, when it comes to hotel property the projected return should be even higher because it's cyclical usually. Look at the yield on hotel reits- the highest of the group.

Buy a suite a 1KW because you want to live there- don't bank on it supporting you when the reverse is far more likely.

 

[sdoody]

Your original statement was that you couldn't see how an investment of this kind could ever yield positive cash flow...now apparently you're changing your argument to the argument that it doesn't yield enough cash flow.

If you don't want to buy a suite there then don't...I have a suite there and I've made about $300 a month after covering all my expenses since the hotel started picking up in March-April (and a fair bit more than that in some months), which is all I was hoping for. The commercial tax rate thing is going to be a problem, obviously, but at the residential rate it's certainly a viable business.

Aside from that, I just like being a part of 1KW...it's an interesting building, it's a new concept in the city, it seems to be doing quite well as a hotel (judging by revenue numbers and things like comments on travel websites), and Harry, despite his faults, is an interesting guy and is obviously passionate about what he does. Is it the best investment out there? Probably not, but to me the other aspects of the project make up for that. You seem to have a bit of a chip on your shoulder about the whole thing, though...wait...are you David Mirvish??

 

[urbanto]

Stinson

You seem to have a bit of a chip on your shoulder about the whole thing, though...wait...are you David Mirvish??

I'm not David but I readily identify with his position and in many respects am in a comparable position to him.

Own there because you want to live there- not to make money. By the sound of it your investment has failed to yield a positive return over your holding period. I suspect that despite your $300 months overall you are down big time. What kind of investment is that? And just wait until they bump your condo maintenance fees again- think the hotel market is going to pick up enough to offset them? THINK AGAIN!