Oceanfront Investing

April 2011
Written By: 
Paul Grimshaw

What’s a condo-hotel and why should you buy there?

The majority of the investment real estate market along the Grand Strand is driven by the turnover of condominium units along the oceanfront. From Garden City to Little River, the area’s skyline is dominated by hundreds of high-rise towers, mid-rise buildings, and wood frame low-rise buildings. The vast majority of these buildings hold the tens of thousands of rental units. These individual condos represent the majority of real estate investment purchases along the Grand Strand. 2011 may be a good time to consider a purchase–just make sure to ask the right questions before you buy.

What Are You Buying?
For most investors an oceanfront or ocean-view condo is considered a second home, and is subject to unique tax considerations. The units can provide a good investment vehicle while also creating a personal vacation home for their owner. Know what you’re buying–all condos are not created equal.

Condo-Hotel vs. Residential Building
First–just what is a condo? A condo is an individually owned housing unit with common ownership of the structure that contains the unit, and common ownership of its associated amenities–pools, tennis courts, fitness rooms, etc. A Homeowners Association, made up of individual owners and an elected board of directors, runs the business of this common ownership, and sets a fee. This monthly or quarterly fee is to cover certain expenses–maintenance, lawn care, insurance, etc. On oceanfront investment units, this fee can range from $300-$1000 per month (on average), with varying degrees of inclusion. For example, sometimes insurance and unit-level electricity are included, sometimes not. An oceanfront or ocean-view condo building usually carries one of two possible designations–a condo-hotel, or a residential “true” condo.

A condo-hotel is just what it says it is. To the guest, it acts like a national chain hotel or motel. The units are often identically furnished, rent for the same amounts as others in the building, but are owned individually. For a condo-hotel designation, the building must have a 24-hour check-in desk that can make and execute nightly rentals, have maid service, and hotel-like amenities. These buildings often provide the highest yield in rental income. Depending on weather and additional variables a three-bedroom, three-bathroom oceanfront condo in Myrtle Beach can generate up to $40,000 per year in gross rental income. Ask for two or three years’ rental history to get an average.

Understand, though, that one bad season can slash these gross rental numbers, and regardless, an owner only receives a percentage of the gross rentals. Depending on the type of rental agreement, to which an owner enters, that “net rental” or take home money, can vary from 80-percent to 50-percent of the gross rental. These net rentals still often completely cover the Association Fees and additional ownership expenses, making these condos particularly attractive to investors.

Residential Condo Building
An oceanfront residential or “true” condo building may also offer short-term, but usually not nightly, rentals, and, despite the name, is usually home to very few full-time residents. One of the primary differences here is the lack of rental desk. Check-ins for guests of these units are usually handled off-premises. Some out-of-town owners do their own marketing, handle their own rentals, and will mail keys and rental agreements to renters. Most of the rentals, though, are handled by an outside agency that specializes in this type of property management–these companies act as vacation rental experts, do extensive marketing, and offer their own rental desk offering daytime check-in, after hours check in, and room cleaning services.

This type of building remains somewhat less-crowded, though with units fully occupied, is still busy in the prime seasons -Memorial Day through Labor Day.

Does the Designation Matter?
In short, financing can be much more difficult (but not impossible) in a condo-hotel. Especially since 2008, creditors are more leery of this type of condo, as they represent a huge portion of the foreclosure market. Most condo-hotel buyers in 2010 were cash buyers, taking advantage of foreclosures and dramatically reduced asking prices from highly motivated sellers. Remember–should you decide to sell a condo-hotel, you may also only be able to sell to cash buyers.

Like their hotel-oriented cousins, residential oceanfront and ocean-view condo buildings can also generate strong gross rentals, and are much easier to finance,

What About Financing?
Every buyer and every building has its own unique criteria in order to be considered for financing. A mortgage broker can be particularly useful here in that shopping banks is part of their service and expertise. Roy Dunn, senior loan officer for the Real Estate Mortgage Network, has weathered the stormy waters of condo financing. “I want the client to paint a picture for me of what they want to buy,” said Dunn. “After they give me the nuts and bolts, we’ll obtain a credit report, and I send them a link to a simple, short on-line application. I’ll call back, finish up with a few questions, and tell them they’re good, or that there’s still work to be done.”

Generally speaking, investment properties require good to excellent credit, a minimum of 25-percent down, strong liquidity, and strong employment history. There are exceptions to these guidelines–lower down payments are available for certain buildings and for those with particularly strong credit and liquidity. Certain buildings are easier to buy in than others–your Realtor should be able answer basic questions and show activity in any given building, which may influence likely financing options.

No investment is without risk. Those who bought at the top of the market in 2005-2007 will be happy to tell you their horror stories, however, today’s investors with cash and the stomach to buy, are snapping up the best deals on the beach–and you can too.

Paul Grimshaw is a freelance journalist and licensed South Carolina Realtor. These are only the opinions of the author, and not legal advice. The comments contained within should not be applied to any specific real estate transaction.