Why You May Not Get A Mortgage For A Hotel Residential Suite
Hotel residences have become more and more popular in Toronto, especially among busy professionals who want to have their own condo style space with the added convenience of hotel services such as on site restaurants, shared pools, fitness areas and even housekeeping/room service. Companies such as Bisha, Thompson and Shangri-La have made names for themselves offering luxury buildings that house both hotel rooms and condos in an effort to provide the best of both worlds.
But while it sounds like it may be the ideal set-up, getting a mortgage to finance this lifestyle residence can be challenging if not impossible these days. In fact, Canada’s major banks have shied away from financing these units in recent years so buyers and sellers have had to turn to alternative lenders. And even then, getting a mortgage may be very difficult.
Why banks are not offering mortgages for hotel residences
Some buyers and sellers may wonder why lenders are often so hesitant to finance residential suites in hotel residences. After all, are not the common space and shared amenities similar to those of a condo building?
Well, yes and no.
As with condos, the owners of these residential suites pay fees to cover the cost of the services and to build up the reserve fund. The business model however is more complicated since the hotel part of the building is a separate corporation from the residential suites.
Then there is the fact that many buyers of these suites are seeing them as a business opportunity. With the growing demand for short term premium housing in the GTA, some buyers are scooping up these properties in order to rent them out when the owners are not using them. This process is made simple and convenient by the hotel’s in-house management company.
And while this may seem like a smart idea for the investor, banks and other lenders are pulling back on funding because of the added liability.
“Between the complex business structure and the added risk that these units will become rental properties, finding a reputable lender can be tough,” says Toronto mortgage agent, Lorrie Boucher. “I’ve personally seen situations in which we’ve had very limited success finding a lender that would provide a mortgage.”
Are hotel residences a good investment?
In recent years, hotel residences have not had a great track record for investors. The high level of luxury that such buildings offer typically means fees that are much higher than regular condo fees. And those who choose to rent out their suites will likely only get about 50% of the rental income with the other 50% going to the management company. In order for the investor to actually make money, it is estimated that they will need to have their unit occupied 60-70% of the time; but statistics show that these types of units are likely to only be occupied 42% of the time.[i] As rental units, many turn out to be losing investments.
Additionally, with less and less lenders willing to offer mortgages on these types of properties, owners may find that they have a difficult time when they want to sell.
For those who are looking to invest in a hotel residence, it is of the utmost importance that they do their homework, have good representation and fully understand what they are buying into. For more help with questions related to hotel residences or any other type of residential property in Toronto, contact the team Mark and Brandon Real Estate today.