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Downtown San Diego’s Best Investment Property
October 10th, 2011 categories: Hard Rock Hotel, San Diego Real Estate Deals
In my opinion, San Diego’s Hard Rock Hotel is one of downtown’s best investment properties. Obviously I can’t predict the future, but I think that Hard Rock Hotel is a great buy. So far this year, there have been 22 sales at the HRH. Of those 22 sales, only two buyers had not previously owned a unit at the HRH. Additionally, one of the “new” buyers purchased two condos. What does all this mean? Presumably, it means that owners at the Hard Rock Hotel, really like owning these condos(even those who bought back in 2007 and 2008 at MUCH higher prices!).
Just like cars, or computers, or even ballpoint pens…repeat buyers are typically a result of a quality product. In this case, we’re seeing people who bought condos for $400-500K(on average) just 3-4 years ago, buy those same condos(more or less) for about $170-200K! To me, this means a few things:
- Owners at the HRH are happy with what they own. This means that they like the condo itself and feel that it’s a quality product. I would assume this also means that they like Tarsadia’s management of it and the income they’re seeing – at least enough to buy more condos there.
- There’s no better alternative. No, I haven’t checked to see what else these buyers may have purchased, but I do know that the clients I’ve helped(12 of the 22 sales this year), have not purchased any other real estate in San Diego during this same time.
- Owners are optimistic about the hotel’s future. Based on the rental figures I’ve seen(2008-2011YTD), the Hard Rock Hotel has been producing more income for it’s owners in 2010 and 2011(2011 slightly better than 2010). 2008 was the best year and 2009 was the worst. It looks like San Diego and the Hard Rock may have already seen the worst.
So why do all these people want to buy at the Hard Rock? For starters, this is property that can generate revenue for the owner and still be used by the owner, pretty much whenever they want. Unlike traditional “rental properties,” owners at the Hard Rock Hotel can collect rent on their condo on a daily basis and are not restricted by weekly, monthly, or annual leases. This means that you as an owner, can rent out the room for most of the summer, but still come down and use it whenever you want!
At the Hard Rock Hotel in San Diego, owners get to use their condo-hotel 28 days a year for free. This includes valet parking, gym/internet access and of course, San Diego’s incredible weather(it’s 72 degrees out right now – it doesn’t matter when you read this). And if you don’t use up all of your 28 days, that means you might make more money(the more your room is available, the more it might get rented!). And for those of you who want to spend more than 28 days a year here(14 weekends), I can help you buy a few more condos.
Numbers:
I’ll give you some estimates on what some rooms might earn. Studios appear to bring in about $17-22K a year for the owners. This is their share. Owners would have to additionally pay HOA dues(about $580/mo) and property taxes(about 1.25% of the purchase price/yr). So if you pay $170K for a studio and it makes $20K/yr, after you pay HOAs and taxes, you’re looking at about 6.4% ROI. Not bad, right?
Now there are other factors to consider…
- There are no guarantees. There’s no guarantee that the revenue will continue to rise. Who knows what will happen to the economy, or the hotel. Maybe a new hotel could be built and take all the market share. Yes, it’s unlikely, but who knows what might happen.
- Future Assessments. Every good hotel must keep their hotel looking and feeling good. This means new beds, TVs, linens, etc. At some point, you have to assume the Hard Rock will made some renovations and the owners will have to pay for it. I’m not sure when this would happen, or how much it might cost, but I wouldn’t be surprised if owners would have to cough up $5-15K every 10 years or so.
- Branding. The Hard Rock name is currently being leased. My understanding is that it’s a 20 year lease and there are measurements to adjust the amount being paid, depending on the hotel’s performance. I don’t see why the hotel would get rid of this iconic brand, but who knows. A potential owner should consider what might happen if the Hard Rock, was no longer a Hard Rock. Would this be good or bad?
- Inventory. Since the hotel was completed in 2007, there have been approximately 50 resales(this includes short sales, foreclosures and some investor sales). This means that there are another 370(420 units total) or so condos that were purchased for considerably more than the current going rate. I’m assuming maybe 20-40 of these have no loans, so that leaves us with about 330-350 condos that are significantly upside down. I would also assume that most of these owners will at some point try and complete a short sale, or let them foreclose. This means that prices(probably) will not rise until this inventory is absorbed. But…if you pay cash and the rent is stable, this shouldn’t matter too much.
Even with all these “what if’s,” I think the Hard Rock is a great buy. There are risks, but I think they are small and predictable risks. With that said, it’s still your money and your decision. If you have any questions, please contact me. I’ve sold 15 condos at the Hard Rock and was part of the “in-house” resale team when I was working at Prudential. And yes, I’ve help people buy and short sell their units.
Click here, here and here to read more about the San Diego Hard Rock Hotel.
Click here to see what’s currently for sale at the Hard Rock Hotel(*I currently have additional units for sale that are not on the MLS and are not short sales).
