Investment with a view

Lured by the prospect of having good rental income and a future retirement home, investors are scrambling to buy, then lease waterfront condominiums to tourists. The rise of tourism and property prices has been a boon.

[Times photo: Dirk Shadd] Margie Leighton of Broomall, Pa., rinses glasses before putting them away while unpacking for a two-month stay at Bahia Vista condominiums in St. Petersburg.

By MARK ALBRIGHT

© St. Petersburg Times, published January 14, 2001

Kathleen and Lee Bushey bought a North Redington Beach condominium in 1991, a perk from their dual incomes and a status symbol to a generation beginning to think of retirement.

But the Waterville, Maine, couple will rent another place for their spring vacation in Florida this March. The reason: A loyal tenant pays them peak season rates every March for their beach condo. "We certainly don't want to boot them out just so we can stay there," said Mrs. Bushey, 60, who owns a home health care agency.

Keeping their two-bedroom condo rented 75 percent of the year has turned their $120,000 investment into a steady stream of income. With the appreciating real estate market, she figures the unit is worth $200,000.

The allure of good rental income, along with a future retirement home, has investors such as the Busheys scrambling to buy and then lease Florida waterfront condos to tourists. Prices for waterfront condominiums have soared 20 percent to 30 percent in three years, reflecting the growing demand for condos in densely populated Pinellas County.

Meanwhile, Pinellas County's tourism has climbed 21 percent in the past decade, providing plenty of vacationers weekly rentals that are cheaper than hotels. The best waterfront hotel rooms can fetch $250 a night in March, but two-bedroom condos with a full kitchen can be found for $850 for a week.

Demand has grown enough to support a dozen condo rental companies that manage more than 10,000 condo units for out-of-state owners such as the Busheys.

To be sure, hotel rooms still outnumber rental condos 31/2 rooms to one along the 33 miles of Pinellas County beaches. And renting condos isn't for those who want pampering. Forget daily housekeeping, room service or on-site bars and restaurants.

The bigger hotels continue to invest millions in remodeling, from $12,000 a room at the Sheraton Sand Key to $65,000 a room at the Don CeSar Beach Resort and Spa. Yet many condo rentals often are decked with 1970s motifs: foil wallpaper and green shag rugs.

Management companies say prodding owners into refurnishing every five to seven years is their biggest headache. "You need durable, not expensive, furniture but many owners just won't spend the money," said Jeff Mattock, a Dunedin interior decorator who has seen units that have not been redecorated in 23 years.

Still, the condos have built a loyal following.

"It's nice to have a little more space and a kitchen," said Mary Tankersley, a 52-year-old New Jersey homemaker who spent the holidays at the Ram Sea in North Redington Beach. "They equip these units with everything you need. All you bring is your clothes."

"We liked this place so well, that after renting it 11 times, we bought it," said John Gill, a British home builder and father of two teenagers from London.

Ups and downs

The condo rental business has a history of more valleys than peaks. Many rentals date back to the massive beach condo overbuilding of the early 1970s. Many that were built for owner/occupants never had one. In the early 1980s more were built as vacation rentals in a "condo-tel" construction splurge that swept up the beaches before colliding with the 1986 Tax Reform Act that undermined most of their tax advantages.

In the past few years, however, demand caught up with supply. No new weekly rental condo has opened in Pinellas County since 1993. Managers say rental rates will begin rising this year for the first time in five years. In contrast, local hotel rates soared about 25 percent to record highs in the past five years.

Rents aren't going up just because of demand. New condo owners need help paying off the new, higher prices they paid for their units. Meanwhile, some condo boards restricted owners to monthly, not weekly, rentals. That has forced rental marketers to find a different kind of vacationers -- older, empty nest couples -- instead of the families on a weeklong holiday.

"Pinellas condos have appreciated because there is little prospect for additional supply," said Marvin Rose, publisher of Rose Residential Reports in Tarpon Springs. "Getting the land and government approval to build a big project is very difficult."

Typically the new buyers are baby boomers taking money out of the stock market for a vacation home. Concerns about recessions and softened travel to Florida this winter didn't deter them. "More than half our buyers in the past six months paid cash," said Heather Sutter, chief executive of A. Clinton Brooks & Co., a St. Petersburg real estate brokerage that manages a rental pool of 800 units.

"They are all dreaming the American dream of owning a place on the water in one of the great sun destinations," said Barbara Capalbo, president of Capalbo Rental and Management, which manages 400 vacation rentals in St. Petersburg and St. Pete Beach.

The surge of condo building helped put a lid on more hotel development in the past 25 years on the Pinellas County beaches. High land costs and restrictive zoning codes made it hard to assemble enough land to make a sizable hotel profitable. The last new one opened in 1989. Instead, dozens of mom-and-pop hotels were replaced by low, squat condos with 20 to 200 units.

"Over the past 20 years, condo rentals absorbed most of the gains we made in our tourist base," said Russ Kimball, manager of the Sheraton Sand Key Resort in Clearwater.

Today, 28 percent of the 35,000 rooms rented for transient lodging in Pinellas County are rental condos. People who stay in them pay room taxes that support 18 percent of Pinellas County's $14.8-million annual tourist marketing and beach nourishment programs.

Hoteliers don't begrudge the competition.

"They cater to a different market, the cost-conscious who stay longer," said Drew Toth, vice president of sales at the 1,200 unit Tradewinds Island Resorts in St. Pete Beach.

They are more likely families cooking for themselves and looking for separate rooms for kids. They stay 10 days versus 31/2 days in a hotel. About 45 percent are Canadians or Europeans, groups that account for about 15 percent of hotel traffic.

Invariably they checked into a hotel on their first trip.

"We saw this place when we stayed at the Hilton next door," said Paul Singerman, a semiretired British lighting store owner. "It's cheaper than a hotel, far more spacious and we can even have family members from England and Canada visit for the night."

Paying their dues

For many owners, it's useful to hire management companies to take care of booking and maintaining the condos. For 15 percent to 20 percent of the gross rental income, they find tenants by advertising in travel magazines, paying travel agent commissions for bookings and working overseas markets with tour operators.

JC Resorts Management Inc. sought AAA hotel ratings for a marketing boost. But instead of an expected three-diamond rating, its portfolio of 180 units in seven buildings got two diamonds. "They base their ratings on what you'd find in conventional hotels, not condos," said Connie Jessup, JC Resorts president. AAA inspectors cited one condo for lacking enough Kleenex and having a home theater system judged too complicated to operate. Unlike condos, hotels offer uniformity, such as identical furnishings in all rooms.

Guests expect rental companies to respond like hotel maintenance crews. One visitor complained that toilets at the Ram Sea flushed too fast. A British vacationer demanded Capalbo provide another unit when the condo lacked a ceiling fan like the one pictured in the brochure. Dealing with spring break rowdies is another challenge.

"I've seen rooms that looked like an earthquake hit," said Jessup, recalling mountains of empty beer cans and holes punched in the walls. "But some of our rowdiest guests are 50-year-old golfers who come for a wild weekend with their buddies."

Prodding owners to upgrade dated decor is a management company's biggest headache because not all owners will spend the money. One approach: Stage remodeling over five to seven years. JC Resorts arranges group discounts at a furniture store. A. Clinton Brooks & Co. grades units A through C so renters are more likely to rent updated ones that cost a bit more. Capalbo ditched 100 units from her 500-unit rental pool to purge dated decors.

"Ninety percent of my problems came from 20 percent of the units," she said. "We depend on repeat business, so it's important not to disappoint a traveler who saved for a year, traveled halfway around the world and expected a place every bit as good as the one we rented him last year."

Decorating disputes can get ugly. At the Innisbrook Westin Resort in Tarpon Springs, the biggest condo/hotel in Pinellas County, unit owners howled after the resort's new owners in 1997 said condo owners had to spend $20,000 to $45,000 each to remodel their units. The protests turned into a class-action lawsuit by 80 unit owners. They accuse Innisbrook's owners of coercing them to sign a new management agreement four years before the old one expired and changing the golf courses from private to public. The new agreement also required a portion of the rent be set aside for future remodeling. The value of some units dropped by a third as a result of the changes, the suit alleges.

Innisbrook's new owners, who poured about $30-million of their own money into other improvements, wanted unit owners to help improve the rental pool's marketability after the annual occupancy rate hit a low of 39 percent.

Many unit owners pulled their condos out of the rental pool rather than make the investment. The rental pool has slumped to 633 units out of 938. Many condo owners sided with the resort management, arguing that without the appearance of a four-star property their condo investments will be hurt even more.

A judge's ruling to certify the case as a class action is on appeal.

Management companies try to steer their owners away from conflicts with guests by making the owners invisible. They advise keeping family photos or identifiable personal valuables hidden. Some owners leave guest books out for comments anyway, but management companies have been known to rip out pages with foul or abusive remarks.

Repair surprises come with ownership. For instance, Bill and Barbara Dickinson, a Richmond, Va., couple who bought a one-bedroom condo in Isla del Sol for $87,500 last summer, faced a $1,000 air conditioner repair bill followed by a burst water pipe in their first month. "We're break-even since then," said Dickinson, a 54-year-old economic development recruiter for the state of Virginia.

Like the Busheys, who own several rental properties in their hometown in Maine, new owners have to adopt the landlord mentality. Some suggest watching the film Summer Rental, a John Candy movie filmed on the Pinellas County beaches.

"If you're possessive and have a fit any time kids scratch your furniture or a lamp gets broken," Bushey said, "this is not the long-term investment for you."

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