ARE YOU MISSING OUT ON THIS HOT INVESTMENT TREND? Hotel Conversion!
As the cost of living continues to rise, more and more people are looking for affordable housing options. Converting a hotel into multifamily apartments can be a great way to turn a property that may be struggling into one that is thriving. There are many benefits to converting a hotel into an apartment building. When done correctly, converting a hotel into apartments can provide significant returns on investment. There are many things to consider when making this type of conversion, so it is important to do your research first.For the right property, the strategy works extremely well, if you're interested in learning more about converting hotels into multifamily apartments, keep reading!
WHY HOTEL CONVERSION TO APARTMENTS IS A GOOD IDEA?
A Hotel typically have hundreds of rooms and several different floors. They generally have staircases, elevators and interior corridors that go to the front doors of the rooms. The extended stay hotels are the ideal conversion prospect because they're typically larger units between 400 to 500 square feet and they have kitchens. A Motel, on the other hand are typically one or two floors and the guests can access the rooms directly from the parking lot. They have open air corridors and staircases and usually only range from 200 to 300 square feet.
Most hotels located in secondary or tertiary markets are typically owner operated businesses. The big hotel brands typically won't put their names on these motels, which is one of the reasons why a lot of motels struggle.
LOWER ACQUISITION COST
Many hotels have been forced to close their doors due to the COVID-19 pandemic, as they cannot cover operating expenses or service debt. COVID has caused a lot of disruption in the hotel and motel world that most of these won't be able to recover from even when the vaccine is fully distributed. This, of course, increases vacancy, lowers the per night rent stay, and allows investors to pick up these assets at a reasonable price to compensate for the large cost to convert to apartments or what's also called micro-apartments.
SHORTAGE OF RENTAL HOUSING
There is a shortage of rental housing due to the high cost of homeownership. We are so far behind in building enough apartments to keep up with the rental demand. And those apartment projects that are being built from the ground up are pricing out many of the renters due to affordability.
FASTER THAN BUILDING FROM GROUND UP
Converting from hotels to apartments is a lot faster than building from the ground up. Most of these conversions depend on the zoning hurdles that can take under six months to complete. The new construction of apartments can easily take 18- 24 months plus from planning to delivery.
APARTMENTS ARE MORE STABLE
Apartments are more stable than motels on the cash flow which allows them to get better capital and trade lower on the cap rates when they go to sell in the future.
CHEAPER THAN BUILDING NEW APARTMENTS
Hotel conversion projects can deliver fully renovated units oftentimes up to 20% below the comparable rental units.
Okay, now let's quickly go over the things to LOOK OUT for when you're doing hotel to apartment conversions.
CHANGE OF USE
Conversion is going to be a change of use, which means there are going to be building code changes and zoning changes. It's the very first thing you want to find out before you even get involved. If the respective planning department isn't going to allow the zoning or change of use then move on.
LOCATION
You want to make sure the location is really good. Think about it; if a motel or hotel isn't doing well, the most common denominator is a bad location. No matter how cheap you can pick up the hotel; if the location doesn't work for long-term renters, then move on.
DEMAND
Most hotels are set up as either studios or one-bedroom apartments and if the market is calling for more studios and one-bedroom apartments, great. Just so you know most markets also like to have two bedrooms and depending on the construction and the location of structural components that might not be possible or may be cost-prohibitive.
LAYOUT
Bathrooms can be challenging if you're looking to combine units or add bedrooms. Typically, the bathrooms in a hotel that has two or more stories, are built so that they are stacked on top of each other for plumbing and venting purposes. So, if bathrooms have to be added or removed, the challenge is aligning them up and the associated cost.
KITCHEN
The biggest challenge of hotel conversions is typically the kitchens. if it has already had full-size kitchens with full-size appliances, sure, that makes it easier but usually, it isn't the case. Just so you know you'll want to have full-size kitchens so that you can get institutional financing as having a full-size kitchen is one of the requirements for agency debt.
AMENITIES
Many hotels will have amenities that don't make sense for apartments like commercial kitchens, big meeting or conference rooms, big commercial laundry facilities, restaurants, and bars. Some popular apartment amenities to replace these hotel amenities are; Larger gyms, Game rooms, 24-hour Clubhouses, One room home office rentals by the tenants or you could also add additional units, a Movie room, Study areas, and Converting conference or meeting rooms into climatized storage units.
FIRE SPRINKLER
Many hotels/motels are built under old building codes and don't have fire sprinklers and the change of use is going to require them. Typically fire sprinklers are running anywhere from $4 to $8 a square foot of sprinkler area so if you had 100 units at 400 square feet each, that's 40,000 square feet times $6 is a square foot is $240,000 or $2,400 for each unit just for fire sprinklers.
RENOVATION COST
The renovation costs are ranging from $15,000 to $30,000 a unit so you must buy these motels or hotels, right. You will naturally be earning less rent than standard apartment complexes, so you're all in costs have to reflect that so you can still be profitable.
OVERBUILDING
You must check with planning officials, permit trackers, commercial brokers, and local engineers to see what the pipeline is of new apartment complexes and motel/ hotel conversions to apartments so you don't get caught up in the craze.
You could be thinking, “How do I find a conversion project like this?” We both know the answer to that question is not easy
They're hard to find because the location has to work and a lot of these motels and hotels are in bad locations, the layouts have to accommodate a full kitchen and still be viable, zoning has to allow it, the purchase price has to be low due to the higher conversion costs and typically, you will have to buy enough rooms to make it all worth it. Most importantly, you need experienced team of professionals to execute this strategy.
Which investment stratergies do you focus on and why? Let us know below!
Harry Samby
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