What 16 Months of Trying to Convert Hotels to Housing Taught Me

By Anish Patel

There’s investing in real estate. Then there’s investing in real estate out of state. Then there’s investing in hotels out of state. Then there’s investing in hotels out of state for the purposes of converting into residential housing, and that’s what we’re going to talk about today. It’s a form of adaptive reuse - your word for the day. It’s what I spent the majority of 2022 and 2023 working on, so I have a lot to say about it.

Today, you’re going to learn about:

• The motel industry

• The great strategy of converting motels to housing

• What it takes to execute this strategy

Let’s dive in!

The Motel Industry

Do you know anyone with the last name Patel? Besides me? If you do, there are two things you can definitely talk about with that person for which they will likely have a LOT to say: 

• Taco Bell. More specifically, the Mexican Pizza at Taco Bell.

• Motels

Indian Americans own the majority of motels in the U.S. (estimates range from 50 - 60%). The vast majority of those motel-owning Indian Americans have the last name Patel. Don’t believe me? Here’s a 2018 National Geographic article on the subject. And no, it’s not like it’s one family with some Don Corleone figure at the top that has cornered the U.S. hospitality industry. Patel is a very common name, like Johnson. There are also other very common surnames among Indian American hoteliers, like Desai and Shah. The vast majority of these Indian American hoteliers originated from the state of Gujarat in India. 

How did this come to be? During WWII, with limited grasp of the English language and subject to racial discrimination when trying to find jobs or get access to loans, a few enterprising immigrants from Gujarat stumbled across a motel that a Japanese owner was forced to give up as she was on her way to an internment camp. The Japanese owner provided seller financing, which was embedded into the the playbook for many, many motel purchases by Gujarati immigrants over the next 80 years. For Gujarati immigrants, motel purchases yielded not only a business, but also a home (my childhood involved visiting many family friends at the manager’s units in which they lived). Gujarati motel owners welcomed other Gujarati immigrants by providing employment opportunities (so others could save for their own motels), access to private loans, and seller financing deals on properties they already owned; they paid forward the opportunities given to them when they arrived in the U.S. As such, cities and towns all over the U.S. have tight-knit communities of Gujarati motel owners that continue to help each other to this day.

Both of my grandfathers got their start in the U.S. owning motels. Immigrating in 1972, my paternal grandfather purchased a motel in the Bay Area, now named The Millwood. It’s where my dad has worked since he was nine years old. If you pay a visit this week, you’ll probably see him there in the morning! Just about everyone I knew growing up was and still is a motel owner. Name a motel in the Bay Area, and I’ll either know the owner or know someone (aka my dad) who does. The same dynamic exists around the country - like I said, very tight-knit communities.

Running a motel is not easy. It is a 24/7 job. There are often staffing issues, meaning owners have to take on night shifts, housekeeping duties, and maintenance tasks (fixing toilets, TVs, etc.), not uncommonly on holidays when staffing is least available. Unlike residential housing, motels are largely reliant on leisure or corporate travel, so demand is very sensitive to market conditions, seasonal trends, and those global pandemics that arise from time to time. Competition is a constant threat. Motels live and die by their ranking and reviews on sites like TripAdvisor. New entrants such as AirBnBs and historically upper tier brands (e.g., Marriotts) moving down market to lower-tier levels are introducing newer, more desirable supply. The roadside motel that in the pre-Google maps world was strategically positioned to capture the weary traveler off the highway is in the modern age, an old property in an undesirable area.

Despite these headwinds, the immigrant mentality has continued to prevail. The hard work of Gujarati immigrants has paid off - their children became doctors, lawyers, accountants, and tech workers, and wouldn’t know how to address a maintenance issue at the motel if their life depended on it. It’s a great example of the American Dream.

There’s a lot more that can be said about the economics of hospitality (aka short term rentals), but we’ll save that for a later release. Let’s move on.

The Great Strategy of Converting Motels to Housing

Not sure if you’ve heard, but America is going through a housing affordability crisis. Today, about 50% of renters are moderately or severely cost burdened. This has been driven by three factors: years of under-building resulting in constrained housing supply, historically high inflation, and declining home ownership (due to prior two factors) resulting in increased rental demand.

Certain cities are feeling the pain more than others. San Francisco has become the poster child for the homelessness crisis. However, other cities like Columbus, OH that are seeing large and accelerating increases in population are also struggling to keep up. This crisis has not only impacted renters and aspiring homeowners negatively, but also local businesses and economies, which we’ll touch on later. 

Innovation is often born out of necessity and crisis. Co-living properties, where unrelated individuals share a home and rent by the bedroom, have emerged as a trend (think adult dorms). In parallel, micro-unit apartment buildings, consisting of 300 - 500 square feet, one-room studios, have also arisen as more affordable housing solutions. Co-living and micro-unit spaces typically share similar attributes:

• High square footage, including large common spaces

• Pre-furnished

• Plentiful parking

• Privacy and security for sleeping quarters

• Regular cleaning of shared spaces

• Provision of basic supplies for common spaces (e.g., paper products, cleaning)

It turns out, these attributes effectively describe a motel, which have added benefits of 1) Proximity to commercial hubs and employment centers (not typical of affordable housing solutions); 2) Large, commercial-grade laundry facility; 3) Business center for home or remote work. They sometimes also come with a pool!

While co-living and micro-units are described as “innovations”, that’s a bit of a misnomer. Rather, it is an example of “what was old is new again”. Co-living and micro-units have existed before in the U.S. and in other parts of the world for some time. In fact, even hotels were housing solutions not too long ago. Hotels used to serve as SRO (single-room-occupancy) housing; however, political rhetoric at the turn of the 20th century led to zoning and housing regulations that ultimately took thousands, and I mean thousands, of SRO units off the market. San Francisco was once home to many SROs - now the city is deeply struggling to house lower or no income populations. Perhaps a connection?

Still trying to picture how a motel unit can be made to look like an apartment unit? Below is an example of what was previously a ~300 sq ft unit lacking a kitchenette that now has all the basic necessities for a longer term resident. 

If I’ve done my job well so far, you will never look at a motel the same way ever again. Those ugly, road-side motels are solutions to our nation’s housing crisis - they can each add dozens to hundreds of affordable housing units to the many markets that desperately need them. Political leaders are banging their heads against the wall trying to figure out how to possibly add the much-needed affordable housing supply when the answers are right before their eyes. But this is only half of the story.

We must also talk about how great of an investment opportunity this strategy represents. Hotels and by extension motels, like any other commercial property, are valued based on NOI divided by cap-rate. In practice however, motel owners typically trade their motels as a multiple of revenue and value per key (key = unit or room). Regardless, the effective cap rate for economy-level motels typically hovers around 10 - 12%. This elevated cap rate reflects the increased volatility and risk associated with a motel relative to the stability of multifamily apartment buildings occupied by long term tenants. As you can see below, the hotel segment is virtually always at an elevated cap rate relative to multifamily apartment buildings (cap rates are slightly lower than the aforementioned 10 - 12% as it includes upper tier hotels; but the spread with multifamily is still apparent in this chart). This means that you can buy a motel at an elevated cap rate (say 10 - 12%), convert it to housing, and have it valued based on a lower cap rate (say <7% cap rate). To put this in more tangible terms, many motels can be bought for $30,000 per key or less in markets where apartment buildings are priced no less than $100,000 per door. And this, my friends, is what I call cap-rate arbitrage (your second word of the day).

In summary, converting hotels to housing make great strategic sense because:

• There is significant unmet need (i.e., demand) for affordable housing

• Potential massive value-add opportunity by converting to housing due to cap rate arbitrage

What it Takes to Execute this Strategy

A great strategy still requires great execution. If you are inspired to convert hotels to housing, you’ll need to demonstrate excellence in each of the below areas.

• Sourcing

• Diligence

• Financing

• Team 

We’ll dive into each in detail.

Sourcing

There are three components to sourcing that I will expand on: 

• Defining your buy-box

• Engaging owners

• Getting under contract

Defining your buy box:

The first step in sourcing is defining your buy-box. Here’s an alphabetized list of pointers on defining your buy box. Note some of these you can only learn upon inspection. 

• Cost basis: Obviously, you want a big spread between your overall cost basis (purchase + renovation) and stabilized valuation. This will vary by market, but in the midwestern markets we were targeting, we were shooting for an overall cost basis of <$40,000, with a minimum stabilized valuation of $60,000. I cannot emphasize enough the word “overall”. A $30,000 / key sale price sounds great, but only leaves $10,000 / key in renovation (assuming your max budget is $40,000). This is not feasible.

• Curb appeal: This is subjective of-course, but your ability to convince zoning officials and source tenants will be much better if the property has more of a “residential look”. Some motels can be easily imagined as being apartments, whereas others simply lack this. If it lacks curb appeal, a lot more cost and effort will have to be put toward making it look more appealing, and there’s only so much lipstick you can put on a pig.

• Electrical: Electrical requirements are much higher for a residential unit with a kitchenette relative to a motel unit for a transient guest. Ideally the property has at least 20 amps for each room. If this is not the case, this can add substantial cost to the rehab.

• Exterior vs. interior corridors: We saw successful conversions for both property types; however, we did hear that exterior corridors facilitate easier management by on-site managers. 

• Demand validation: More on this in the diligence section, but ensure your target property is in an area that has attractive rental rates for studios. This will inform your max purchase and renovation cost.

• Parking spaces: Zoning regulations generally only require a 1:1 ratio of parking spaces to units for hotels. However, multifamily housing requires a higher ratio, a 1.1:1 ratio at minimum, but this varies by market. If you’re lucky, you may be allowed a variance on this requirement; however, you’ll be much better off if there is already a higher ratio or if there is space for more parking.

• Sprinklers: You can be sure that local housing regulations will require sprinklers in each unit. If the motel lacks these, this can add substantial cost to the rehab. You may get away with this if the motel is single story and there are fire walls in between units.

• Unit count: The sweet spot from a unit count perspective is 100 - 150 units. Others who have successfully converted hotels taught me and my partners that anything below 100 units will not generate enough revenue to justify having on-site management, a critical component of smooth operations. Anything above 150 units becomes too complex to manage in a cost efficient manner. 

• Unit size: Ideally unit sizes are larger than 300 square feet, anything smaller will make adding a kitchenette more difficult. 

• Vintage: Motels are built to be quite resistant and handle a high-volume of tenants, so you can get away with older buildings that don’t have any major structural issues. However, a property that is <50 years old is preferable. Also, be sure to think ahead to when you might want to sell the property. A 10-year business plan means you probably shouldn’t buy a 49 year old property.

• Zoning pathway: Every market has a different path to rezoning. In general, secondary markets (think Hayward or Millbrae vs. San Francisco) have less bureaucracy and smoother zoning pathways. It is not a bad idea to do some initial diligence on what this process looks like and how favorable local officials are to the idea of converting hotels to housing before you start targeting motels in an area. You want to go where you are wanted. More on this important subject in a bit.

Getting in touch with owners:

One of the great advantages of targeting businesses like motels is that they list themselves on Google Maps, OTAs (e.g., TripAdvisor, Expedia, etc.), etc. Once you pick a market, you can pretty quickly identify all the motels in the area.

The fastest, most effective path to getting owner contact information is using a tool like PropStream or CoStar. Of course, these tools would also help you skip the step of identifying motels through Google Maps or OTAs as you can quickly filter based on high-level target criteria. These platforms are not cheap. If you have access to a kind soul that will allow you to borrow their login information, take advantage of that. 

The slower but free approach is using brute force cold calling, which may be farmed out to a VA. If you start calling motels in an area, the phone will quickly be answered and more often than not, it will be answered by an employee running the front-desk. Ask if the owner is on-site. If not, ask when they are typically on-site or if there is a number by which you can reach him or her. A well trained employee will not give the contact information of the owner; however, you will find from time to time an employee that is not so well trained (I once had someone give me the name of the owner, his brother, his son, and his wife). If the latter happens, then great, you can have a conversation with that owner. If the latter does not happen, you must get creative. Do not tell an employee that you are looking to buy the property - this is their job after all and a change in ownership is a threat to their job security. They will typically not help you. I would typically say that I work for a firm that is collecting data on properties in the area and would appreciate an opportunity to speak with the owner. That would work maybe 20 - 40% of the time.

From time to time, rather than an employee answering the phone, you will be put in touch with the owner or a member of the owner’s family. If this happens, take note. It may mean the owner cannot afford or cannot find staff to man the front desk. The likelihood that they are willing to sell at an agreeable price and consider creative financing terms is much higher.

What do you say to the owner once you have him or her on the phone? Here are my suggestions by order of importance:

• Establish credibility: More on this later, but having a Co-GP or Co-Sponsor that has ideally done this before will allow you to truthly provide assurance that your team has done this before and can close. No seller wants to waste his or her time with someone who can’t close quickly. They may make decisions such as not filling open positions on their staff in anticipation of a sale, so they certainly don’t want to go through the trouble without confidence in the buyer.

• Don’t waste your or the seller’s time: Build rapport during the call but also cut to the chase. Say that you are part of a firm that is looking to acquire hotels in the area and is potentially interested in the property. Ask if they are open to selling. If they say no, cut bait. You won’t get a great price from someone who isn’t interested in selling. Keep this person’s contact information in your Rolodex. They may be interested in the future. However, more often than not, the seller will say something along the lines of “depends on what you are willing to buy it for, what’s your price?”. Which brings me to the next point.

• Do not offer a price: Don’t fall into the trap of agreeing to an overall or per door purchase price on the first call. Rather, emphasize that you pride yourself on having a very transparent process and work closely with owners to reach mutually agreeable terms. State that in order to provide a price, you’ll want to get a sense of the financials. Ask what he or she is looking for from a revenue multiple perspective and recent revenue figures. You want to target 3X or less from a revenue multiple perspective (this is industry standard). Why do hotel revenues matter when you are looking to convert into residential housing? Because by valuing the property based on revenue, you’ll decouple from local, per unit valuations, and are more likely to get a better deal. They may or may not provide you with numbers on the call. If they are avoidant or require a non-disclosure agreement or contract in order to go through this process, then make a judgment call on whether you want to go through the effort on this particular property. An NDA is easy but if the owner requires a contract, this will still cost money even if you back out during a contingency period as you will want to use a transaction attorney to draft the contract (more on this in a bit) and may require an earnest money deposit. But if this feels like a real opportunity to you, get the property under contract - it significantly increases your control of the deal.

• Avoid discussing desire to convert to housing: A savvy owner that learns you intend to convert to housing will base their desired price on the value of local housing. That won’t help your chances to get a great price.

• Validate / obtain data: Fill in any data gaps to understand whether this property fits your buy box. 

• If willing to sell, ask if they are open to some form of seller financing: There are many ways to frame and position this, but you should always explore this as an option. It can help both sides get a mutually beneficial win and allow for a much smoother transaction process.

• Get additional leads: Ask if the owner has additional properties that he or she may be willing to sell. If he or she is not interested in selling any of the properties, ask if he or she is aware of other owners in the area that are willing to sell (as mentioned previously, the hotel owner communities are tight-knit).

Getting under contract

You’ll want to work with a transaction attorney to draft your contracts. Don’t try to short-cut your way through this. It’s not worth it. While you should definitely consult with an attorney and not take what I’m about to say as legal advice, as part of your contingencies, I would explore including a six month zoning contingency with opportunity to extend beyond if needed. You don’t want to acquire a motel that is not yet zoned to be residential. This is the primary valuation driver for your business plan (remember: cap rate arbitrage), but there are no guarantees that this will occur.

Diligence

Not every deal is a great deal. Charlie Munger has been quoted saying that if the 20 best transactions in the entire history of Berkshire Hathaway were removed, their record would be dismal. Those 20 best transactions would effectively mean doing a deal once every two years if they worked all the time. And that’s Berkshire Hathway, led by Charlie Munger and Warren Buffett, arguably the most astute investors the world has ever seen and had no shortage of opportunity flowing to them. 

So what does this mean for sourcing motels? Just because the general strategy of converting motels to housing is great, that does not make every motel a good motel to convert. Furthermore, your access to financing and expected rehab costs may look different from that of another operator. So what might make a great opportunity for someone else won’t be so attractive for you.

What makes a particular motel a good opportunity for conversion? First and foremost, stick to your buy-box. Do not waiver. You created your buy-box for a reason. I could just stop there, but I’m going to expand on several critical ingredients: 

• Demand validation

• Operating costs assessment

• Zoning pathway assessment

• Rehab scope and plan

Demand validation

A duplex in a large town will have no trouble in finding someone to get it to full occupancy. However, getting a 100+ unit building nearly entirely made of studios close to full occupancy poses a larger challenge. The unmet need for affordable housing is definitely there, but you still want to do your homework and understand whether your property is well positioned to meet that unmet need. 

For example, you may be in a city with a large blue collar population struggling to make ends meet. However, if your motel is very far from where these employees work or would want to live, you aren’t going to be set up for success. You can work with the local Chamber of Commerce and get insights from them or from local employers on where the need is. In fact, we actually held a focus group at the Columbus Chamber of Commerce doing just that. The focus group ended up being so valuable for the Chamber that we got invited to come back and do it again! Below is a photo of yours truly at this focus group. It helped tremendously in terms of building local support and advocacy while also helping us understand what the specific needs are. 

Confirm and then confirm again that studios are renting at levels that will satisfy your underwriting requirements. If you are getting a bank loan or sourcing investors, you’ll need to show them this data. Do not fall into the trap of assuming your units will rent for higher than the market data suggests. It’s very easy to change a digit here and there in your underwriting - avoid this temptation. Better to use conservative assumptions with upside potential. 

Operating costs assessment

The other side of demand validation is deeply understanding your operating costs. This is not easy to do without having access to like-properties in the area, which will be the case for this strategy. The best you can do is extrapolate from local multifamily housing data for properties that manage lower income populations and are largely studios. The standard 50% rule (meaning 50% of income goes toward OpEx, prior to debt service) is a good starting point, but you’ll want to do more diligence. Just like with demand validation, be conservative. While you will have economies of scale with more units, you will also be dealing with primarily lower income populations and have more management costs relative to what is required for single family homes or duplexes. 

Zoning pathway assessment

Understanding the zoning pathway is something you can do before you identify a property. Engage local zoning officials and get a sense of their process. Here are some questions to tick off:

• Who are the influencers and decision makers involved? If you meet with an official or group of officials, ask who is not in the room that will have influence. 

• Is there an election coming up? Political officials may want to avoid signing off on big projects from outside investors during an election year, even if the project is aligned with their rhetoric. 

• Do the political officials indicate support for affordable housing but relegate the ultimate decision making power to someone else? We learned politicians do this to have their cake and eat it too. By relegating the decision to someone else they can maintain consistency with their political stance while pleasing other powerful constituencies that may not totally align with their perspectives,

• Is there a neighborhood group composed of volunteers with zero real estate background that have decision making power? What is their perspective on affordable housing and how do they want their neighborhood to evolve over time?

• How long is the overall process? It is not uncommon for large cities to have 12 month or longer processes that include multiple tiers of approval but smaller cities can be done in as little as 30 days. 

• What are the officials’ perspectives on your target property and plan. Are they supportive of re-zoning but want to reduce the density substantially or make any other major, costly adjustments (rendering the project unviable)? 

Some markets like Houston have no zoning whatsoever! Other markets have designated hotels as housing by right, meaning no zoning process is required. Extended stay hotels are usually the easiest to push through (as they come with a kitchenette already). They can be a lot more expensive to purchase but rehab costs are much less. As mentioned previously, secondary cities have much more streamlined zoning pathways. Go for the secondary cities that are part of larger, growing MSAs. They benefit from all the same macro trends yet have a lot less bureaucracy.

Do not take general support of the concept of adding hundreds of affordable housing units to market as indication of a clear zoning pathway. You must dig deeper to avoid wasting your time, the seller’s time, and your money that will go toward costly zoning attorneys. If there are any barriers that would render your project infeasible or suggest a more complicated process, strongly consider backing away from the project. Go where you are wanted - life’s a lot easier that way.

Assuming you have done appropriate diligence on the zoning pathway, consult a local zoning attorney and get their thoughts and opinions. They may indicate additional barriers or issues that may or may not render your project infeasible. You want to work with someone with a good track record and has good rapport with the city. You also want this person to get along with your GC as they will be working closely together to secure any variances and make adjustments to meet the local code and requirements. 

Remember my recommendation above to engage with the local Chamber of Commerce and local employers? Employers have substantial sway on government stakeholders given they drive the local economy. Given this, they can really help in overcoming any pushback as part of the rezoning process. Do yourself a favor and network with these employers – they can help you.

Rehab Scope and Plan

If you have ever done a rehab, you know that buffers need to be added to assumptions provided by a GC around the total cost and overall timeline. Part of this is due to a GC’s incentive to ensure you move ahead with the project (i.e., get him paid) and another part of this is due to the inevitable but unforeseeable issues. Things will arise that you did not predict that will inflate your budget and your timelines. Motels are large commercial properties and converting them to housing is a complex endeavor, no matter how you look at it. A minor $1,000 adjustment per unit for a 100 unit building is a $100,000 cost. I hope it is easy for you to see how quickly a rehab budget can get out of hand and why experience and a proven track record in rehabbing properties of this type and scale is a necessity. 

Do not try to wing this or extrapolate your experience from smaller scale projects.  Be extremely thorough in sourcing GCs to lead your rehab effort, and then add significant buffers to the estimates they provide. Do not try to make “minor” adjustments in your underwriting given the rehab costs are rendering the project infeasible. The costs are what they are. If the numbers don’t pencil, they don’t pencil. 

I mentioned earlier that certain operators may have lower rehab costs. This is usually because they have vertically integrated their construction capabilities, which eliminates GC mark-up costs, eliminates misaligned incentives, and can enable access to bulk discounts as they rehab multiple properties simultaneously (not something you can do on your own and as you are getting started). One example is Vivo Living, which has been successfully converting hotels all around the country. If you are not vertically integrated, you will pay a lot more for your rehab than they will, which will ultimately mean you will have to charge more rent per unit, potentially above what the market will bear.

If you don’t have a trusted, well-vetted GC, it is not a bad idea to partner with these types of operators that have the capability and experience in converting hotels. For example, you can help source deals for them while they do the rest. You will sleep better at night knowing an experienced professional is overseeing the GC and rehab and have a much higher likelihood of keeping your project within budget.

Financing

As you might imagine, COVID-19 was a tough period for hotels and motels. It’s part of the reason why hotel conversions became such a trend in recent years - owners were forced to sell properties that saw occupancy drop dramatically (see below). 

This of course has made banks quite reluctant to lend on anything that sounded, smelled, or looked like a hotel. Remember the earlier point around needing a zoning contingency in the contract? Having a target property rezoned to housing was effectively a requirement to get access to solid financing from a bank.

However, even if this is achieved, you are seeking a major rehab of a large commercial property; not to mention that it is a form of rehab not quite yet in the mainstream and therefore perceived as a more risky endeavor. That level of risk is reflected in higher interest rates and through full-recourse terms. Generally, full-recourse is to be avoided as it can result in total catastrophe for you and everything you own if things go south. You must be completely confident in your business plan to execute such an arrangement, but remember, you can never be 100% confident. 

As mentioned earlier, if you can secure a seller financing arrangement with the seller, that will help dramatically. However, the seller will not finance the rehab costs, which, depending on the purchase price of the hotel, can be 50% or more of that purchase price. Secondly, that seller would need to be comfortable with being in a second position to a construction loan, which can pose challenges and will require additional negotiation finesse.

If you are able to obtain financing that you are comfortable with, you will likely need to source equity investors, which is a whole effort in itself. There are plenty of books on the subject, but just know that this takes time and a lot of effort that you need to balance with everything else described thus far. The money will not simply come because you have a good deal. Investors have lots of options to choose from, all of which claim to be “great deals”.

Given the challenges around obtaining financing, this is another area where having a co-sponsor can also be extremely beneficial. A co-sponsor with a substantial balance sheet can help sign on a loan and help you get access to better terms relative to the typical retail investor. Furthermore, they likely have an existing pool of investors or capital partners that eliminate the need to source from individual outside investors. Other hotel converters my partners and I engaged with were often linked with capital partners such as a private equity group or family office that believed in the strategy and could easily finance projects in a manner that supports the business plan. These capital partners had already thoroughly vetted the operator, so your access to their funds is a lot easier through the operator than if you were to try to establish a direct relationship. The bar for a direct relationship is usually very high and requires a substantial, standalone track record. Once you get a few hotel conversions under your belt with a co-sponsor, you will likely have a much better shot at establishing direct relationships with these larger funding sources.

Team

Clearly, there’s a lot that goes into converting a hotel. Lots of moving pieces. Lots of areas of expertise required. You will not get anywhere without a really solid cast of characters surrounding you. I’ll provide some important points for each of the key roles, in alphabetical order:

• Buy-side agent

  • If you are doing this out of state, you will want someone that can help source necessary documents from the seller, liaise with the seller for any other needs, and keep contract deadlines in check. Of course they can also help source new leads.

• Capital partner(s)

  • If you have friends or family or an existing pool of outside investors that can raise the necessary funds, power to you. But if you want to scale and do more than one project, this is a necessity to move quickly on projects and not have financing be a risk.

• Co-sponsors

  • Optional, but highly recommended for all the reasons mentioned above.

• General contractor

  • Do your homework. Be thorough in your vetting of GCs and find someone that you can really trust. Be prepared to switch your GC if they are not performing in the initial phases of the project; in other words, have back-ups ready too.

• Government stakeholders / corporate engagement

  • Optional, but highly recommended to help validate your assumptions, provide necessary public support through zoning hearings, and overcome any unexpected pushback to your plans.

• Property Management: 

  • Your PM must be comfortable and experienced with managing 100+ units. PMs that manage <100 units have a very different business model than those who do larger complexes. The former has multiple investors work with various team members whereas the latter dedicates a whole team to individual properties. Do not expect a PM that manages your small duplexes manage a 100+ property; they do not have the right systems in place for this type of a project.

  • In addition to having systems to manage 100+ units, the PM must be comfortable managing a high volume of lower income populations, which can come with unique challenges. 

• Transaction attorney

  • Don’t shortcut this. You want someone who can help you structure contracts with sellers that will protect and optimize your interests.

• Zoning attorney

  • Find someone with a good, relevant track record and gets along with your GC.

Conclusion

Hotel conversions represent a solid strategy to not only create incredible returns for yourself and your investors, but also have a meaningful impact on hundreds of individuals that are in need for more affordable housing. There are 90,000+ hotels and motels in the United States, the majority of which are owned by independent operators. There is so much opportunity out there for any who dare to pursue it. Clearly, this approach does not come without its challenges, but it can be done. 

If this wasn’t enough for you, here are a couple additional resources:

• Empty Hotels Get Second Life as Tiny Apartments During Pandemic (Wall Street Journal)

• JF2863: Tips for Navigating Hotel-to-Multifamily Conversions ft. Becca Hint (Best Ever Commercial Real Estate Podcast)

The views and opinions expressed in this newsletter are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Please contact your legal, tax, and financial professionals before considering any investment.

DE