My Realty Gains
Specialist in Hotel Conversion15+ year real estate investor5+ year multifamily syndications
Prashant Kumar, CCIM – I would like to focus on that, How hotel conversions can help Investors? How can it solve the affordable housing situation? So give us a little bit of your background, David. How did you venture into hotel conversions?
David – Let me first start by saying that I am also a high-tech guy. I went through and got my electrical engineering degree back in the 1980s and worked for Lion Tech Systems, which is a defence contractor for about nine years in corporate before I ventured off to be an entrepreneur. I eventually made my way into Real Estate. I was starting actually as a general contractor. I had a friend who also worked in the high-tech Industry and we just wanted to do something that we had more control over.
We decided we wanted to be more entrepreneurial. We came in as licensed general contractors, basically doing the projects for these Investors. But that was back in the 2000s, before the 2008 crash. The 2008 crash came and we decided to flip from being the contractors to being the Investors.
You know, like a lot of people started with single-family homes and progressed up to larger and larger things and syndications.
And finally, in 2019, I moved over to hotel conversions. And the reason I did it was really that at that time I was feeling that multifamily was starting to get pretty expensive even back then. I just saw this opportunity and so I started Investigating. Hotel sort of looks like multifamily.
The rooms are typically smaller, of course than a traditional apartment but can we take this asset that in some cases, as these hotels get a little bit older, they basically become obsolete as hotels and they don’t perform well as business models or Investments? We decided to buy one and see if we could convert it. We made it nice enough that you could get people to live in 300 to 500 Square foot rooms. And what we found is that yes, we can. That was kind of how the whole model was born. But in getting more involved in the model, you mentioned the win-win proposition.
The residents when the community wins and the Investors win. How that works is a lot of the residents that we find at these properties are looking for they want to live in the nicest area that they can, but they don’t have a really big budget. By using our model where we provide all-inclusive pricing because generally, we can’t separate the utilities at hotels, they weren’t built that way.
We provide our tenants with a very competitive price strategy. Typically our single price is a little bit less than what a one-bedroom rent would cost.
The one bedroom you’re going to pay for all these other things. You’re going to pay for utilities, you’re going to pay for your Internet, your TV, your phone. All those things get wrapped up into one price in our projects. So that’s a win for the tenants, for the community. It’s a win because these properties are getting old, they’re getting tired, and they need to be refreshed, right?
We can take a hotel that was probably a B-class hotel and has now turned to maybe a C or even a D-class hotel and turn it into a nice D-plus apartment complex. That improves the community. It reduces crime in the area. It does a lot of really positive things for the community and then finally for the Investors. The business model is such that we have some really good leverage, and I can go into that a little bit more a little bit later, but basically, we can provide very good returns to investors with these projects.
Prashant Kumar, CCIM – Awesome.
Prashant Kumar, CCIM – How do you feel? I mean, in terms of competition as compared to multifamily and hotel? As you said, it’s completely different.
David – I think you’re seeing some opportunistic multifamily people picking up a project here or there. I don’t know. There are a couple of other people in the country who are specialized in this but I tell the story back in, right before COVID hit, I went to this convention and it was like at the National Convention of Hotel Conversion Experts or whatever. It was out in Phoenix, and this was in, I think it was like September of 2019. I get out there and you’ve been to these multifamily events. There are 1000 people there who say, I’m going to buy Apartment buildings at this time. The specialists in that area, there were eight of us.
Prashant Kumar, CCIM – Wow.
Prashant Kumar, CCIM – I mean, do you just convert room by room, or do you convert multiple rooms into one apartment? What are the logistics behind converting these rooms into apartments?
David – Well, I think, first of all, the first step is having your buy box. What do I want to buy? What does the hotel look like?
I’m not just going to buy any hotel. It has to be in the right market. You want it to be in an area where the population density is high enough. You want to be in a desirable area. I don’t buy any D classes. I generally don’t buy and C Minus class. Most of the hotels that are available in those areas tend to almost be motels and that’s just, like, not in my space at all. I want to have a property that’s big enough that I can have onsite staff. I want to have at least 80 units, what I found is that the economics are such that assuming there are enough people who are interested in living in the smaller units, which we have had no trouble with any of our previous projects, you don’t want to combine them because the thing is, let’s say you can take a 350-square-foot unit and you can get $1,000 a month for it.
Now, if you combine two of those units and make a 700-square-foot one-bedroom or small two-bedroom apartment, are you going to get $2,000 a month for that? No, you’re not. you know, optimal economics of it says the conversion cost is fairly high, too.
I mean, when we come in now and do our conversions, we convert room for room. The primary cost is we’re going to be adding a kitchenette. We’re going to be upgrading electrical, lighting and things like that. It’s kind of a vanilla grade value-add. We always want to verify our plumbing situation and the construction of the building as far as how hard it is to get updated plumbing and electrical in but other than that, it’s not a major renovation.
I mean, most of the time, the hotels have decent amenity sets too. They’ll have fitness centres, they’ll have community rooms. They’ll have patio areas, and a dog park possibly already there. We just need to maybe upgrade them from a B Minus class to an A Minus class. New equipment, just kind of getting the landscaping, maybe changing colour schemes on the building, redoing parking lots. It’s the biggest aspect of the whole thing when it comes to the renovation is working with the city to make sure that we have our zoning adequate for where we are going to do with it.
Prashant Kumar, CCIM – How much is the typical cost of conversion for each room into an apartment? Keeping the class in the hotel? Just the room?
David – 15,000 maybe. I mean, we might be able to get it done as low as ten, but, you know, with inflation now and costs of appliances and things up, I would say $15,000. Here’s a typical one. We have a property in the Minneapolis area in the Twin Cities, and we purchased the hotel at about $43,000 a door.
We ended up putting in each of the rooms, we put in about $15,000. Our all-in cost was about 60,000 a door. Across the street, they have an A Minus or B Plus Apartment complex. Now, bigger units, right? But similar to what we’re doing, they’ll sell for $180 to $210,000. You can see the economics there. As an engineer, as a math person, I mean, it didn’t take me long to look and go, this math looks pretty good.
Prashant Kumar, CCIM – In terms of what you charge, you provide the whole solution. It’s one price that includes your TV because it’s already included. You provide Internet because it’s already set up. Water, electricity, everything is included. And all the tenants come in and sign the lease for you, with you. And the office space is there, and you have all the amenities. You have everything for the tenant to live in that space and cook food. So have you created any space where have you thought of providing food because with some of these hotels have their kitchen also.
David – Generally what we do is, if it makes sense, we will sublease that out to someone else. Because the food industry is really tough. It’s a high labor cost. It’s labor intensive. It’s generally a low margin. I mean, we like to stay a little people have asked me if the other one is assisted living. Right. Would you want to convert these to assisted living and so far, we’ve kind of avoided that just because of the amount of labor involved and the labor markets are really tight now. We like something a little more I won’t say passive, but it’s not so labor intensive. It’s more capital-intensive than labor-intensive.
Prashant Kumar, CCIM – How is the economics of the deals in the hotel convergence has been so far for you and how do you see that for the future?
David – Well, the first two projects that stabilize are they were almost so high. I don’t know what I want to necessarily say, but let’s just say that they were stabilized above 25% Cash on Cash.
David – I’m not saying that every project is going to be like that. I think the bigger the projects get, the lower the numbers come. But I’d be pretty confident and comfortable saying that is a typical project. We’re not going to pursue a project unless it pencils at a 20% IRR to the investor.
Prashant Kumar, CCIM – How difficult it is to convert into a zone in terms of zoning from the city. What are your thoughts on that?
David – In 2019, before COVID, when we approached cities, they scratched their head a little bit and they’d say we do need we could use these units. They’re priced affordably. But are you going to be able to get people in them when they’re so small?
They were kind of a little bit hesitant, but since we went through COVID and since so many hotels have become distressed assets, these cities are like, we don’t want this thing sitting empty. We don’t want a bank owning it and sitting empty. If you can turn it into this, go for it. We’ll work with you to get the zoning right. Their attitude has changed since COVID in our favor.
Prashant Kumar, CCIM – I’m also feeling the same thing. You know that I’m buying a 150-unit hotel in Sierra Vista and converting it into assisted living and city officials are all over the place. They want that to be converted. They don’t want that to be sitting idle. They want it to be converted into a space that can be utilized for some sort of living, permanent living. Right now, the hotel is running below capacity. They are probably running at 20, 30% capacity only. They fear that current owners may walk away. They are very much willing to work with us to do whatever. They are very cooperative. Let’s just put it this way.
Prashant Kumar, CCIM – How does the zoning work in this? Is it just a simple conversion? You go to the city, you take your architect plans and they converted it? How does it work?
David – That’s a really hard question to answer because I think the answer is it depends. Cities are their own entities. They are independent, they behave independently. I think most of them have been very reasonable but for some of them, I think the bigger the city becomes you’re going to do something.
For example – Sierra Vista. That’s a relatively moderate-sized city. You’re talking about working with five or six people maybe, to get the zoning done. You go to a city like New York or even Minneapolis, and all of a sudden, you’ve got 50 people involved in the process, and you’ve got an eight-layer process. They’re very regimented.
You have to go and have these public meetings with your neighbors, and you have to illicit X amount of buy-in from the neighborhood, and you have to publish this at this time, and you have to have these review periods. The process can stretch time-wise because there are just so many steps and so many people involved but when you go into the suburban areas. You go to the city manager, and if the city manager likes your project, it’s going to happen. They’ll push their staff to get it done.
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