Buying Hotels and using as Studio Apartments

[Natalie Schanne]

Over the past year I have seen several deals for hotels in foreclosure on TEN-X that have seemed like home run opportunities. I’ve asked my friends to invest with me but haven’t seen anyone interested even though they are like 20% the price of a multifamily 1 bedroom apartment in the same town. WHAT AM I MISSING??

Deal 1: 350 key 100,000 sqft hotel with 30,000 sqft conference center on 10 acres. Harrisburg PA. Fully furnished. 1950 original build but recently renovated. Last loan was $15m. Auction started at $1m and ended at $4.5m. (Sold to a local apartment company). Had been a common wedding venue, meeting space. They relisted it as a hotel with $95/night rates. (Rebranded Penn Harris Hotel by Wyndham)

My idea was to rent to 350 single professionals at $800/mo x 350 = 3.36m revenue per year plus on site laundry / restaurant sales. Property was next to a hospital and many offices. Also to build a self storage on spare land.

Deal 2: 200 key extended stay hotel (rooms with small kitchens) in College Station TX near Texas A&M. 30 years old. Fully furnished.

Bidding started $1m

Deal 3: 230 key hotel in Morristown NJ, 13 acres. Fully furnished. Current Sonesta. Close to everything. Auction price starts at 4.5m. In this area, a crappy old 10 unit apartment building earning $1500x10=15000/mo rent, can sell for $1.5-2m easily.

why the hotel versus multifamily valuation is so different? Like cap rate 5% vs 10%?

Also what are the financing options and is it harder to finance a hotel than a multifamily? I’m guessing so with so many of these buildings going into foreclosure in the past 2 years since Covid shutdowns.

Anyone interested in bringing cash or expertise and partnering up on a Nj hotel outside nyc (New York city)? I have $500k cash.

[Greg Scott]

Seems like just as a market is starting to change you see a lot of deals like this, converting hotels to apartments, converting apartments to condos.  I've never done either but I've seen a number of them that started and failed to fully execute, so I assume they were financial failures.

From an apartment owner perspective, a building with 100% studio apartments is a terrible acquisition.  In a recession, people will double up with their buddy and pay less for a 2BR than they would for two studios.  Families generally won't live in them either.  So, studio apartments tend to have high turnover, which is expensive.  Now, if you brought a huge bucket of money to convert groups of 3 hotel rooms into nice 2BRs, that might work.

Another issue with converting a hotel are the utilities.  In a hotel, the are all master-metered.  While that can be managed, it is not ideal.