Advice for motel converted to long term rental?

Question

Hi BP!I'm looking at purchasing a motel that was converted to 10 long term rentals. I'd appreciated any advice or gotchas if anyone has seen something similar. The numbers seem good enough at first glance for some further research.

-it's not separately metered, all utilities covered by owner

-no pool or common areas besides laundry. No landscaping just a gravel parking lot.

I have quads so I'm familiar with multifamily challenges. Anything change for a 10 plex?

Thanks!

Blake McWilliams · Answer

Of course!  I'll start with the largest learning curve.  In Illinois for commercial property, property disclosures are not required.  During the due diligence time frame a lot of my conversations with the owner were had over the phone rather than in writing, via email and text.  I've since built a more detailed email procedure on questions regarding general conditions/ known problems.  Some things that went wrong were rather unpredictable, like an improperly buried wire for a sewer pump that the ground and hot wires began touching throwing the breaker. (This was right out of the gate) Other things were a furnace, AC, Water heater.  However a couple larger items that should have been discussed: the pipes would freeze every winter (we've since found a fix), no water shutoff exists in each unit, the well pump has to be turned off and cut water to all 18 units, no pest control was ever done on the property, there was a unit that would take on exceptional water during rain due to improper prep and installation of a new concrete slab. I could keep going I believe we've received 50 maintenance requests since April on this unit.  Most things could have been avoided with proper maintenance from the previous land lord.

It seems we have started to round the corner at this particular property but it came with much more work than anticipated.

Ron Todd · Answer

@Blake McWilliams Wow, that is a lot! I've asked this seller for any documentation he had and he's yet to provide anything. He said he wanted to meet in person first. I can kind of understand that he wants to make sure I'm legit but that's a bit of a red flag for me. After we meet, if he doesn't provide documentation then I'll move on. It's nothing spectacular, just utility bills, trailing 12, rent rolls or whatever he's got so I can build an accurate assessment and make a fair offer. I hate to be cynical but I feel the same way you do, I need things in writing.

Jaycee Greene · Answer

Is that a local bank or credit union? You must have a great PFS - that's a great deal. Good luck!

Ron Todd · Answer

@Jaycee Greene sure thing! Asking 30k a door, I just did a drive by the other night but have a walk through tomorrow to get an idea of what is needed. It's a mix of single and two bedroom units. I've got my local lender lined up. Offering prime +.5 and 30 year mortgage with no balloon.

Blake McWilliams · Answer

Hey Ron!  Motel's being converted into LTRs can be a creative way to improve vacancy and cash-flow overall.  My advice is going to be more generalized but comes from personal experience.

We recently purchased an 18 unit in April of 2024.  The vacancy was low and rents were fair based on comps.  With initial projections we were expecting to NET 60k/year.  This was assuming 10% for maintenance and 10% for vacancy.  My prior experience was in small multifamily.  Seemed like a home-run.

Fast forward to today. Our maintenance each month ran 30% until December zapping cash-flow and our expectations.  What we learned, through quite frankly our own difficult times, was that no one sells a well performing property if it comes without a headache.  We now underwrite our deals with higher maintenance and are ok with lower cash flow for the first few years while we play catch-up with deferred maintenance.

I mention all this to in short say, expect very high maintenance on the front end.  If you're prepared for that and you can still see some form of upside in the deal, take your shot!

Cheers!

George Skidis · Answer

Insurance for 1-4 families is reasonable. Insurance for a 10plex will be higher.

How many bedrooms or bathrooms in each unit?

Is it all on one level or a two story?

If a single level you might consider 55+ independent living. If that works you may end up with tenants who stay longer and fewer vacancies.

Jaycee Greene · Answer

Great! That's kinda what I expected. I usually use the FMRs for the area as a minimum rent, but if you can attract non-S8 tenants, that works too.

Can you share any numbers on the opportunity: purchase price/door, any rehab costs, ARV?

And have you approached any lenders yet on this idea? I suspect a local bank or credit union might be your best bet.

Jaycee Greene · Answer

Hey @Ron Todd! What are you expecting in terms of tenants/monthly rent based on the area around the hotel? What type of area is the hotel located in? In my experience, most hotel conversions tend to attract Section 8 tenants.

Ron Todd · Answer

@Jaycee Greene local bank. The PFS is strong but I think most of it stems from building a relationship over several years. I'm in a small town so the people aspect is a huge consideration.

Ron Todd · Answer

@Blake McWilliams thank you, that's fantastic advice! If you don't mind sharing, what maintenance issues did you run into? They just put a new roof on, so that's one large expense I can budget less for early on. Each unit is on individual wall/window units and I know from experience those can be a pain to deal with too.

Advice for motel converted to long term rental?

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