Apartment to AirBnB to Condo Conversion

15 Replies

Here is a healthy modern day brainbuster. I am currently underwriting the following play -

Currently a 25-50 unit multi-family. Primetime location. No shortage of traffic. 

Renovated each unit

Convert to full-time Airbnb 

Exit plan - year #6 sell as condo conversion 

*Keeping it slightly vague for privacy purposes*

MY QUESTIONS - 

What vacancy rate do you run for short-term rentals? Has anyone run a large scale Airbnb? 

Expenses of condo conversions? 

Any other pitfalls I may be missing? 

I have done a fair amount of research on the subject, but feel the community would enjoy the challenge as it is not common practice! 

There really isn't sufficient information in this post to make any meaningful contribution. Your vacation rental vacancy rate depends on the market demand, the location of your properties, the amount of supply, the amenities of your rental, the time of year, etc. These are all things you need to determine locally and need to know before going in. The expense of the condo conversion depends on what is needed to achieve the standards demanded by the market - in addition to the application fees, zoning fees, lawyer fees, permit fees, survey fees, etc.

Have you checked with the city of Houston to see if they would even entertain the conversion?

And my biggest question is why do you think this is a good strategy? The same things that make for a good vacation rental, don't necessarily make for a good condo conversion. Typically, you're going to want to pick the highest and best use for a property and stick with it, whatever that may be.

-Christopher

That really depends on the location. I know AirBnB near Facebook, LinkedIn, and Googl headquarter the vacancy is close to 40%. You need to run different scenarios for your projection.

As for conversion, I would go to City planning asking them the requirements. Often it is elevator, parking, club house, pool etc.

@Christopher Brainard , The property is located downtown Houston. 

Good point on condo conversion fee's which I was uncertain if it was market by market or general ballpark #'s that could be used. I was optimistically hoping it would be similar to if you were to use construction cost $/ft #'s to build. EX $10k per unit ...etc

Great question about the strategy. We plan on separating from the rest of the market based on the age of the building & product differentiation. We plan to do a vintage remodel for each unit.  We are not competing with Hotels, apartments, or other Airbnb. We are really seeking to offer an experience through the short term rental. We feel that the condo conversion would be an attractive option at an affordable price, to own a place to live downtown & give the future owner confidence they can use this place as a rental. 

Thanks for taking the time to answer

@Sam Shueh Thank you for the insight and time to answer. I was 40-60% is what we had anticipated, the problem is I am having a hard time finding a whole building dedicated to airbnb. 

Suggest you to check with Houston :

https://www.airbnb.com/help/article/905/houston--t...

I doubt you are multi-family can be 100% airbnb it is not a hotel. Neighbors will raise hell.  If you got awful reviews from unhappy guests etc you are likely to be out of business. Need to look at long term business plan.  

@Loren Miner The only thing I can comment on is that you would have no problem keeping the units full in downtown Houston but I'm very interested in your condo conversion. I own a condo in the DFW area but I know that most condos ban Airbnb's. I'd definitely like to know how to you complete the condo conversion. Very interesting! 

Originally posted by @Loren Miner :

@Christopher Brainard, The property is located downtown Houston. 

Good point on condo conversion fee's which I was uncertain if it was market by market or general ballpark #'s that could be used. I was optimistically hoping it would be similar to if you were to use construction cost $/ft #'s to build. EX $10k per unit ...etc

Great question about the strategy. We plan on separating from the rest of the market based on the age of the building & product differentiation. We plan to do a vintage remodel for each unit.  We are not competing with Hotels, apartments, or other Airbnb. We are really seeking to offer an experience through the short term rental. We feel that the condo conversion would be an attractive option at an affordable price, to own a place to live downtown & give the future owner confidence they can use this place as a rental. 

Thanks for taking the time to answer

Unfortunately the cost isn't going to be fixed. I looked into this about fifteen years ago when I lived in Dallas and the condo conversion wasn't economically feasible at the time. If I recall properly, our cost to update and convert was about 15k a unit, which was the difference between buying multifamily units vs condos at the time. Permits and fees were about a third of that. I realize this is old data and hopefully someone else can provide more updated costs.

Other than that, I would point out that you would be competing with hotels and other airbnb. You may have a better product (the experience angle is key to a successful airbnb), but your still running a hotel for all intents and purposes. The city may also see it this way. I think I would call them first before you get to do into this. Good luck!

-Christopher

@Loren Miner     You're buying a hotel..... probably needs to be licensed as a hotel.... 50 units...you'll need full time maintenance, maybe security, front desk person, housekeepers, HR, etc.   I think that would be crazy to keep up with trying to do everything al-la-cart.   1-2-3 units maybe....you're buying several full time jobs likely if you want to do all 25-50.

Condo conversion can be done, but remember when you start trying to sell, it's going to be very tough likely for buyers to find financing. So you either have to do that yourself or find someone who will. Not sure what price range you are thinking about, but many buyers likely in the price range you are thinking are FHA or low down payment buyers. Those lenders and maybe even all lenders hate to be the first 1 or 10 or 15 lenders to lend on a project like that to buyers. The like to see 50% or more owner occupants...reserves and budgets for HOA, etc.

Things may change to make these requirements easier, but I would not gamble on that.

So then you are left with cash buyers or high down payment buyers....those tend to be investors, who typically don't like condos....and then you still run into the problem of financing for owner occupants.

If this is your first deal I applaud you for thinking outside the box.  It's a grand vision.  One I would advise against.  Way way way too much risk for 1st time deal.  If this is your 10th multifamily and you've learned a lot on the first 9, and you have lots of resources and time....and you can get a freaking awesome price on the purchase side, might be worth a shot.   Start with 1 as AirBNB and expand it as demand warrants and tenants move out when their leases are finished.   Best wishes.

Have you done your market research? My REI company does what you are talking about, and after around 5 units in one location, it becomes totally unsustainable. Maybe your market is different, I don't know. But I seriously doubt it. I've walked a fine line between AirBnB condo/motel/hotel for 2 years now, and it is very tricky. Better to a few units, and have a backup LTR plan. Don't get emotionally tied to an idea either. If you are underwriting this, you should have ran some numbers with a minimum of 50% vacancy with that many units. (Still may look nice on paper with that high of a vacancy)

At some point, you've got to ask yourself why someone would choose your AirBnB's over a hotel of some kind.

Also of note is land use regulations, zoning, variances, insurance... I mean, I feel like people have this misconception nowadays that starting a real estate AirBnB empire is as simple as listing the unit on the website. While AirBnB would love for you to think that, it is nowhere near reality. I spend all day running numbers on properties... So many of them are too fluffy and look good to an investor surfing the web. Many others would never work due to regulations. 

Like I said, you will need to investigate, zoning, city ordinances, insurance, permits/licenses, health codes (if you have anything over 4 units, with more than 1 floor, you will be under ADA compliance jurisdiction), and irate neighbors.

Interesting that folks telling you all the bad things about AirBNB are mostly not actively doing that business model!  There is a great site called AirDNA that has the vacancy rates and other stats for airbnb in any city.  Totally worth paying for.  Also, many might be surprised that the units with the lowest vacancy are not vacation rentals but regular homes catering to business travellers and families.  You need to think about what makes AirBNB appealing to different audiences as well as the scalability factor.

I know several folks who have scaled and with 3rd party management, it is still much more profitable than monthly rentals.  You might also think about hybrid models.  For example, many folks love duplexes b/c they can live in one and rent the other to pay their own mortgage.  Maybe see the condos in packages that let someone buy one and rent the others?

What AirBNB has done so well is to totally disrupt the business model for individuals who want to take advantage of the technology platform that makes it easy to earn extra money.  Same with Uber.  No, not 1 person can dominate in that market which is why it often does not scale effectively.  So maybe what you need to do is develop a new model that could work for both you and future owners.   

Would like to brainstorm with you on this further.  We're doing similar projects in Galveston and see a hybrid model as a way to double cash flow but we don't want to be so large that we're running hotels - yet.  Good luck!

@Loren Miner I am really curious how this worked out. I am worried the city will have levied fines and taxes on you for operating a hotel without a license and not in accordance with zoning regulations. BUT I hope I am wrong. I would love to see this work for you and your investors.

I am worried it didn't work as you have now gone 8 months since making these posts and have not returned to Bigger Pockets.

The big successes always come from those who persevere and I hope you are able to continue from this and not give up.

Well, @ryanblake It was exciting! The property ended up going to auction through TENx. Turns out because it was previously on the market so long, we were the only bidders. TENx had changed the incremental bid amounts on the auction, mid-auction, to create more activity. Long story short. The property was expected to go for $2.2m, we ended up getting the property for $1.75m (+ TENx broker fee's) .... totaling about $1.85m when all said and done. 

Our client ended up dropping the deal as it was too much risk for him at this point, and honestly probably a little out of our scope for executing the deal. 

I think in the long run to buy the property across from the Toyota Center, and a park in downtown Houston, it would have been a great deal. Options included using it as student housing for the law firm across the street, restoring as a traditional apartment or going 50% Airbnb (two buildings), creating a "superstructure" on top. In the end, there was a lot of creative ways to make the deal work. 

Also, Camden is going to create a big mix-used center walking distance from this location, so if even a covered land play would work for the location if you have the bank roll. 

http://swamplot.com/crane-gets-airborne-above-the-lot-next-to-root-square-where-a-new-camden-tower-will-rise/2018-02-27/

Today it was recently sold to Fat properties who has about 10yrs more experience and sounds like they are going to do a great job on the building. 

http://swamplot.com/the-changes-coming-to-the-pre-...

However, still emotionally attached to the deal, especially since Houston is working on a hockey team, and they would be playing out of the arena across the street! 

@Loren Miner I like that idea of going 50% on the STR. That seems a little bit easier to keep the city off your back. I would just be worried with so many cities trying to regulate STRs so much that they would look for any excuse to crush those kinds of projects.

It is a shame that didn't work out when the price basically dropped $500k. That would have been a steal downtown.

I am glad to see you are still active. When I saw you hadn't posted in awhile I was worried the deal went through and the city screwed you guys.

Think big and great things will happen. Hope you and Eastwood are still making waves in Houston.

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