Hotel Conversion

7 Replies

I have been approached with a deal to purchase an older vacant hotel. There are currently 6 apartments 22 hotel rooms and a 3 bedroom house on site. Purchase price would be 150k and needs about 200k in improvements. Seller is willing to finance entire deal at 5% interest. The more I look into it the more potential I see. It's located in a small town about 3 hours away. I just finished turning over a 33 unit apartment complex that is now 100% full. I have the experience and time to commit to turning this place around too. I spoke with the city this morning and found there is a housing need especially for transient workers during the summer and fall. Original plan was to convert entire place to studios or one bedroom rentals with 12 month leases but now after talking with the city I'm thinking converting the 2nd floor to long term rentals and the main floor to short term month to month furnished rentals. The city was really excited to hear we are interested in transforming the property and will work with us to rezone the property and possibly provide some financial assistance to help with improvements. Anyone have any experience with hotel conversions or short te rentals?

We own hotels. This is a solid strategy assuming the hotels are in the right location. I will say a few things to keep in mind though. Hotel rooms won't be individually metered. So your rent will have to be inclusive of all utilities and probably even cable and tradeYou might also not have on-site amenities such as individual laundry machines. The larger flagged hotels keep this on-site for the guest to use, but its usually one or two dryers. You'll also need to spend significant capital building out kitchenettes in each room. I am assuming that since its a motel it doesn't have any in either room. You are basically trying to convert it to an extended-stay hotel. 

Also is the property exterior or interior?

Anyways feel free to PM me if you need more help. Done a lot of hotel acquisitions, but we haven't converted any of them though.

You are right the utilities are single metered so they would be all inclusive. It's an interior two floor building. There is a good size laundry room that we will install coin op to help with additional revenue. We are thinking of installing kitchenettes in the upstairs units that will be long term apartments. The main floor would be furnished hotel rooms and rent month to month. Currently we are thinking to install a fridge and microwave and then we would build a community room with full kitchen in the former lobby for those tenants to use. I have never ran a hotel so at this point I plan to have them as all rentals and close the lobby. I know a hotel could have higher revenue but also comes with more expenses for staff, maid service ect

Just joining the conversation. This sounds like a great conversion idea. Depending on how many long-term stay units you'll end up having I think you will need to account for some level of staffing. I used to work for an extended stay and there are some guests who like to have at least weekly maid service. Some even paid extra to have daily service. Also, an engineer (or will you have your own maintenance crew). Someone at reception. I know you said you're looking to get rid of the lobby but a front desk person can be a great asset, as these people are likely coming from out of town on business they will need quite a bit of assistance settling in and getting familiarized with the area, building amenities, etc. How do you plan on marketing your rooms and attract guests? Will you hire a sales person/team? Just giving you a few things to think about.

Some other things to note that I didn't mention was that you'll need to make sure rent is high enough to account for wear and tear of your FF&E. Simply renting the room is not enough. When a tenant is staying for a year, trust me there will be damage to the furniture. As a current hotel owner, we start seeing wear and tear after six months and thats for rooms that are not going full every night. Unlike traditional apartments, you will be responsible for the furniture in these rooms. Just imagine them being furnished apartments with all inclusive amenities. Also you will need to probably even provide services such as wifi. So therefore I am stressing the importance of making sure you have high enough rents to cover these amenities. You will need some staffing as well, just one maintenance person and one person in the lobby to manage the property. If the numbers match up, this acquisition might be worth it. 

We are currently looking at an interior hotel as well that isn't doing extremely well that we might plan to convert in separate units or reflag to a better hotel brand, but are doing proper due diligence to make sure we make our profit.

Thank you both for all the input. We were originally planning to purchase this hotel as a conversion, but after talking with the city we have learned this is the only hotel in the city. The closest hotel is about 15 miles away. Having never ran a hotel we want to be sure to look at all options to determine what makes the best financial sense for this space as well as meeting the needs of the community. If we decide to operate it as a hotel, would you franchise or not?

@Trevor Haasch  

Franchising will be very difficult even with the economy brands.  How old is the property?  The property is too small & probably too old for a brand, even with a significant renovation.  There are a few select brands that specialize in tertiary markets up your way.  Americinn & Cobblestone are two brands that will take on smaller properties.  However your 200k in improvements probably wouldn't cover the costs needed to bring the exterior & interior up to par for a brand.  I'm just guessing based on your comments.  Check out Cobblestone's website under their conversion brand, I believe it's the Boarders Inn product.  Look at the existing construction of some of the properties to get an idea for what you would need to do on the renovation side.  

Beyond that I would make sure that there's demand for a hotel in this market.  Just because it doesn't have a hotel nearby within 15 miles doesn't mean a hotel should be there in the first place.  The current owner is selling for a reason (with owner financing), & maybe that means the market needs a fresh new hotel property or maybe that means it doesn't have the demand.  

You don't have the luxury of looking at a STR report to comp nearby properties because of the lack of supply. However you could pull a STR report from other similar towns nearby, find a product that will match yours and get an idea for ADR, Occupancy & ultimately RevPar. Like @Jimmy Klein  mentioned location is very important.  And also take note of his comments on FF&E wear and tear.  FF&E is something you should reserve for on a yearly basis (3-5%).  Also when you have a brand you will have brand standards, which need to be accounted for.  Good luck! 

I definitely agree with all @Chris Winterhalter  said and also wanted to add something. Another thing to consider is how hands on do you want to be? If you do decide to go the hotel route, whether branded or not it will have to be very involved even after opening. Maybe more than you would like.

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