Rental Property Investor · Mobile, AL · Member since 2018 · 4 posts · 0 votes
There is an Old Motel/hotel in my area for sale at $164,000. I'm not sure how old it is but the building looks like it could be a good investment.
I was thinking, would it be a good idea to convert some old motel/hotels into apartments?
Would I need a commercial real-estate license to operate it?
My idea involves knocking down some walls to convert 10 motels into 5 apartments.
What should we watch for if we decide to invest in such a big project?
@Donald Murrill I wouldn't give up on the idea just because no one else has tried it. A broker from Marcus & Millichap told me that this exact strategy can provide excellent Return on Investment if done right. And someone in my town just applied for a zoning variance to do this exact thing. I've been watching but around here they want like $1-2 million for old, tired motels that might work.
Listen to what @Karen Schimpf said about doing a rental analysis and getting contractor bids. You can do both for free and even if the answer is that it makes no sense you will learn a lot from the process.
Do you know what she means by this?
First on cost, find 3 contractors in your area that can give you bids. You may have to pay an architect a few thousand dollars to draw up plans first. You'll need a statement of work of everything you'd want the contractor to do. Some contractors may help you draft that.
Don't forget exterior improvements to soften it so it doesn't look like a converted motel.
Let's say you do that and the average bid is $200k. So after construction you're into the property for $363k.
You now have 5 apartments with an average cost of $72k per unit. To make that worthwhile you need your monthly rent to be $750-$1000/month.
That's where the rent survey comes in. Draw a circle of about 5 miles around your property and look for any competing apartments. Find out what they charge for rent for a similar sized apartment. How many square feet, bedrooms/baths, finishes, and amenities do you offer. You want to look for similar options and see what they charge.
If they are charging $1100-$1300 and have no vacancy you're in good shape, otherwise move on to another idea.
So, to summarize a bit, this strategy works really well in areas where small apartments are in short supply and fairly high rents. Think San Fran, NYC, Washington DC, Chicago, Atlanta. It also could work if you can pick up the motel cheap and/or do the construction cheap.
Also, be very careful with low-end motels because they tend to be crime ridden and that can be a hard thing to transition out of.
But, do the work for your particular deal and see what it tells you.
Yes you could make them apartments. You do not need a commercial license to do this. You should watch for the load bearing walls, you should also make sure that all apartments have two egresses, and that they are up to the code of the township that you are in.
@Donald Murrill I recommend getting a contractor in to take a look at the property to give you an idea of the cost it would take to convert the hotel rooms into apartments. Add at least a 10% contingency of total project cost so if overage occurs you will be prepared to handle the unexpected. You need to know the full cost of purchasing and fixing up this motel to see if the project would be profitable when you do your rent analysis. Lastly, if this is your first fixer-upper, I suggest going in with an experienced and successful fixer-upper partner/mentor.
@Karen Schimpf
Your absolutely right! I've been racking my brain around this idea, wondering how much I could make more so, than how much it will cost.
I've been hesitant about the price of $163,000 for the purchase though. I think It might be a little too steep for a run down hotel/motel, that might cost more than it is worth.
Wouldn't you think?
It's been up for sale since 2009, and the price reduce several times from $199,000-$163,000. I just set an alert to wait til the price drops again.
@Donald Murrill The most important is doing upfront rent analysis using the number assuming you rehabbed the property to make sure the deal makes sense. Do not waste time and effort if the rent analysis shows rehabbing the property will not make sense.
There is a reason this place has not sold for almost 10 years! Price. It is coming down while others are going up, and likely needs to come down some more. There may be other issues too. Probably a good one to stay away from.
@Donald Murrill
Buying a motel and turning it into apartment units isn’t as easy as it sounds. I strongly advise you to go to the zoning office to see IF it’s possible. If it’s possible within the zoning code then the conversion would be presented at a zoning meeting where adjacent neighbors and officials will give their opinion. People then vote accordingly.
@Donald Murrill I wouldn't give up on the idea just because no one else has tried it. A broker from Marcus & Millichap told me that this exact strategy can provide excellent Return on Investment if done right. And someone in my town just applied for a zoning variance to do this exact thing. I've been watching but around here they want like $1-2 million for old, tired motels that might work.
Listen to what @Karen Schimpf said about doing a rental analysis and getting contractor bids. You can do both for free and even if the answer is that it makes no sense you will learn a lot from the process.
Do you know what she means by this?
First on cost, find 3 contractors in your area that can give you bids. You may have to pay an architect a few thousand dollars to draw up plans first. You'll need a statement of work of everything you'd want the contractor to do. Some contractors may help you draft that.
Don't forget exterior improvements to soften it so it doesn't look like a converted motel.
Let's say you do that and the average bid is $200k. So after construction you're into the property for $363k.
You now have 5 apartments with an average cost of $72k per unit. To make that worthwhile you need your monthly rent to be $750-$1000/month.
That's where the rent survey comes in. Draw a circle of about 5 miles around your property and look for any competing apartments. Find out what they charge for rent for a similar sized apartment. How many square feet, bedrooms/baths, finishes, and amenities do you offer. You want to look for similar options and see what they charge.
If they are charging $1100-$1300 and have no vacancy you're in good shape, otherwise move on to another idea.
So, to summarize a bit, this strategy works really well in areas where small apartments are in short supply and fairly high rents. Think San Fran, NYC, Washington DC, Chicago, Atlanta. It also could work if you can pick up the motel cheap and/or do the construction cheap.
Also, be very careful with low-end motels because they tend to be crime ridden and that can be a hard thing to transition out of.
But, do the work for your particular deal and see what it tells you.
@Jeff Kehl Outstanding advise Jeff!!!! Great job on breaking down the steps for @Donald Murrill and all other investors seeking to convert a motel into an apartment.
You need to check zoning and commercial/residential codes/laws in your area first. Converting a hotel to apartments is not as easy as knocking down walls and throwing cash at it. There are a TON of codes that are butts head when it comes to commercial vs residential. The building types, based on use, are completely different.
Go to your city and see what they think. Then go to an architect before you go to a contractor. They will know the building codes WAY better than any contractor.