Old Hotel into apartments, Should I buy?

Question

I have an opportunity to buy an old hotel built in 1952 which has been vacant for 30 years. it is a 42 room hotel on one level 13,000 sq ft. Cost looks like 30k. repairs are estimated to be 850,000. we plan on turning it into 2 bed 2 bath apartments and some single bed single bath apartments. gross rental income would be 10,000/month. I estimate the ARV to be 1.5 million. The property sits next to the main road and has extra space to build a 8000 sq ft building if desired. Would this be a worthwhile investment. I have been a residential contractor for 30 years, this would be my first multifamily investment. Any advise or opinions would be much appreciated.

Buck

Scott Mac · Answer

Hi Buck,

Just some of my random thoughts,

Resume Speed Iowa probably not, Anahiem Calf, maybe.

Is this an area where people want to live stacked one upon the other, or would they rather 'Spread out".

Who will be your renters, local working people or Section-8, and how long will it take to lease up to stabilized where you can get a long term financing in place.

What if Lease up to stabilized takes longer--how long can you "Weather the storm financially".

What about lead paint, asbestos, lead pipes, etc...

Does your estimate include a realistic bid on the electrical upgrade as apartments will probably require more electric amps than the hotel rooms have, and is that available from the Power Company, or will they up charge you to run extra service from point X to your address (if it's available at all).

30 years abandoned, I assume the blacktop is pretty much rubble and will take a full replace.

Hotels have long in wall A/C units, 2 bedrooms will probably require mini-splits. Are there mini-split installers in your area that can work up high on your buildings top floors.

What about heat and hot water, how will that be handled.

Can the buildings existing plumbing and the line(s) to the main street waste line handle the bathrooms  and kitchen sinks (1952 lines might be cloggy and an endless source of complaint) have sewer scopes been done to see what they look like.

Will you be required to put in fire escapes (as well as other modern fire equipment)--has that been budgeted for.

Have you talked about tax abatments yet with the governing authority.

Does the area show a shortage of apartments, or will it take a long time to fill units when they turn over.

Hows the roof (and the real roof underneath--the wooden one), how many layers of roofing are on it, how many can be on it and still get financing.

Does it have some unique history, ie. did Frank Sinatra always stay there, people think its haunted, once owned by the Beatles, etc..

Who was the last Hotel Chain to Flag it and why did they shut it down (Legionaries Disease, poor economy, expensive structural issues, etc...)

Just my 2 cents.

Vincent Grossi · Answer

It sounds like a pretty stellar deal.  How are you financing the purchase and repair?  That will tell you both your after-repair cash flow, your holding costs during the renovation, and whether you need to use that new ARV to refinance out at the end and get your capital back.

It might be worth running through the BRRRR calculator here if you haven't already.

Buck Dabill · Answer

@Mike Smith Thankyou for your thoughts, I know your time is very valuable so thankyou for taking the time to offer me your insight. It is deeply appreciated! I am coming to the conclusion that you are right, "not enough meat on the bones", and not worth the risk. I am now turning to look at building new apartments and or a storage facility on that lot after tearing it down.

Mike Smith · Answer

@Buck Dabill I agree with @Evan Polaski when he calculated your stabilized cap rate at 6.67% IF your rehab costs come in at budget.  If your rehab costs go over budget, you will quickly trend down to 6% or 5% cap rate on a 70 year old build with a rehab.  I'm not aware of your market, but I feel you could find a turnkey project or one with much less rehab cost and risk for a similar cap rate.  I don't feel your project is worth the risk to produce a 6.67 cap rate.  If a heavy rehab produces a 15% cap rate, the upside is worth the risk.  Your project has very little "meat on the bones" for issues.

Secondly, as a long time builder, I would recommend that you estimate your rehab from a "backwards" approach.  Instead of estimating what you think you will need, create a spreadsheet of a new build, and simply deduct off items that are already acceptable and don't need rehab work.  Ie, if the foundation, framing and trusses are sound, remove that from your estimate but leave all other costs.  This method typically produces drastically higher rehab estimates and is normally much closer to actual costs that the typical "It just needs a little drywall touchup and interior/exterior paint".  I realize you have 850k in costs, but $63 SF isn't going to touch a heavy rehab that entails a hotel to apartment conversion on a 70 year old building that has been unoccupied for a long period of time.  To do this rehab, you are going to have to tear down to bare studs and redo all the plumbing/HVAC/electrical, IMHO.  It could potentially be cheaper to build on a bare pad than rehab the current building.

Andrew Hogan · Answer

@Buck Dabill

Have you given much thought into the exit plan?How long would you be looking to hold? How would you go about promoting and selling this to a potential buyer?Aside from the significant operational risk getting the property into shape, you would then have to continue to manage which is a whole other ball game :)Sounds like there is a high upside potential, but being your first multifamily go-around, there is a good amount of down-side risk as well.

Buck Dabill · Answer

Thankyou for your insight, its very helpful...my agent says the caprates around here are  about 6%,  I will check into the zoning...i had assumed it was multi family just because it was a hotel...good call, i will check.   Thanks again

Buck Dabill · Answer

Thankyou for your insight, its very helpful...my agent says the caprates around here are  about 6%,  I will check into the zoning...i had assumed it was multi family just because it was a hotel...good call, i will check.   Thanks again

Buck Dabill · Answer

Thankyou

Buck Dabill · Answer

Thankyou for your insight...i will do that

Old Hotel into apartments, Should I buy?

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