My wife and I are located on the north Oregon Coast (think Astoria/Seaside), and are relatively new to real estate investing. We have done a condo remodel from studs to rental, and are currently doing a live-in remodel on our main house w/ ADU, but are very interested in scaling up in the next few years to do this full time. We are specifically looking to take on 8+ unit opportunities. Given the massive shortage of housing in our area, we want to help expand housing by specializing in adaptive reuse projects. Generally speaking, I think this will be a great niche for the coming decades, and we really like the idea of providing value to the community through our investments.

With this in mind, we came across a motel/inn in the area that seems like the perfect opportunity for an apartment conversion. It is a 25-unit property with all units either 1BD or 2BD and full size kitchens in each. The cost to "convert" is therefore quite low when compared to a typical conversion deal, therefore most of the reno $ will be spent on exterior remodel (façade, roof, security fence, etc.) and more superficial upgrades. The business itself currently runs weekly/monthly rentals (and many tenants have been there for years). We recently did a walkthrough with the current owner, who was very open with us about the business and what she's looking for.

While all that sounds great, here are the main hurdles I'm seeing:

1- Asking price ($3M): We met with the seller and she is looking to list the property at $3M this spring. We do have a good connection with her and may be able to do some partial seller financing, but the price seems a bit steep for what we'd be getting. This price includes $50K for a vacant building (used to be restaurant, I would like to convert it to storage units and potentially lease front portion for retail (i.e. coffee shop)) and $200K a few vacant acres behind the motel. Some of this land can be developed, but the majority is for septic (the whole city is on septic unfortunately).

2- Financing: While the property is older (1950) and definitely needs upgrades, is there enough value-add opportunity to entice a private or hard money lender? It currently rents pretty well (5% vacancy) and the NOI is around $270K-$300K. I think we can reasonably push that over $340K (with 7% both cap rate and CoC), but I'm not sure if the juice is worth the squeeze with a 20% down payment of over $600K. I know hard money is typically avoided for these type of deals, but I was wondering if the cost to renovate is near the cash the Owner is looking for (say, for a down payment on her new house), if it would make sense to do hard money loan (e.g. $300K) and carry rest of the note with the Owner? Then refinance once it's converted to an apartment.

We've spoken with the city, and we may be able to use the current zoning or at most will apply for conditional use. Given the incentive to provide housing, I don't see this as a major issue. One area we have left to explore is whether or not Oregon has any grant programs to incentivize these kinds of conversions to provide longer term housing. I have reached out to several local conventional lenders who have all said a) this hotel is a great candidate for this project but b) their bank may not take on the project (not a hard 'no', more of a "we'd be more interested once its stable apartment rentals").

Anyway, I know that's a lot of information but I'm curious to know if anyone here has done a deal like this, and if there's something major we are missing? Though we are willing to walk away from the deal, I'd hate to give up without even putting together an offer just to see what is possible. I have a lot more information I can provide if needed, just let me know!

Beaverton, Oregon

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