Converting a 32 unit hotel into apartments

[Jared Saunders]

Hello,

I am currently going through the process of analyzing my first large multi family investment.

The building itself is an old hotel that had suffered from minor fire damage on the residential end of the building. Yes I said residential end, the previous owners had their own house attached at the end of this 32 unit hotel building. (Insert picture)

The house section of the building may have to be torn down , not 100% sure yet as I haven't been able to get more than a rough estimate of repair from my contractor. The 32 hotel units themselves are in surprisingly good condition. The idea my partner and I are leading with is converting the 32 single units into 13 1 bed, 1 bath units, and 2 bed, 1 bath units. The rough project cost for this conversion would be roughly $175,000-$200,000. Although I can get the building for only $50,000, I am still not convinced if it is worth it.

Below I will list the pros and cons we have with this investment and what obstacles we face.

Pros -

Demand(80% of this 40,000 population town are renters!)

Good relationship with the housing authority ( we are sure we can section 8 these units as a fall back being that there are hundreds of people on waiting list in the area)

Rent prices including utilities can bring $550 for 1 bed , $650 for 2 bed.

Great price on the building 

Great banking and repair resources (Being this is my hometown I know a lot of good connections) 

Cons-

Right now the property only has one meter, this means being forced to include utilities with all the units.

Being such a major project the conversion expense is the real kicker on this investment. 

Attached is a very in-formal version of the BP Rental property analysis tool(Sorry BP , do not have a pro membership YET so I had to improvise) 

I did use rather conservative numbers in the hopes of making this first analysis a worst case scenario. As you can see the utilities is the make or break. 

Any advice, coaching, recommendations would be greatly appreciated! 

[Account Closed]

@Jared Saunders - 

I'd explore the cost to submeter each unit rather than directly meter them.  It puts the onus  on you/your property manager to bill and collect, but it may be a more cost effective way to address your concern.  Check with the power company, they may have folks available to work with you and guide you through the pros and cons of per unit metering or they may be able to make usage projections based upon historical averages for like kind units from which you can bill.

As for the insurance... perhaps the previous owners never made a claim as they didn't want to pay the deductible, but the coverage is in place.  You may want to consider adding a provision to the contract that provides you with the proceeds.  Might be worth looking into.