There is an old motel/hotel in my area.

[Donald Murrill]

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?

[Jeff Kehl]

@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.