How would a lender value a property generating 32k a month?

Question

So here’s my situation.

I recently bought a hotel, and converted it to efficiency apartments.

It has a common area, and a courtyard that is still being worked on. The rooms are finished and occupied. There are 43 rooms in total. It’s generating about $33,000 a month, $21,000 after all expenses. My plan is to use a big chunk of that to do more community development.

I’m also considering refinancing to pull more money out of the building. Have about 500k in it so far. Closed 3 months ago. How long do I need to own it and how would the bank value the building?

My goal is to get more long term housing options in my community.

Kimberly Gamez · Answer

I am an investor out of Michigan and we actually own 3 converted motels. In my experience we only needed to show a current "rent roll". Now since you own the property you should be able to provide. This may be a dumb question but have you asked your local lender this question? OR send a local commercial appraiser the question and see what they would want to see. It will all depend on your local lender. I am happy to talk more about my experience with this type of asset class. Good luck my friend!

Hope Fick · Answer

Thank you Percy, that does help!

I’m 1/3 owner of this project. I’m estimating over 3/4 of people with housing vouchers can’t find a landlord to take it, even excluding the ones that have other issues like criminal history. I can’t believe the government solution to housing is to give somebody a piece of paper, and probably nine out of 10 of those do not receive an actual place to live. It’s crazy to me.

Even the trailer park is full. There is no construction happening for this income group. We’re still considered a very affordable housing area, a new construction three bedroom two bath home will start at about $209,000.

The local nonprofit has been paying up to 30 days for people to live in a hotel just down the road, which is costing them approximately $78 per day. They’re spending a huge amount of money on super expensive housing. We were full 6 weeks after the local office approved this space. Everyday 3-5 vouchered people call me, needing somewhere to live. We could use many more just to meet current demand.

Madhav Ghanta · Answer

This is amazing what you're doing for the community.  I assume these are section8 tenants?    how do you vet them? was looking at doing something similar on a smaller scale in the very unaffordable palm beach / broward county areas of south florida.

Jared Rine · Answer

@Hope Fick...based on your last message, I'd suggest you probably talk with the local bank first (the one you don't want to rock the boat with), and see what their thoughts are with regards to what you're planning/trying to do.  That way they aren't blindsided.  If they aren't able to move forward on something, whether now or in the near future, then it'd likely make sense to start talking with other lenders. If the numbers check out to what you mentioned, then you probably have a ton of equity locked up, as long as there are comps to support, and you could rinse/repeat this model if it's in such a demand as mentioned.   Experience talking, these deals are not easy, no matter where they are (I've had clients with similar situations in other areas, such as FL, where motel/hotel conversions are more a norm).

Hope Fick · Answer

I wished there were comps! No one has done anything like this around here. I think there’s a few in Kansas City Area. Locally had a 32 unit 1 bed complex sell for about 1.4 million over the summer. But zero converted spaces. I’m really hoping someone can look at the income and expenses and do a value calculation that way. I had 5 calls today, 4 were vets, 3 were on the street. We have 0 openings.

Hope Fick · Answer

Thanks for the feedback. Kimberly - Talking to a commercial appraiser would be a great idea. I need to make that connection locally. It was because of my parents connection to the local bank this even happened. We started a LLC and are 1/3 owners. I don't want to rock the boat with the current lender at all, I know they are very conservative and probably would be blindsided if we tried to refinance soon.

I'm a residential real estate agent by trade, I specialize in flip properties. This is a whole other world to be sure. I'm just happy it's going well, but also planning for the future.

Jared Rine · Answer

@Hope Fick..that's truly awesome and you've turned the property into what seems like a cash cow.  From a lender perspective, this still might be difficult to value though because of the quirkiness of the asset, even though it's 'multifamily,' per say.  I don't know if you found what you're looking for, but I'd be interested in hearing more.  PM if you can.  Thank you.

Mike Dymski · Answer

This is great - win/win/win for the residents, community, and you.  Be careful with zoning...multifamily use may not be permitted in commercial zoning (or may have to pursue re-zoning or zoning variances).

Percy N. · Answer

@Hope Fick, congratulations and I respect your vision.

A commercial property like this is valued based on its NOI (Net Operating Income) divided by the market cap rate.

So $21,000 x 12 = $252,000 NOI

Assume the cap rate is 5 (could be more or less in your market), $252000/0.05 = $5,040,000

You should be able to get a 70%-75% LTC loan on this (minus any reserves and fees).

Hope that helps.

Hassan O. · Answer

What’s the current zoning?

How would a lender value a property generating 32k a month?

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