How to Convert Distressed Hotels Into Profitable Apartment Buildings

Alex Cartwright (00:00)
When you’re buying something at that kind of price point, that’s you’re fundamentally taking a different risk than the people that are spending 200 a door. Yeah, that you spend 200 a door. I’m not saying that’s a bad deal. Okay. You’re not doing the construction. There’s leases in place. Okay. But there’s not the upside potential. You’re not gonna 3x the value of the units. All right. We’ve got the

We put ourselves in a position to try and sometimes 2X the value of the of the units. I shouldn’t say usually 2X, sometimes 3X the value of the units.

Cody Crabb (02:03)
Welcome back to the Real Estate Pros podcast by Investor Fuel. I’m your host, Cody Crabb, and today I’ve got Alex Cartwright with me. Alex runs HotelSHIFT Capital, buying end of life hotels and converting them into multifamily housing.

We’re going to dig into why this is really a deep value add apartment play and what makes a hotel a good conversion target in the first place. So Alex, thank you so much for hopping on today. I really appreciate it.

Alex Cartwright (02:28)
It’s a pleasure to be here, Cody.

Cody Crabb (02:30)
so I’d love to hear a little bit more about how you you know, how you got into this. This it this seems like such a specific niche, and I’d love to hear the story of how this came about.

Alex Cartwright (02:41)
It is certainly it is a specific niche and that is that’s a that’s a virtue. that’s a benefit. And it it it’s certainly not the case that I kind of closed my eyes and thought we are gonna go be in the hotel business and we’re gonna we’re gonna go and try and find crappy hotels that can become apartments. I didn’t I didn’t conceptualize it that way and then go out and do it. There was some trial and error, some learning.

And the opportunity kind of presented itself. So I was doing a lot of traditional multifamily buying, renovating. That is a great business. Don’t want to knock it in any way. But it’s also a competitive business. A lot of people out there have got the business plan. Let’s find a apartment complex that is in need of some TLC. Let’s buy it at a good price, renovate, raise the rents, raise the NOI, and either

refinance or sell and move forward. It’s a great business plan. Apartments are a great business for a lot of reasons that folks listening here probably know. but it’s competitive and it’s hard to have an edge when you’ve got the same business plan as everybody else. and I thought that it was the risk reward just wasn’t quite there back in 2021, 22 when cap rates even on C class property were in the fours and fives.

That’s a yes, a lot of upside when your cap rates in the fours and fives, every additional dollar of NOI is getting multiplied by 20 to 25, but that means a lot of downside as well. and so I was concerned about the risk reward at cap when cap rates are at that level for all multifamily. And the I went to a conference where a broker says to me, I’m aware of a hotel for sale, and I think it makes sense.

as a conversion to apartments. And I thought that’s strange. Yeah. But I’ll go look at it out of curiosity.

Cody Crabb (04:37)
See you.

Yeah, you saw my reaction when we started talking. I like, Really? Hotels to apartments?

Alex Cartwright (04:47)
Really? Hotels. Like I never I never looked at a hotel for sale.

Cody Crabb (04:51)
Well and I think also like j just as an outsider that doesn’t know anything about this, like I’m imagining the hotels I’ve stayed in and I’m like, How on earth? Like how does that even work? So yeah, I can imagine you’re a little bit like taken aback by that.

Alex Cartwright (05:53)
Was and I so we went and looked at the hotel and I thought, wow, what a pain in the ass. We’re gonna need to rezone the property. We’re gonna take everybody out. You’re going to cancel the franchise. Most hotels have a brand on them in the hotel world. They call that the flag. So a Marriott, a Hilton, a a Holiday Inn. These are all different flags, the term is. And those are all franchises. Usually those agreements are twenty years long.

So you have get that agreement canceled in order to remove the brand. Then we’ve got to install sometimes sprinklers, kitchens, sometimes or combining rooms to make one and two bedroom units. And then we’re gonna lease them all up. So there’s a lot of work. But like any good entrepreneur, you just try and put a price on these different problems. Okay. Or they’re not even problems, just obstacles. And it it’s when you’re folks that have maybe flipped a house or fixed up an apartment unit.

You don’t look at a house and say, well, that’s just too ugly to flip. If it’s an ugly house, you just start putting a price on everything that it needs and see whether or not the upside is justified. And I came to figure out pretty quickly that when you’re buying a hotel, $30,000, $35,000 a unit, and the multifamily across the street is $150,000, $200,000 a unit, you’ve got a lot of upside. And that low cost per unit is also effective.

Downside protection. And when you’ve got that kind of low basis, you can offer very competitive rents, more competitive than the regular multifamily guys, and you can supply units that are more affordable in nature, which are is exactly where there’s a lot of demand. And that’s exactly the kind of units that are difficult to build ground up. So you’re not competing for the same tenants that new construction multifamily is.

And I thought, and I ultimately thought this is this is a strategy. There are lots of old hotels. Every hotel becomes an old hotel and it’s not worth remodeling at some point. And so I just need to be the expert. I need to become the expert on weaving through this maze of complexity so that we can take advantage of the opportunity to buy old distressed hotels that nobody wants to buy.

and turn them into great apartment complexes at prices where a lot of people need to live.

Cody Crabb (08:26)
Hm. Yeah, I think it didn’t even the location thing didn’t even occur to me. The fact that there are kind of these established buildings in well in high traffic areas close to amenities, because that’s where they build hotels. So it makes a lot of sense. so for listeners, why does buying at that kind of price point per door change the whole risk profile when we’re talking about like buying apartments at very much not thirty to thirty five K a door?

Alex Cartwright (08:56)
Well, when you’re now look, you can buy a hotel. Like I just we just bought one downtown Denver about a little less than 30K a door. You you’re definitely gonna spend, depending on the finish level that where you want to go and how vertical the property is and how much work it needs, gonna spend thirty forty K a door renovating it. It’s not already an extended-stay hotel where it’s not already has larger rooms and kitchens in every room. So

I don’t want the it’s still a great deal, but there’s renovation that’s involved.

But When you’re buying something at that kind of price point, that’s you’re fundamentally taking a different risk than the people that are spending 200 a door. Yeah, that you spend 200 a door. I’m not saying that’s a bad deal. Okay. You’re not doing the construction. There’s leases in place. Okay. But there’s not the upside potential. You’re not gonna 3x the value of the units. All right. We’ve got the

We put ourselves in a position to try and sometimes 2X the value of the of the units. I shouldn’t say usually 2X, sometimes 3X the value of the units.

And you can only do that when you’re buying units at a really cheap price. And we can buy units at a cheap price because we’re buying them at a hotel valuation instead of a multifamily valuation.

Cody Crabb (10:50)
Hmm. So I’d love to hear a little more about, you know, what’s your criteria? Because hotels, I mean, the word hotel, when you hear apartment building, like the you get kind of a general vibe of what you’re looking for. I imagine with hotels, y you could pretty much just get anything. Like I’m imagining just anything could come across your desk. So I’d love to hear like what are the must haves for you? Like location, room size, like what’s i extended stay stuff, like

What makes you think that this is a good hotel for this?

Alex Cartwright (11:22)
That’s a great great question. And you’re right. There’s a lot of variations in hotels. Some have big atriums in the middle. Sometimes the doors open up to the outside. That’s called exterior corridor. Some people call those motels. And some of them, like you said, are extended stay. They already have big rooms and they have kitchens. Some have kitchenettes. Some are all suite hotels.

The construction and the layout, the architecture based on the brand and when it was built, you’re right. They absolutely vary. So what’s most important? I give you number one most important thing is how high are the rents. Because the rents are very high in the area. There’s a lot of dem that means fundamentally there’s lot of demand, desire to live there. And it is gonna be weak and if the rents are high, it will merit spending more money on construction to convert a hotel.

Into multifamily. So my hotel criteria for what’s desirable in the hotel structure is more flexible the higher the rents. In other words, I’m not going to be interested in spending the same amount of money to remodel a hotel in Dallas than I am in Denver, because the rents are higher in Denver. And I’m not going to be interested in spending the same amount of money on a hotel in Oklahoma City than I am in San Francisco, because

Rents are higher San Francisco, so I’m willing to be more flexible on the hotel structure itself. But if I but the dream hotel structure obviously is an extended stay. So you think about a Marriott Residence Inn, Hilton has a brand, Homewood Suites, IHG’s Candlewood Suites, or Staybridge Suites. These are all hotels that have got full kitchens in them and the

Cody Crabb (13:12)
Basically

condos, right? Like that’s kind of the vibe you get.

Alex Cartwright (13:15)
I would call them small apartments but the point is they’ve already got the in the electricity and the plumbing called the MEP infrastructure to be like an apartment. They’re the most apartment like. However, those hotels are typically newer. An extended stay hotel is not something that’s been around much longer than twenty, twenty-five years. And those hotels typically run

pretty well as hotels. They’re less likely to be distressed. You can find them. You can definitely find an extended stay hotel whether it’s maybe it’s not that distressed, but there’s just so much upside to converting it into an apartment because maybe the hotel labor is unionized and so the hotel owner’s not making a lot of money. Maybe the brand, Marriott, Hilton, etc., is demanding a very expensive remodel to the hotel. And it’s best just to convert to apartments. Maybe the city

Wants more housing, or they need more senior housing, or that there’s some reason that the city wants more housing. Maybe the neighborhood has changed, right? We’ve purchased hotels next to office parks where corporate travel’s not come back to where it was pre-COVID. Purchased hotel in an area where there used to be an airport and the airport got moved somewhere else and the area was redeveloped. So now there’s not as much hotel demand. So there’s situations like that where

You can find an extended stay hotel. but if it’s not extended stay, then we like hotels with larger rooms. The larger the rooms, the better, because then we don’t have to combine as many rooms and make one and two bedroom units, right? And we can we can make the make the units look more and more like traditional multifamily.

Cody Crabb (14:51)
Yeah.

So if someone is walking into one of these, like do they think I’m living in an old ho converted hotel or is this like you would never know?

Alex Cartwright (15:48)
No, especially if it is our we’ve got kind of two lanes that we put our hotel conversions in. One is a workforce housing, you might think C class conversion. And so those are like in an area where there’s just a lot of demand for that kind of thing. And so when we’re doing that, then we’re doing more studios, it’s a more basic kitchen. and it

It doesn’t look like a hotel, but it doesn’t look like a fancy apartment either. It’s a more basic apartment. But you go into our property in a downtown area, it’s targeted a young professional. There’s finishes, full-size appliances, full-size kitchen. There’s nothing about the unit that looks and feels like a hotel. We’ve got a property that’s got underground pickleball courts, underground parking, indoor, outdoor pool.

Multiple fitness centers, golf simulator, you know, leasing office, mailroom area, et cetera. None of that feels any different than a new amenitized multifamily product.

Cody Crabb (16:53)
Hmm. Yeah, interesting. so one question I’d have, you even kind of alluded to it being a pain before it was you know, there’s a seems like there’s a lot of red tape that would go along with this. Now, have you just kind of like figured out all the tips and tricks and that’s why it’s no big deal to you, or is that like still a big issue? Like

Alex Cartwright (17:14)
Don’t want to give the impression that it’s no big deal because you can’t figure out all the tips and tricks, right? There’s surprises on every one of these. We learn, we get prepared for them. You know, you always have multiple plans, multi you know, backup plans, contingency plans in place. But the fact that there’s red tape, meaning you’ve got to sit down with an architect and maybe install a sprinkler system.

Upgrade a fire alarm system. sometimes an older hotel, the railings are too short or the spindles on the staircases are too far apart. So we have to add in spindles that are that are narrower, things like that. That all you gotta look at all that as an opportunity, okay? Opportunity to sit down, you figure that out, and that’s why.

You’re getting compensated via being able to buy these things at a low price because you’re willing to have the patience, take the time to figure out what needs to be done. And in the very beginning, of course, I say the beginning of an acquisition project when we are first looking at a hotel, we’ll have a conversation with the city and say, What do you think about this plan? Are you guys able to be flexible on some of the requirements? Are you on board with us converting the hotel?

And we’re not proceeding with any project that unless the zoning allows multifamily or we’ve got some approval from the city before we close on the property.

Cody Crabb (18:43)
Yeah, I think that that’s a really good call out because I imagine it’s one of those things where hearing it elsewhere, like just hearing they want to convert that into a apartment building, might just kind of catch you off guard, like it has me a little bit. I’m like, Really? That’s a thing? But when you say, Yeah, we can plop a big amount of units in a place that r super needs it and it’s gonna cost you nothing and ta da, why don’t we just approve it? Like it it sounds like hey, yeah, that sounds like a

Alex Cartwright (19:10)
Let me

tell you why it’s not strange. You think about a hotel. You already have individual front doors to units. You have individual bathrooms. You have individual HVAC systems for heat and air conditioning. It’s designed to have a parking space for each unit. There are common areas, right? And elevators, etc., where it’s all meant to hold multiple people. There’s typically sound insulation between the walls. Every room has got a unit. This thing was meant to hold a lot of people during the day.

And at night. The big thing that you’re missing is some storage space, like closets, and a little bit more living space. That’s why we want the bigger rooms or we can find some rooms. And of course the kitchen, which in most cases we can add.

Cody Crabb (19:57)
Hmm. That I find this really I don’t know why this is just kind of fascinating to me. I think the reason that I’m so interested in this is because it seems like you know, there it there are enough like you said, I think there’s enough obstacles that just not your everyday person would just look at this and be like, this is a great opportunity, but kind of having the niche seems like that’s really been helpful to you because you kind of know in a lot of ways what to what to expect.

Alex Cartwright (20:23)
That’s right. You gotta look at the red tape, the challenges, the additional knowledge you need. Those are all barriers to entry. That is keeping out the lazier folks, right? And that limits our competition.

Cody Crabb (20:38)
Yeah, for sure. so in a lot of cases, these things have what you need for the most part. and it’s just kind of making it legal and livable and all these all this.

Alex Cartwright (20:49)
I wouldn’t say they have what we need for the most part, right? Just a lot of there’s a lot of infrastructure we can need.

Cody Crabb (20:54)
Right. Yeah, yeah, sure. yeah, you put it better than I did. But as far as like what do you look at on the opposite side that’s like, Eee, I’m not even gonna touch this? Like are there some red flags that that you typically see?

Alex Cartwright (21:06)
Yeah. three or four big ones. One is if the if the if the hotel has very small rooms, which I would call like two hundred fifty square foot and lower. And sometimes you have that if the hotel’s in a dense area or if the hotel was built before nineteen sixty. Those are situations where we just have to combine too many rooms and the economics break down and they probably are better as

either tear it down or remodel it as a hotel. So that’s a flag. two, vacant hotel, hotel that’s been shut down. We’ve never been able to make that work. You know, once you shut it down, the mechanical systems, plumbing, electricity, etcetera, those tend to deteriorate. And so we can’t reuse them. Or they get vandalized to the point where it’s just as expensive as new construction or more by the time you’re putting it back together.

So vacant hotel we’ve we stay away from.

Cody Crabb (22:08)
From.

That’s interesting because you would think that that’s like a gold mine, but like that’s good that’s one of those things. I guess you’ve just kind of been there done that.

Alex Cartwright (22:15)
Yeah, even vacant a handful of vacant hotels, like I wouldn’t want even if they were free, just because it’s too much to put back what we need. And you know, some other red flags are really location. So, you know, you think about someone that needs a more lowercase, a affordable apartment. A lot of people on limited income, their biggest expense is housing. And then their second biggest expense is transportation costs or commuting costs. Hotels are usually

on major thoroughfares. They are close to places where people work. They’re close to places where people shop. They can be in great residential locations. But the hotel that is right next to the truck stop, right next to the interstate, that is a noisy spot. It’s not very livable. There’s nothing to walk to. It’s fine to sleep there for a couple nights, but it’s not a place where you want to be every day. There’s not maybe not a lot of green space, etc.

So the location does matter. Are there, it’s important to us to see. Are there other apartment complexes nearby? Is there green space nearby? Are there other single family homes nearby? Are there schools nearby? Are there grocery stores nearby? In other words, is it a residential feel? And not every hotel can hit that. So I would say three big red flags. old, so old that the rooms are small, not good. Vacant or partially vacant, shut down.

Almost never works. And then are we close, right on a major highway, doesn’t feel residential, slowed, or near an industrial site. Typically doesn’t work either.

Cody Crabb (23:53)
Yeah, I do like that it’s kind of about vibes at some point, ’cause you’re right. Like I’m thinking about the hotels I’ve stayed at and like there are plenty of them that would just fit right in as a as an apartment building, kind of the location. It just kind of seems like it could be, but some are certainly like you said, like an airport hotel is gonna be very strange. It’s gonna feel very out of place. So yeah, it seems like that’s something you really gotta keep an eye on. who’s typically bringing these deals to you? Like are you is it investors that stumble across something? Like, what is it that, you know?

how are you finding these typically? People

Alex Cartwright (24:25)
Well

people know us as folks that want to look at older hotels, but we go to hotel brokers. So folks may not be aware that just like in multifamily, you’d go to a multifamily broker, go to a multifamily conference, meet the people that are in the multifamily business. Hotel world’s the exact same. There’s folks that specialize in selling hotels, there’s conferences for people that are in the hotel business that want to buy and sell hotels, and so

We spend our time with those people and we analyze those properties.

Cody Crabb (24:58)
Hmm. Interesting. Yeah, It’s just like you’re just specializing in this specific kind of conversion. so I think d do you typically have like a general like layout that you kind of go back to? Is there kind of a floor plan design that that you kind of reuse or is it kind of

Yeah.

Alex Cartwright (25:19)
Yeah,

yes and no. It’s not distinct for every hotel, but the because look, if they build a Best Western in Kansas City and they build a Best Western in Columbus, Ohio, a lot of times it is the same building. Okay. So the infrastructure is very some very similar. And a lot of hotels, the infrastructure, the architecture is similar, but it’s not quite where we can do a straight up

Copy and paste. the design does vary some depending on the location within the market, who our target tenant is, and what the exact layout of the hotel room is, how many rooms we’re going to combine. That depends on what demand looks like for studios, one bedrooms, and two bedrooms. That’s stuff we sit down and decide on a property-by-property basis. So, yes, it’s the designs are somewhat similar, but it is.

There’s architecture work that’s done on each project.

Cody Crabb (26:17)
Hm, okay. Yeah, I think that’s so interesting. I think this seems like an I mean you tell me if I’m wrong, but this also seems like a really good opportunity to build kind of what you want. Instead of just kind of building a bunch of the same units like you see sometimes. It’s you can kind of customize the area. I’m

Alex Cartwright (26:35)
I am in the business of supplying what the consumer wants to buy. So forget about what I want, right? We’re researching what there’s demand for in the market and looking to serve the consumer by filling that demand. So there’s a lot of demand for basic units and at a competitive price, that’s what we want to supply. There’s a lot of demand for more amenities, but let’s say all inclusive, including the water, the electricity, and the Wi-Fi, then that’s what we want to supply.

So look, it’s I guess my point is it’s not about what I want, right? We’re out there researching what the customer wants and trying to find the best way to deliver it.

Cody Crabb (27:15)
Yeah. Well, this has been really interesting. I thanks so much for all the insight that you’ve given us. we’re just about out of time here. But before we wrap, I just wanted to you know, you’re you said you’re always kind of looking at potential candidates. You’ve become the hotel to apartment guy, it sounds like. where should people go if they wanna learn more or bring opportunity your way?

Alex Cartwright (27:35)
wants if anybody wants some help analyzing a hotel for potential conversion, we’re glad to lend our insight. If anybody wants to do a conversion and they and they need some they need some guidance or they you know want us to consider potential partnership they’re glad to get glad to get in touch our website HotelSHIFT, S-H-I-F-T, HotelSHIFT.capital can sign up for our mailing list and learn about everything that we’re doing.

And see the newsletter that we put out. I don’t have any canned marketing crap. It’s all stuff that we, meaning our team has written, and it’s all about specifically hotel to apartment conversion. We do a little bit of investing also in traditional hotels, just because we’re in that space and we hang out with a lot of hotel people. And we’ve got some partners that have long experience in hotels.

And so occasionally we come across a great opportunity for something that makes sense as a hotel. And we with a partner invest in that as well. So if folks are folks are learning about getting exposed to hotel investing, sign up for our mailing.

Cody Crabb (28:45)
Yeah.

Yeah, I could see that. Well thank you so much. I appreciate you hopping on today. and listeners, thanks so much for giving us some of your time as well. we couldn’t do this without you, so thank you. Make sure you visit that website, check out this interesting niche and learn more about it. And we’ll see you on the next episode. Alex, thanks so much for hopping on today. You take care.