Here Are 4 Solid Reasons Why Savvy Commercial Real Estate Investors Consider Hotels an Ideal Post-COVID Venture

Written by Posted On Monday, 24 May 2021 12:34

Without a doubt, the COVID-19 pandemic affected the hotel segment of the real estate market. Based on statistics obtained via Statista, three key indicators from March 2021 show a year-over-year decrease in performance:

  • Occupancy is down
  • Average daily rate is down
  • Revenue available per available room is down

Real estate investors know to use certain metrics when making real estate investment decisions. Metrics such as cap rates (found by dividing the annual net operating income by its current value), net operating income (the amount of money a property earns after taking into account all the expenses), and the gross rent multiplier (the price of a property by its potential gross annual income) are all affected by the decrease in these three key indicators.

This would lead many investors to assume that, despite the ability to pick up hotels right now, they should shy away. However, hotels could be an amazing asset to your real estate portfolio if you have the right strategy – conversion from hotels to apartments. Here’s why.

#1: Insidious Housing Shortage

As of April 2021, new housing starts fell 9.5%[ii], and the housing market is 3.8 million homes short of what is needed for demand[iii]. That shortage is 52% higher than the shortage in 2018. Additionally, there is a shortage of 3.6 million affordable rental homes[iv].

With numbers like these, it becomes apparent that finding a way to increase housing units in areas struggling with a housing shortage makes sense. Therefore, buying a hotel to transition into apartment units has the potential to make financial sense.

#2: Ability to Obtain Seller Financing

Many hotel property owners are eager to sell their hotels. Even though COVID restrictions have been greatly reduced, many hotels are on the verge of collapse and the likelihood that they will be able to recover is slim according to a recent American Hotel and Lodging Association survey[v]. As you can imagine, lenders will be far more stringent over the coming months when lending for a hotel property, which will limit the number of potential qualified buyers.

Because of this, many hotel owners will be willing to offer seller financing. By doing so, they can speed up the sale, offset any potential capital gains tax, and create an instant revenue stream without the hassle of running the hotel in a post-COVID environment. This is good for buyers, especially those who may not fit the criteria for the traditional lending process.

#3: Buyers Control the Deal

When sellers want out of a property, the buyer has the opportunity to negotiate the terms of the deal. Controlling the deal allows the real estate investor to negotiate such things as interest rate, maturity date, money down, balloon payments, and more. This often leads to a deal with more favorable financing.

#4: Pennies on the Dollar

In many cases, you can find hotel deals for pennies on the dollar, which is far better than the deals currently being found on most multi-family deals. Whether you purchase the hotel property for yourself or wholesale it to other investors, the potential to make money when converting these properties is substantial.

Things to Keep in Mind

As with any deal, not every hotel property makes for the perfect apartment conversion. Here are a few things to keep in mind.

  1. Some hotels, like extended-stay hotels or those with kitchenettes, are more easily converted than luxury hotels that do not already have separate living and sleeping spaces.
  2. Hotels that serve business clientele may have a substantial amount of event and meeting space that will need repurposing.
  3. Older properties may not meet the current residential building codes and will cost more to retrofit.
  4. Always look at the zoning and ordinance. Properties zoned for hotels may not be zoned for multi-family use. Additionally, local ordinances on parking requirements for hotels may differ from that of apartments.
  5. Since units will be small, typically from 200 to 400 square feet, they will appeal to a younger generation. Be sure to buy in areas that would appeal to these renters.

By looking at hotels with conversion in mind, investors may be able to find amazing deals in a commercial space experiencing financial trouble. As always, be sure to do your due diligence and crunch your numbers, but certainly, don’t dismiss hotels without a further glance.

 

[i] https://www.statista.com/statistics/1109880/coronavirus-hotel-sector-kpis/

[ii] https://www.census.gov/construction/nrc/pdf/newresconst.pdf

[iii] https://www.wsj.com/articles/u-s-housing-market-is-nearly-4-million-homes-short-of-buyer-demand-11618484400

[iv] https://reports.nlihc.org/sites/default/files/gap/Gap-Report_2020.pdf

[v] https://www.ahla.com/covid-19s-impact-hotel-industry

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John Trautman

John Trautman has spent his entire adult life in real estate. Purchasing his first property at 23, he learned the process of flipping and real estate holding from the ground up. Real estate continue to be his passion while he spent eight years as an account executive and later a vice President for Washington Mutual in the mortgage division. Holding the position of President’s Council and several years of President’s Club, he learned the lending business from the mortgage office perspective and lender perspective. Throughout his life he has also been a small business owner, commercial real estate holder, property designer, and house flipper.

During the downturn, John followed the deal to Detroit, Michigan, where he invested in single family rentals and multi-family dwellings. Once his returns were realized, he moved quickly to Arizona to invest in another distressed market.

His passion for making a deal and real estate has lead him to create a hands-on real estate investment mentoring club called Real Estate Knowledge Institute

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