Can converting hotels into apartments solve the affordable housing crisis while providing a lucrative investment opportunity?

 

In this episode, host Angel Williams sits down with Alex Cartwright, an Associate Professor of Economics at Ferris State University and a real estate investor focused on hotel-to-apartment conversions. Alex shares his journey from traditional multifamily syndication to discovering the untapped potential of converting struggling hotels into affordable housing. He discusses the challenges and advantages of this unique investment strategy, emphasizing the growing demand for workforce housing and the limited supply of old hotels ripe for conversion. Alex also delves into the financial aspects of hotel conversions, explaining how the shift from hotel to multifamily cap rates can lead to significant returns with limited downside risk.

 

Alex conducts macroeconomic analysis on target markets and conducts the underwriting for Vilicus Capital offerings.  Alex has also previously worked as a consultant with one of the biggest mobile home owners in the country. 

 

00:00:00 - 00:03:00 - From Traditional Multifamily to Hotel Conversions

 

• Alex found it increasingly difficult to find deals in traditional multifamily syndication.

• He sought a niche where he could be known as the expert and scale his business.

• A broker introduced him to the concept of hotel-to-apartment conversions.

 

00:03:00 - 00:08:00 - The Demand for Affordable Housing and Supply of Old Hotels

 

• Affordable housing is in high demand, but no one is building it.

• Hotels have a limited lifespan and struggle to compete with VRBOs and Airbnbs.

• Converting old hotels into apartments can unlock their value and meet the demand for workforce housing.

 

00:08:00 - 00:14:00 - Navigating the Challenges of Hotel Conversions

 

• Cities are often open to rezoning old hotels into multifamily properties to create more affordable housing.

• Converting hotels floor-by-floor allows for maintaining cash flow during the process.

• Hotels often serve as "proxy apartment buildings" for those on the edge of homelessness or in need of simple, affordable living arrangements.

 

00:14:00 - 00:16:00 - The Financial Conversion: From Hotel to Multifamily Cap Rates

 

• The real conversion is financial, as hotels trade at a lower cap rate than multifamily properties.

• Buying at a hotel cap rate and refinancing at a multifamily cap rate can lead to significant returns.

• The lower basis in hotel conversions provides upside potential and downside protection.

 

00:16:00 - 00:19:00 - A Real-World Example: The Houston Hotel Conversion

 

• Alex's recent Houston hotel purchase was acquired at $28,000 per door, significantly lower than competing multifamily properties.

• The low cost basis allows for flexibility in rental rates and a cushion against downside risk.

• While finding the right deal takes work, hotel conversion opportunities are not as rare as one might think.

 

Quotes:

- "Affordable housing is exactly what no one is building, and affordable housing is exactly what disappears every time another syndication group buys the C class property and upgrades it to a B minus." - Alex Cartwright

 

- "The real conversion is actually a financial conversion because a hotel trades at a cap