YFP REI 121: Use Conversion: Failing Hotel to Thriving Apartment with Alex Cartwright, PhD

Alex Cartwright, Founder and Managing Partner of HotelSHIFT, discusses a current hotel property that he is working to convert into affordable multifamily housing.

Episode Summary

Nate Hedrick and David Bright talk with Alex Cartwright, PhD, Founder and Managing Partner of HotelSHIFT, a real estate investing firm that specializes in converting hotels into affordable multifamily housing. Alex, David and Nate discuss details about a hotel conversion property they are working on together in Houston, Texas.

Alex breaks down the project and his strategies for transforming struggling hotels into successful multifamily complexes. He gives tips on how to look for deals and mitigate risk. Alex also explains the benefits of economies of scale, syndication, and working with a team on large-scale real estate investments. Listen to learn more about why Alex plans to keep investing in the niche market of hotel conversion.

About Today’s Guest

Alex Cartwright, PhD is the Founder and Managing Partner of HotelSHIFT, a real estate investing firm that specializes in converting hotels into affordable multifamily housing. Alex conducts macroeconomic analysis on target markets and conducts the underwriting for HotelSHIFT offerings. He is an experienced multifamily investor and has served as lead GP on multiple syndications. Alex has worked as a consultant with one of the biggest mobile homeowners in the country. 

Alex is the Chair of the Management Department and Associate Professor of Economics in the College of Business at Ferris State University where he teaches classes on Managerial Economics, Economic Growth, and International Business. His Economics research has been published in several scholarly outlets, including The Cambridge Journal of Economics. Alex is an affiliated scholar with multiple Think-Tanks and has served as an Economic advisor to congressional candidates in Peru. Alex received a B.S. in Mathematical Economics from Hampden-Sydney College where he graduated Phi-Beta-Kappa, Summa Cum Laude and first in his major. He earned an M.A. and PhD in Economics from George Mason University where he was the F.A. Hayek Fellow in the program for advanced study of Philosophy, Politics, and Economics at George Mason University’s Mercatus Center.

Key Points from the Episode

• Hotel conversions and value-added strategies in real estate investing. [0:06]
• Converting a hotel into multifamily units with unique features and demographic advantages. [4:30]
• Hotel valuation and conversion to multifamily property. [11:01]
• Renovating a distressed hotel with 120 rooms, including challenges and opportunities. [15:57]
• Cost-effective construction methods for 120 units. [21:08]
• Partnering for real estate investments, including benefits and challenges. [25:46]
• Zoning requirements for hotel conversion to multifamily property. [31:07]
• Converting hotels to multifamily properties in cities with favorable zoning laws. [37:22]
• Real estate investing, nuances of multifamily properties, and syndication structures. [41:54]
• Real estate syndication investment structures and profit distribution. [45:24]
• Hotel conversion investing with a focus on due diligence and vetting the general partnership team. [50:11]

Episode Highlights

“But the real conversion trick is actually a financial conversion. It’s not a physical conversion. We’re buying something that is valued like a hotel. And then we’re going to make some physical changes to it so that we can lease it up, turn around and get it valued like a multifamily.” – Alex Cartwright [14:57]

“We’re part of a team where everybody’s got a job. This is the way I want to do it going forward. It’s just so much easier, and it’s so much more profitable.” – Alex Cartwright [31:52]

Links Mentioned in Today’s Episode

• YFP Real Estate Investing 102: Navigating Today’s Market with Economist Alex Cartwright, PhD
• YFP Real Estate Investing 120: Deep Dive: Converting to Highest and Best Use 
• HotelShift
• Alex Cartwright on LinkedIn
• Subscribe to the YFP Newsletter
• YFP Disclaimer
• Your Financial Pharmacist
• YFP Real Estate Investing Facebook Group
• Nate Hedrick on Instagram
• David Bright on Instagram
• YFP Real Estate Investing Website
• David Bright on LinkedIn
• Nate Hedrick on LinkedIn

Episode Transcript

Nate Hedrick  00:06

Welcome to the YFP Real Estate Investing Podcast. I’m Nate Hedrick.

David Bright  00:09

And I’m David Bright. We’re both pharmacists and real estate investors that believe that real estate investing does not have to distract from a meaningful career in pharmacy.

Nate Hedrick  00:18

Each episode we share stories that educate and inspire pharmacists to leverage real estate investing as a part of your financial plan. Hey, David, how’s it going?

David Bright  00:30

Hey, good, thanks. How you doing, man? 

Nate Hedrick  00:32

Good. We’re in the middle of summer. So I’m doing I’m doing great. I know, maybe not middle of summer, but I’m counting it once the kids are like, almost done. It’s like middle of summer for me. And I ride that as long as I can.

David Bright  00:42

Yeah, once we get our kayaks out for the season. Yes, it is. It is summer in my mind, even if it dumps back into the 50s and 40s. I’m still considering it summer in West Michigan. 

Nate Hedrick  00:51

Yeah ,that’s because we’re good northeast part of the country people like once we’ve decided weather it doesn’t actually matter. It’s shorts weather from now.

David Bright  00:59

Exactly. Exactly.

Nate Hedrick  01:01

So that reminds me though, like I know over the years, we’ve talked to our audience and people that listen this podcast probably know a little bit about us and what we do, obviously, they’ve gathered we have families, maybe with smaller kids, we like being outdoors a lot. We talked kind of all about that. And we also talk a little bit about the the investing that we do, right, some small, single family, small multifamily rentals and flips that that’s really we try to avoid talking too much about about that. But that’s kind of a little bit of what we do, right?

David Bright  01:30

Yeah, I think we have to give context here and there for what we do and where how we come into the conversation. But yeah, for the first 100 episodes, we we really wanted to not make this just like what what do Nate and David invest in?,  but instead, bring in a broad base of real estate investors with really diverse strategies and, and we did hear about single family and multifamily and short medium long term rentals, motels, commercial buildings, and a lot of mindset around that for how you can develop strategy and find out what’s right for you, it’s a good fit for you as an investor. And, and in that, again, we’ve brought some context in from what we do. But we’ve pretty sparsely talked about our own real estate investing portfolio or strategies. 

Nate Hedrick  02:09

So the reason we bring that up is that we’re, this sort of marks a shift from that strategy. Today, we’re gonna bring on Alex Cartwright, who we last had on episode 102. So not that long ago. His strategy is all about hotel conversions, and how he builds off those hotels, or motels and switching over to apartments. And so this sort of builds on our deep dive episode from last week, episode 120. That was all about use conversions. So if you missed that episode, definitely go back and check that out last week. And Alex does a pretty solid introduction to the concepts. I don’t want to dive too deep into it here. I want you to listen to that episode to totally get that but, but we were able to kind of partake in this right, we were able to buy into this investment ourselves. And that’s a big, big difference for us. So we wanted to dive into that pretty deeply.

David Bright  02:55

Yeah, in today’s market, where investors are buying multifamily buildings at a rate of return that’s below what they’re paying an interest to the bank, it can be really hard to find good value added strategies or good positive cash flow investment strategies for multifamily. But again, that you and I, we believed in this concept of use conversions in the single family and small multifamily space. So it seemed like a logical extension to do this on the larger scale.

Nate Hedrick  03:20

Yeah, exactly. And we’re both working with Alex, like I said, on this project, and we wanted to bring in him in to really talk more about the strategy, particularly how we’re hearing a lot of questions about how do we find deals like this? How do we find deals with value add potential? Or, you know, how do I find deals that cashflow in some cases, right. It’s just It’s getting tight in certain markets. So certainly not everyone will want to work out and go out and buy a hotel or anything like that. But this was something that we invested in thought we wanted to share with you guys. And it’s a tangible concept for those that are looking for more ideas in the US conversion space.

David Bright  03:52

Yeah, and a lot of what Alex talks about, even in terms of what to look for what to avoid some of the general concepts about use conversions that can translate really well into the single family or small multifamily space. So even if you’re like, I’d never buy a hotel. What are you talking about? Like? So many of the concepts and mindset in this episode, translate across a lot of different investment opportunities? So I think it’s still got a lot of gold in there that Alex left us just regardless of your investing strategy. 

Nate Hedrick  04:23

Agreed. All right. Well, you guys enjoy. There you go. 

Nate Hedrick  04:27

Hey, Alex, welcome back to the show.

Alex Cartwright  04:29

Nate, David, it’s so good to be back with you guys. This is the very first time I’ve been invited back on a podcast and so I’m, I’m honored that the time I’m invited back is to be here with you guys and super excited to talk with you all again. Whenever I’m talking to people about what I do and my business model, I find myself pointing them to the episode that I recorded on you guy’s podcast last year because I selfishly I feel like I did a really good job. So I hope I guess I aspire to do just as well this time.

Nate Hedrick  05:01

I love it. That’s perfect. We were lucky to interview then and excited to have you back on today. You know, for those that have not been staying up to date, we have been collaborating actually behind the scenes ever since that episode aired, staying in touch and actually finished up collaborating on a project here at the beginning of the year. And I’ve been working on it ever since. So why don’t we dive in, we want to kind of do a deep dive on that project and tell people a little bit about it. I think the model is really unique. And I think you’ve got a great perspective on how it’s run as the as the general partner. So tell us let’s start with kind of an overview of the 702 project, as we’re calling it. Give us the elevator pitch. What’s the what’s the business plan? 

Alex Cartwright  05:43

Absolutely. So you guys know I focus on hotel to multifamily conversion. So I’m on the hunt for crappy hotels. And I’m and by the way real honored to have both of you as investors in the project. It’s a small group, I think with spouses, less than 12 investors, which is kind of unique and in this space. And so the 702 we call it because the full name is I can’t even remember, it’s like America’s Best Airport Inn and Suites. It’s something long as generic doesn’t roll off the tongue. But the address starts with 702. So we’ve just been calling it the 702. It’s in Houston, Texas, a couple miles from the IAH airport, which is the main airport there in Houston. And the property made perfect sense as a conversion for a couple reasons. One, it was built as a 250 unit Holiday Inn. And at some point down the down the line, the owner combined almost all of the rooms and turn it into 120 unit Hotel. So 120 units were something like 105, or 103 of the units are actually two hotel rooms put together. So you’ve got like these 580 square foot rooms that will be competing with one bedroom apartments, the adjoining door on the rooms will be a door between the bedroom and the living room. So we’ve got big rooms, then where the two rooms were combined, one of the bathrooms was removed and converted into a kitchenette. So you have the plumbing and the basic setup for a kitchenette already there. And then the last big thing is this hotel has a sprinkler system with sprinklers in every room. And that’s because it was built in 85. Usually hotels that are pretty vertical and built 80s or newer tend to have the sprinkler system in it. So with the big rooms, the sprinkler system, the kitchenette outline. And then of course all these rooms mean that we’ve got tons of excess parking, which hotels aren’t always built with as much parking as multifamily is we had no parking problems there. But all these great features aside, and there’s a lot of great demographic reasons to like Houston. But we also bought this for $28,000 a door. And I don’t just mean like per hotel room, per unit per 580 square foot unit. And that is in a zip code where multifamily trades for $130 to $140,000 a door depending on the class and condition. So we’re we’re in the process right now of doing the rehab. And one thing that’s unique about how we’ve set up this project that some other hotel converters don’t. And by the way, for the record, I’ve compiled a list of everybody that I can find that’s doing this in the country. And we believe there are 17 different investment groups that either ever have, or are trying to actively trying to convert hotels like pretty, it’s still a pretty niche thing. So what we’re doing that’s different than a lot of people is we don’t gut the whole property and throw everybody out. We’ve got a construction plan where we can have 60 of those 120 rooms occupied at all times. And what that means is we’re never going to burn cash on the operations. And we’re going to put more money into the property that it makes when you consider the capital expenses, the new roof, the new H fac rehab, etc. But in terms of the operating expenses, we’re we’re we’re in the black every month and we’re just dumping that money right back into the construction. 702 is also operating as what I call a proxy apartment building. And that’s a lot of these lower end hotels. So for example, and that what that’s fancy terminology that I coined for people who are already living there. So the day we bought the building, there were 60 rooms occupied, okay. 58 of the 60 had been there four months or longer. We’ve got dozens of people that had been there for years. Were on six different school bus routes. They’re these people get mail at the front desk, right? These kind of hotels are where you go for better or worse, when you’re an eyelash above poverty, you can’t pass the credit check, or maybe the background check, you hand your 50 bucks at the front desk and say, I need somewhere to stay for the week, they don’t ask questions and they let you in. And some people, either because they can’t manage their money well, or whatever their life situation is, stay for years. So it’s an apartment building already. We’re not advertising on Expedia, with monthly rates, etc. So we’re keeping all we’re using weekly and monthly rates to retain those 60 people keep the money coming in as we’re remodeling and leasing. And we can talk about ultimately, some will stay some will go, but we’re running it, as I call it a hybrid, partially extended stay, partially multifamily. And over the next 12 months, we’ll work on getting to the point where we’re finishing about 12 rooms a month, and we’ll start leasing those 12 rooms as apartments and the property will become entirely multifamily.

David Bright  11:01

No, I think that’s a great 30,000 foot overview of of so many different wins in this process, right. There’s an opportunity to take this building that really needs a lot of love, and fix up the building. There’s an opportunity to take some folks that are in a tough situation, to rehab those units and get them in a better long term situation where they can stay there and be much more proud of where they live. Right? And they’re not immediately displaced and evicted or anything like that. They have a shot at continuing in this apartment. So it feels like a win from a lot of different angles. I know as as pharmacists, we talk often about how pharmacists are not all about taking on lots of risk. And so ways to mitigate risk in investment. Make pharmacists smile ear to ear right. So and there’s a lot of risk mitigation strategies in this and I think you already hit on on one of them is it you were able to buy this building super, super cheap compared to everything around it. And, and the way that that I’ve kind of been describing this is buying it as a failing business because this was just a mismanaged kind of end of lifespan hotel situation, and then turning it around and valuing it as a fixed up apartment complex. So can you walk us through kind of that valuation differential and how $28,000 a room can be purchased, and then turned into something that’s so much higher than that?

Alex Cartwright  12:29

That’s great question. So two things are going on high level that I’ll dig into. Two things are going on high level that allowed us to get it for $28,000 a room. One, you said it perfectly, David, the hotel is at the end of its economic life as a hotel, and two, hotel valuation is much different than multifamily valuation. So let me tackle that second one first about the valuation differences. Most hotels actually trade on a revenue multiplier, as opposed to an NOI multiplier, some kind of gross profit multiplier, you don’t get many businesses in the business world that trade on a revenue multiplier, usually, like some unprofitable biotech company or tech startup might trade on a revenue multiplier. Hotels trade on a revenue multiplier, because they are so management intensive. And sometimes the mom and pops that run them pay themselves out of the property. And so it’s very hard to compare apples to apples when you’re looking at bottom line profit across different hotels. So they trade on a revenue multiplier. Usually, you’re kind of a baseline, there’s always exceptions to the rule in real estate valuations, right? Lots of different variables to look at. But I would say a good baseline multiple for a hotel is three times annual revenue. So a hotel that is getting about a million dollars in bookings, it’s in a major city, it’s worth something around $3 million. That’s a good baseline. All right. Now, what that translates into on a cap rate basis is something around maybe 15% to 18% on the cap rate. If you can think of that as every dollar of net income is getting multiplied by something like five to seven, right, so five to seven times earnings. Multifamily, on the other hand in a major metro trades at between a six and eight cap. So that’s anywhere on a multiplier perspective, that’s anywhere from 14 to 16 times earnings. So there’s a much higher multiple applied to multifamily. Multifamily gets amongst the highest multiple across all of real estate. And that’s because the cash flow is considered so desirable for investors. And it’s so desirable specifically because it’s so durable. It’s hard to build multifamily, there’s increasing demand for it. And so everyone is just having to suck it up and pay to get multifamily income. But the real conversion trick is a is actually a financial conversion. It’s not a physical conversion. We’re buying something that is valued like a hotel. And then we’re going to make some physical changes to it so that we can lease it up, turn around and get it valued like a multifamily. So that’s one reason why it’s $28,000 a door. $28,000 door, great price. It’s not the crazy like, one 1/4 or 1/5 of the market price at like it is on the multifamily side. That’s maybe that’s maybe like a 20 or 30% discount from the hotel price. So why so cheap on the hotel side? Are we just lucky and it’s a failing hotel? Well, partially, we’re lucky that we found a failing hotel and bought it, right? Partially. But the other thing you got to understand hotels have a limited economic life that’s different than multifamily. So this hotel that we bought started off life as a Holiday Inn. And then it became a Best Western. And then it became an Oyo, and then it became a mom and pop. It went what in the hospitality world they call down flag. The flags became less and less prestigious, less than less of a price point. And they also came with lower, meaning cheaper, franchise requirements for the owner. Every five to seven years, that hotel owner has got to remodel all of the rooms. They have to undergo when the hotel world’s called a PIP or a property improvement plan. And a PIP from Marriott is very expensive, not as expensive as the PIP from Best Western. And this PIP from Super Eight is even less. And the PIP from Oyo is even less and he can’t afford any PIP then maybe you go mom and pop and buy your furniture from a hotel liquidator. And a lot of mom and pops work themselves into a corner where they can’t afford to do major capex on the property. They lower the nightly rate, that low nightly rate temporarily boosts occupancy, but it attracts the wrong crowd that brings crime and starts beating up the property. And pretty soon other people don’t want to stay there. And now the hotel is at a point where they can’t lower the rate anymore, because no one wants to stay there. And they need to dump it for $28,000 a door. And one other cherry on top that I forgot to mention earlier, is no bank really wants to finance a hotel that does not have a flag on it, that’s in disrepair, right? And is has a bunch of riffraff staying there. It’s kind of an bankable, this is not a great business to just open a mom and pop hotel with no brand on it. Have 120 rooms next to an airport with no brand? Like, no bank wants part of that. And so we were really able to push for some very competitive seller financing terms that got us off the ground. And I and that’s a that’s a pattern that you see in hotels around the country. 

David Bright  17:57

And what blew me away too is I know you and I flew down we were on the same flight. We check this out one weekend and we walked a lot of these units. And what just blew me away is, because I’m used to doing single family fix and flips. And we would walk into some of these rooms and there would just be no furniture like the furniture would have broken in some room and they would have pilfered furniture from another room. And so kind of the management strategy was be as inexpensive as possible in the rehab. So there were a bunch of unreasonable rooms and I’m thinking to myself, for $1000 bucks or $2000 bucks, this room could be rentable again, and it could generate revenue. So it just felt like from just a management of operations standpoint, there was a lot of low hanging fruit to increase value quite a bit. So it seemed like there were just a lot of opportunities in this one. 

Alex Cartwright  18:47

Actually, to that point on the seventh floor, which is where we started renovations the top floor because it was vacant. There were no air conditioners and any of the walls. The air conditioners that go in the walls of a hotel, they call them a PTAC unit. If you don’t know what that is, I’m sure that you’ve seen. It so a great big floor unit that sits in every hotel room. There were none of them on the seventh floor because it’s PTAC units and other rooms would fail they were pilfer them from the seventh floor and put them other places. This shows how cash strapped they were. The owner we bought it from a you know absolutely no, no I’m not trying to attack his character in a way, just just like he was like 60 grand behind on his water bill. His taxes were coming due and they’re the roof is not in good shape. And there was a whole floor that was shut down and it was just time to move on. Like the clock was ticking. It’s not like he was behind on his debt payments, but that’s the way it was going without some big injection of cash into this property.

Nate Hedrick  19:52

It feels like you know, as we’re talking about this, it immediately draws you back to like where a lot of us got started, which right is this a small single family fix and flip like find a distressed property fix it up. This is just taking that like to a whole another level, maybe we can dive a little deeper into some of that rehab because I think I think that’s where a lot of this opportunity is coming, right? We’re talking a lot about how the property is distressed and how we need to put money into it, because that’s where they were failing. So, talk to us a little about that rehab, like how do you coordinate 120 room fix and flip all of a sudden.

Alex Cartwright  20:23

I gotta say, as somebody that has worked as a project manager on 120, unit mobile home park, and as somebody that’s done, not that many, but a couple dozen fix and flips, not that I haven’t, I’ve only flipped a couple properties, like fix them, sold them. Most I’ve just fixed and refi or I fix and have them in my own portfolio, but I’m pretty familiar with it. And we’re only three months into this. I don’t want to jinx myself, but the scale just comes with a simplicity that is that makes it a whole lot easier. Right, like on a project I’d like, what if I’m remodeling a four unit or a two unit property, I’m generally not hiring a GC. And I’m generally having to make a lot of trips to the store, Home Depot, Lowe’s, etc. to get the different materials at different points in time. Whereas here, I love that David’s helped me with this – we ordered 50 buckets of paint, boom it all shows up in one day. There is no going to the store and buy 12 refrigerators at a time. There’s no going to the store to buy 50,000 square feet of flooring, right? You order it, it comes on a truck, we’ve got 24 hour staff there because having 24 hour front desk is cheaper than having 24 hour security. And so they unload it. Then when we’ve got we’re big enough to where we’ve got the scale to have one crew doing demo while one crews doing drywall repair the other crews doing painting, the plumber’s there, the electrician’s there, like I I’ve never had to talk to a tenant because we have a whole staff of people that work at this hotel. It’s just amazing. And also economies of scale on the cost side. We signed a contract to get AT&T fiber optic cable pushed out to 120 units. Our two year contract is for $850 a month, and not even considering our $2,000 signup credit. I mean, think about what you would what somebody would pay for fiber optic in just a one bedroom apartment. Is it 60 bucks is it 80 bucks? Like we’re paying less than 10 bucks a unit we’re paying right now for Comcast $1,100 a month. And this is for people to have like HBO and baseball games and these different things on in their rooms, which they love. And so how, what’s the rehab, and I’m glad to dive into exactly what we’re doing. But in general, I really feel like I’ve pushed in the clutch and moved it to the next level, like this is the kind of rehab I want to do. 120 units. They’re all the same. We’re buying stuff at scale. Like don’t quote me on this. I think I’m remembering it correctly. I believe we’re paying $468 for four cabinets and a countertop in each room. And that’s with the hardware on the cabinet. And this is and this is not the cheapest cabinet out there. David, you helped me with this, because you helped me find that you helped us find this, this price for the appliances we spent, I think $900 per room, isn’t that right?

David Bright  23:46

It’s been remarkably affordable to see what scale really brings to a lot of these bids, right, to get all the pieces and the delivery and the it’s just yeah, the simplicity is mind boggling for those of us that have done the single family fix and flips, right. 

Alex Cartwright  24:03

And I’ll say one more thing that on the from the contractor end like, I’m used to being the guy that’s calling the contractors and said, well, when are you showing up? When you showing up? When are you showing up? When is this going to be done, right. And I’m always getting a bid and that that bid has a deadline on it right? And I’m looking for them to reduce the bid if they don’t hit the deadline. And there’s always things that inevitably happen with construction, but contractors are kind of notorious for being over budget and late. And the old contractor trick as far as I’m concerned is they show up the first day, make a bunch of noise, drop off a bunch of tools, and then you don’t see them for a week. And then they come back and demo a bunch of stuff to make it look like a lot of work has happened. You don’t see him for another week. I’m exaggerating a little bit, but you get my point. But when you’re spending 100,000 hours a month with the contractor like they can’t wait to get there and work faster, right? Like, our contractor told us he can remodel 24 rooms a month. And we’re like, whoa, we’re not sure we want to spend money that quickly! We’re not sure we can lease these things like, we’re not sure we want to throw people out here that quickly. Just, I’ve not had this kind of problem before where they want to work. And I’m kind of throttling them a little bit. So from a construction management perspective, this is just a whole new world. And now really, where a lot of my time and focus lies is in studying different materials, negotiating with the suppliers, and then just ordering stuff on a schedule to make sure that we’ve always got a nice stock of materials for the guys to pull from and keep working.

David Bright  25:46

It makes a lot of sense, even though it’s still counterintuitive, to some extent, from this single family, or small multifamily thing that the three of us did before this, right. You know, we all were in that single families, small multifamily space. And there’s a lot of advantages to that, right. Like much lower barrier to entry. Particularly if you’re going to house hack and live in one of the units, you could talk about a 3%, 5% down. You know, for for, in a lot of cases, $5, $10 $20,000, you can get started one of those situations, this was just a little bit more than, you know, $5,000 to get started in this deal, right. And so that was a big shift for me. And for a lot of projects this size, it’s just too big for one person to go alone. So I’m curious if you could talk for a minute, Alex, about this, this wrestling match that we all had in our heads of like, do we buy our own thing that we can do individually at the small scale? Or do we all want a small piece of a much bigger piece of pie?

Alex Cartwright  26:47

Yeah. And I’m so glad you brought, that brought that up, because it’s also counterintuitive. And you’re and I just want to echo what David said. I started off with the house hacking on the two unit, I bounced the other two units. I proudly still live in a two unit and do the house hack. I think it’s a great strategy, I encourage everyone to get into real estate that way. We could do a whole episodes on the benefits of that. So not pooh-poohing that at all. And when I went on to buy other properties, I never really thought about doing it with a partner, because fundamentally, I could make more by doing it on my own. And when you’re not dealing with big complicated rehab, then you can probably figure out how to do it on your own. But to your point, David, here, we had to put about a million and a half dollars down to get it. Like just to give everyone some flavor. And that was a $1.1 million downpayment plus and construction money that got us started before we went to wrapped up a construction loan that’ll help us accelerate the rest of the construction. And like, first of all, not everybody has $1.1 million. But this project, right, to go after this. That’s, that’s number one like you, you just need people to help you. But the people are more than just like names attached to dollar bills, right? Like this, this property has got this property requires some things that your standard fix and flip doesn’t have. For example, this property requires somebody that’s looking at the account every day. We’ve got 120 different rooms and customers coming and going. This requires someone to really keep up with the monthly books. This requires somebody that also know something about marketing and branding. We need to put a name on this property we need to be advertising digitally when it’s time to collect residents. And this also requires somebody that is going to know something about finance. And that can negotiate on the loan documents, like I’m blown away on how much of this stuff is negotiable. I’m used to playing around in the two to four unit before I got started in syndication. And the biggest property I’d done before this was was like a 14 unit class a multifamily. Right. So that to go from that to 120. And when we’re negotiating this contract, the attorney’s like let me see the loan docs, I’m going to negotiate some terms in there for you. Well, I’m used to just like the bank says sign this, this is the deal, you know, not just price and interest rate, like terms of the loan, it’s all negotiable. And so I’m grateful that we have people on our team. One person on our team owns the largest property management firm in Maui. He’s got a CPA on staff that’s doing our books and then it’s holding our people accountable. My other partner, his dad started a bank. He worked in a bank every day for like 40 years. This guy knows loan contracts and I think he’s flipped almost 2000 houses like, and owns a lending business. He knows loan contracts, right? And that, and that gives me all kinds of peace of mind. We’re finally at a scale where this adage of you go farther together is true, right? It’s true. We’ve got an appraisal, and I think that will beat this. But we’ve got an appraisal, showing that this property under some very conservative assumptions, is worth in the low nine millions, once it is stabilized. And that’s after spending a little bit less than $2 million on construction. So think about you buy something for we paid $3.4. $28,000 a unit times 120 units. We put around 2 million into it. So for just for easy numbers. So let’s say we’re in the we’re in the low fives, and you take it to be worth a nine and a half, maybe 10. You’re doubling your money. You’re not really fixing, you’re not really flipping a home and doubling your money. But also, you’re doubling your money on something that is generating five to $6 million, and forced appreciation and equity for everybody. Right? It’s hard to find opportunity where you can force that much appreciation in 12 to 18 months, and do it with the level of risk that we’re taking on. So I’m glad so yeah, wrapping up there. Absolutely. We’re part of a team where everybody’s got a job. And I’m, this is the way I want to do it going forward. It’s just it’s just, it’s like, there’s no reason there’s no wonder this is how Blackrock does it, right? Because it’s so much easier, and it’s so much more profitable.

Nate Hedrick  31:38

So what I find interesting is you went through that, I love the breakdown of the team there. And one of the pieces, I felt like when the team was super, I recognize the team being super involved was during the due diligence period. If I think about you know, put my realtor hat on for a second, right due diligence on a single family home, it’s like a seven day inspection, right? It’s like, Oh, yep, all the outlets are GFCI protected, like, I mean, it’s a joke compared to what we went through. But like, I think give people some perspective, like talk about that due diligence period, because I think there’s a lot there that was completely foreign to me going through this for the first time, especially when we have so much familiarity on the single family side, or the most small multifamily side. This is just a whole different order of scale.

Alex Cartwright  32:19

Yeah. So in a, when you’re looking at a larger hotel or multifamily project, you still call on your home inspector that comes in and checks all the GFCI. And they, they turn on the faucets and, and they do all that, and that doesn’t look that much different than a home inspection, I’ll say it’s a lot cheaper. So I’ve inspected 100- 120 units for like $4,000. So when you think you get a whole house inspected for like, what two to $400, it’s, it’s it’s definitely cheaper on a per unit basis, they come out with a team of inspectors and this, this takes all day. But on top of that, you’ve got, you’ve got an insurance due diligence period where people are combing over the claims, and making sure that you’re going to be able to get this property insured at with coverage and at a rate that you’re comfortable with. And we had an elevator person come out and do a lot of due diligence on the elevators. And then beyond that we had an environmental person come out and do what’s called a phase one study. And that studying to make sure there’s no presence of toxins or other environmentally hazardous substances, they’re studying the grade of the building, and seeing like if things drain away from it, etc. And so yeah, we probably had five to seven different vendors out there that we paid to get reports from. And this is aside from all of the construction folks that we had out there to get bids from and and then all the material folks, the vendors that we that we call and so it’s not you know, it’s not like it’s fundamentally more complicated. There’s just more specialists that that you got to call in the process. 

Nate Hedrick  34:03

What about the zoning side of things? I mean, obviously, this is a unique situation, right, and we’re not just buying multifamily. We’re buying a hotel and then rezoning it or re-reclassifying in this case as multifamily. You know, for us we’re in a unique situation where it’s a bit easier, but But talk to us about that zoning requirement. 

Alex Cartwright  34:21

So whenever I am looking at a hotel for potential conversion, my first call is always to planning and zoning, because I want to see what their temperature is on it. Now, there’s kind of three buckets that your hotel could be in, it can be in the hard no category will be in the what I call the zoned by right category. Or it can be in the yes category. So the hard no category is and I won’t name names here but like there’s some cities in Ohio, some cities in Texas, some cities in Virginia that I’ve called and they’ve said we do not want affordable housing. There’s a lot of nimbyism, like not in my backyard-ism. There’s this stigma that and I’m not aware of any actual social science behind this. But there’s a stigma that affordable housing residents will call the police and fire department more often and overrun the schools and be a net drain on public services, not contribute a lot in tax dollars. So that’s the lip service that sometimes you get from mayors. And they will, they’ll pretty much say, no, we do not want that hotel becoming multifamily. And when I hear that I say, all right. Sometimes you get you look at zoning. And within the hotel zoning, it says the zoning code will say this can be a hotel, you can also have a retail store, a gas station, a list that all these different uses. And multifamily will be included in those lists of uses. That’s what’s called zone by right. And so if you’ve got zoned by right, you can go to the city and say, Hey, I just want to do a change of use here. That doesn’t mean that you automatically get it, you need to jump through some hoops, but you are entitled to it right? They can’t really put their fists down and stop you unless they want to go out of their way. And sometimes they’ll tell you that they want to go out of their way. And so I just pass on those. So you’ve got zoned by right, which is essentially a maybe. And then you’ve got this other category, which is we want hotel conversions to happen. And I would say the places that are in that category are like most major Colorado cities, Houston and major Texas cities and all of Florida. And there’s a couple reasons why. So Houston first. Houston’s the only major city in the United States that doesn’t have zoning laws. You wouldn’t know that when you first get off the plane there. But after you start looking around, you’re like, yeah, it is a little weird that there’s like a tire shop right across from the school. And like, just kind of look a little bit out of place. There’s like billboard and there’s crap everywhere. Because there’s there’s no zoning. Now this doesn’t mean there’s no building code. It means there’s no zoning. So you’ve got to of course have the fire suppression, you’ve got to have the right number of parking spaces, your elevators have to be the right dimensions. But if you comply with the building code, they will not tell you, this hotel cannot be a multifamily. So you combine the fact that we don’t have that entitlement risk or zoning risk to use a fancy real estate term. We don’t have the entitlement risk. We’ve got the the depends on how you measure it the either third or fourth largest city in the country that is not just has 27 Fortune 500 companies in it, but it’s home to 27 Fortune 500 companies, right? That that’s that and job growth, population growth, it’s a best place, or Texas consistently ranked as the best state to do business in for the low taxes and a lot of other business friendly policies. It’s like this is exactly where I want to own apartments that rent for $800 to $950 a month, like there’s going to be demand in that city of 10 million people for that price point of apartment in any economic environment economy is growing, the economy is contracting. And so that with no zoning laws meant that Houston was a target market for me. And I’ve been looking at other hotels there. So to specifically answer your question, Nate, when it comes time, when we’re a little further along in the renovations, and we want to start dialing down our hotel income and really ramping up our multifamily income. We engage an architect firm that will help us fill out some paperwork with the city to officially change the use from hotel to multifamily. And in Texas, they can’t in Houston, at least they can’t say no to us. Now, if we were in Dallas, if we were in Orlando, if we were in Denver, these are all places where I’d love to do a project, we would want to get the city’s permission prior to closing because we don’t want to take on the entitlement risk. We don’t want to get stuck with another mom and pop hotel. And we’ve got no advantage over any other hotel operators like I don’t want to be in the in the hotel business. So just real quick, why do I name Florida and in Colorado? Two reasons. Florida a few months ago just passed this thing called the Live Local Act. And the Live Local Act says that if you repurpose a building, and 40% of the building is rented at a rate that qualifies it as affordable, which by the way in Florida is pretty easy to do. Then the local municipality cannot prevent a zoning change. It’s the state law. Right? So if if you hit certain affordability requirements and you buy a hotel, the city cannot get in your way. So we’re seeing more of the conversions in Florida and Florida from being so tourist-centric has gotten a lot of old hospitality product out there. Now, because it’s more attractive to people that are interested in converter conversions, you got to be careful, because it’s not like there’s demand for 300 studio units in any given city in Florida, right. And this is exactly what we’re seeing in Jackson right now, Jackson, I’m sorry, Jacksonville, Florida. I know a couple people that have done conversions. And they’re struggling precisely because the market is flooded with these cheap studios, and Jacksonville doesn’t have really high rents to begin with. Then in Colorado. Colorado, and Denver, and in the other major cities, they understand there’s an affordable housing crisis. And they’ve got processes I know in Denver and Colorado Springs, even in Denver, if you buy a hotel within a certain zone, you can go through a an established process with the city where they will fast track your hotel to multifamily status, because they see this as a great avenue for creating affordable housing that doesn’t rely on any taxpayer dollars. So my long winded answer to you got to research the city upfront. And that’s our first call we make before we get any farther down the road on due diligence. I’m negotiating right now on a hotel that just because I don’t have the contract yet, I won’t say out loud the city name, but it’s in a major Colorado city. And there’s a conversion, one other conversion in the city. And it’s right down the street from this property. So that gives me a lot of confidence that the city is going to let this happen. And then that hotel, it’s already got the kitchenettes in every room, it’s an extended stay brand. Now we’re not able to get it for $28,000 a door, we’re looking at more like $46,000 a door, but we’re gonna be able to lease it up I think a lot quicker.

David Bright  41:54

Nice. There’s so much in there that is there’s a lot of nuance in this space. And so I can tell business professor has done his homework, right, that that shines through in everything you’re saying. One of the things that that stressed me out about this model, when we first started talking is it did feel like there’s a lot of details and a lot of nuance and a lot of roles and a lot of scale, right like 120 unit inspection. What happens I’ve I’ve hired folks to replace furnaces and single family houses. What do you do when all the Hvac in 120 unit hotel needs to be replaced? Like these just felt like bigger problems. But one of the things that you’ve helped introduce me to is this, by bringing more people into this picture, there’s some diversification by distributing efforts across people’s skill set, that I didn’t have to become the multifamily Hvac expert or the multifamily zoning expert or anything like that. You can build a bigger team around that. So can you those that may be hearing all these details and maybe getting stressed out of I don’t know how I can ever do something that different? Can you walk people through how that you don’t have to know all the pieces? You have to have the right team.

Alex Cartwright  43:10

That’s exactly right. I will do that but you open the door on me saying something about H fac, which I just want you to think about it like your one bedroom condo, that’s got your typical forced air HVAC system. When that goes out on you a new furnace or compressor outside, I depending on the size of it, etc in the market you’re in, it’s a would you agree with me it’s around a $3,000 repair to get the whole system. 

Nate Hedrick  43:38

That’s right. 

Alex Cartwright  43:38

So in a hotel room, where we’ve got our PTAC units, right, that are just basically big wall units that slide in under the windows, we just ordered these great big ones from HD Supply, brand new with warranty, for $525 bucks, and they plug into the wall, our handyman changes them out. Think about that in terms of repair costs, I don’t have to spend $3,000 times 120 or even budget for those kinds of replacements, right, this is $500 bucks every five to seven years to pop those suckers out and pop new ones in. When you’ve got a lot fewer square feet. It also reduces the amount of stuff that you have to replace. So, but to your point, David, yeah, you you don’t have to know everything because this is a real business where you’ve got people that are specialized in different roles and they’re coming together. There’s enough meat on the bone to share and for the people that want to watch from the sidelines, those people can be limited partners in the business. So on most of these deals, this is what’s called a syndication structure. And syndication is a fancy term for people pooling money together. But it in the United States, if you take someone else’s money, and they don’t do anything to receive the profit aside from give you the money, you’ve sold them what’s called a security or a piece of stock in the building. And so the that that has got to be registered and filed appropriately. Real estate folks do this every day. And so the structure of taking a building, turning it into shares, and then selling those shares to everyone that’s participating is called syndicating the building or securitizing the building. So when we sell those shares, like we did in 702, we sold two kinds of shares, limited partner shares, and general partner shares. And so you may hear limited and think that this is like the second tier share class, not the case at all, limited partners refers to their limited liability, and their limited requirements on the day to day operations of the building. So a limited partner in terms of their liability, where if the if somebody doesn’t pay on the loan, somebody sues the building a flood happens, whatever you can imagine, the limited partner, and I’m not an attorney, this is just my understanding of it, the limited partner is limited to what their investment in the building is, right? That’s their cap, the general partners don’t get that kind of liability protection. The limited partners also aren’t required to partake in the operations of the building. The general partners are responsible for overseeing the all of the operations of the building. That’s the construction. And that’s the leasing and then after we’re leased up the day to day operations of the building, overseeing the staff, paying the bills, keeping things clean, making sure everyone’s paying on time, etc. And so when we, the when you get involved in a syndication you can you can choose if you want to go on the limited partner route, or the general partner route. But when it comes time to distribute the profits, right, that’s all it comes time to take advantage of the depreciation, the tax benefits. It’s not like folks are treated any differently, like everybody’s an owner in the building. And as a matter of fact, on on most syndications and on our syndication in 702, the split of the shares between the LPs or limited partners, and the GPS, general partners, is 75/25 or 75% of the profits go to the limited partners, and 25% go to the general partners. And so the lion’s share of the profits are going to the people that pledge their money. And by the way, while I’m at one of three general partners in the deal, I’m a limited partner as well, because I put my own capital into the deal as an investment. And then I’m not to get too nuanced in this but I’ll say one more thing. So I don’t want folks to hear a limited partner and think they’re like this is not the full bite at the apple. Under the way we structure our syndications, we structure what’s called a there’s a European way to split profits, and there’s an American way to split profits. And if you dig deep in people’s PPM, they call it the private placement memorandum, you can read about the different ways to split profits. Here’s the here’s the difference. Under the American split, as soon as profits come in, they’re split 75/25. Under the European split, when profits come in, they’re split 75/25, but only if the limited partners have received 100% of their investment back. And so the way that our syndication is structured is that on a refinance, when we turn this thing into a multifamily, we get the appraisal for nine and a half million dollars, we obtain a new loan, which will be substantially more than the $2.3 million loan we currently have on the property, we’ll have a bunch of cash to pass back to people and it’ll be non-taxable because it’s a refinance it’d be beautiful. And that cash doesn’t get subject to the split until limited partners have 100% of their initial investment back. So the limited partner investment is prioritized over the general partner investment.

Alex Cartwright  43:50

I remember reading through that with my lawyer trying to understand all of this because it’s brand new and it’s it’s great to like actually have that broken down right and have that explained because there are so much nuance to this, especially if you’re if you’re interested in that limited partnership, right. You want to jump into this without with that lower level of risk, don’t have the experience, it can feel like whoa, there’s a lot of terms being thrown around, there’s a lot of documents being thrown at me, help me to actually understand this, because I don’t know how I’m gonna get my money back. I don’t know how I’m gonna make up return on this. So it’s, I’m really glad you dove deep on that, because it can it’s very telling as to how much time you spent thinking about how to make this rewarding for everybody involved. So I appreciate that a lot.

Alex Cartwright  50:23

I’m glad to do that. And I’m and David I like I’m thrilled that you were able to come down and see the property. And at least then, in our syndication, I can’t speak for others, but and I’ve done one other beside this hotel conversion. But in our syndications, we’ve, we’ve got a biweekly investor call, and we I like I encourage folks to visit the property, like I want them to see and appreciate what’s going on. And that way, hopefully, when something does not go to plan, which thankfully has not really happened yet, like there’s they’ve been there and there’s some color around their understanding for for what’s going on. But also one more point on that, Nate, absolutely. There are a ton of terms, there are different groups out there of people that are investors as limited partners where folks can go and learn. But at the end of the day, like it, it’s about being with a general partnership team that you kind of click with, and that you trust, because there’s like, there there is there’s just pardon my language, like there’s just so many ways to bake BS into the underwriting and make every building look like a winner. And if you’re not a very serious, sophisticated finance guy or legal guy, you may not catch it. And so the best advice I can give is you invest with people that you know well, and that have a track record. And at the end of the day, I think the real question is of the general partners, like how much money are you putting into the building of your own money? And are you as the general partners going to sign personally on the debt for this building? Right, and our general partnership team put in a little over 30% of the capital needed for the acquisition. And and we and we have someone to sign on the debt, right. So that shows skin in the game, 

Nate Hedrick  52:35

I think that’s huge. We had one other syndicator on in the past with a ton of experience and said the exact same things. Vet GPS, don’t vet deals, because that’s how you’re going to know that you’re, you’re gonna make success. So I appreciate you bringing that up. So I guess we’ll wrap things up, Alex, this has been awesome. Just really appreciate you taking a deep dive on this. But I’d love to know maybe a little bit of what’s next for you. And then if you could pepper in where people can find you if they want to learn more about what you’ve been up to and just looking for a place to connect. 

Alex Cartwright  53:05

Thanks. So this will be the first time that I’m announcing my new brand name on a podcast. Last Monday, we rebranded the company. I was known as Villicus Capital, V-i-l-l-i-c-u-s. Villicus is steward in Latin, the academic and me really liked the Latin name, but nobody could spell it and nobody a lot of people couldn’t pronounce it and, and it didn’t say anything about hotel conversion. I really wanted a name that showed that we’re not a syndication group that is like dabbling in some multifamily and some self storage and some mobile home parks and like we’re not opportunists. We’re laser focused on our niche, which is hotel conversion. So I wanted hotel conversion to be part of the name. And actually, Nate, you can appreciate that I’ve been working on this for months, because a couple months ago, we exchanged some emails about some different names. So we’ve and conversion is kind of a clunky name. That means different things to different people. So we settled on Hotel Shift, s-h-i-f-t. So folks can go to HotelShift.capital, which is our new website. I hope they sign up for my investor newsletter. I’m trying to be really good at doing some informative videos to send out to people about our projects. I’m also trying to stay disciplined about putting a little something on LinkedIn every day and building our presence on there. So folks want to look me up on LinkedIn, maybe you guys can link to that on the show notes. Very happy to connect with people there. 

David Bright  54:37

Alex, really appreciate you being here. We really appreciate you walking us through this deal, the complexity but also yet the simplicity of this model of taking a failing business, turning it into a successful apartment complex. Just thanks so much for being here. T

David Bright  54:53

Thanks for listening to the YFP Real Estate Investing Podcast. If you liked what you heard in today’s show, please leave us a review and subscribe to the show so you never miss an episode. If you have a question know someone that would make a good guest or want to connect with us, head on over to YFPrealestate.com and join the growing YFP Real Estate Investing Facebook group.

Nate Hedrick  55:10

[DISCLAIMER] As we conclude this week’s episode of the YFP Real Estate Investing Podcast, an important reminder that the content of this podcast is provided to you for informational purposes only, and is not intended to provide and should not be relied on for investment or any other advice. information in this podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with their financial advisor with respect to any investment. Furthermore, the information contained in our archive newsletters, blog posts and podcasts is not updated and therefore may not be accurate at the time you listen to it. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist unless otherwise noted, and constitute judgments as of the dates published. Such information may contain forward looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward looking statements. For more information, please visit YourFinancialPharmacist.com/disclaimer.

David Bright  56:05

Thank you for your support of the YFP Real Estate Investing Podcast. Have a great rest of your week.

[END]

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