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5 Key Considerations for Your Hotel-to-Apartment Conversion
Construction costs, location, and zoning regulations are the key factors to consider before deciding on a hotel-to-multifamily project.
- 5 Considerations for Converting a Hotel to an Apartment Building
- 1. Are Your Hotel Rooms Big Enough?
- 2. Will Local Government Allow It?
- 3. Is the Property Well Located?
- 4. Can You Afford It?
- Calculate Your Conversion's Loan-to-Cost Ratio
- Property Management Expense Projection
- 5. What’s Your Exit Strategy?
- Related Questions
- Get Financing
5 Considerations for Converting a Hotel to an Apartment Building
During the challenges to the hospitality industry over the past couple of years, many hotel owners looked for ways to find revenue as the sector went almost completely vacant practically overnight. While many shut down to wait out the decline in travel, some looked into repurposing their assets into something with more stable demand.
For many, this meant converting hospitality assets into multifamily communities. Considering some similarities between hotel and apartment properties, this may have seemed logical. After all, multifamily demand remained robust during the pandemic — major city centers notwithstanding — and as a result, a hotel-turned-apartment building could be a wise long-term play.
However, while hotel rooms and apartments may share much in common, they are emphatically not the same. There are five key questions to consider if you are looking at getting out of the hospitality business and into the multifamily sector.
1. Are Your Hotel Rooms Big Enough?
USA Today reported in 2015 that American hotel rooms averaged a little more than 350 square feet in 1995. While that figure only fell to 330 square feet in the next two decades, many newer hotels have opened in recent years. The average multifamily unit has 882 square feet. That’s quite a difference, to put it mildly.
Many medium-sized hotel rooms can be converted into studio apartments easily enough. That said, should you wish to take advantage of the demand for larger units, the costs of knocking down walls to double (or triple) unit sizes could be significant — and fraught with complications depending on the structure’s wiring, plumbing, and other systems.
2. Will Local Government Allow It?
Check the zoning laws or ordinances in effect at your property. While many zoning boards classify hotels and multifamily assets as commercial real estate properties, they may be zoned differently in your area. Zoning changes do occur from time to time, but they typically are time-intensive and require meetings with your local government or city council.
Even if a change is approved, there may be different restrictions that your property could run afoul of. For example, a hotel-zoned parcel may require a higher parking ratio than one in a multifamily zone — or vice versa. Multifamily-zoned properties may also require a different floor area ratio, too, which may shut down your project before it even gets started. While many of these zoning requirements can be bypassed with government approval, don’t assume you’ll get it. Even outside of zoning, other legal issues could arise if your hotel is a registered landmark or on a historic register of buildings.
3. Is the Property Well Located?
Hotels and multifamily properties don’t share the same values in terms of location. A business hotel may be adjacent to an office district — and a multifamily asset might feel out of place. Similarly, housing demand in your market may be highest in the suburbs, so converting a hotel in the city center may not do much to attract the same renter base. Don’t assume that just because your hotel’s location was a big plus in the past, the same will hold true for an apartment community in the same spot.
4. Can You Afford It?
Construction costs are soaring, and there’s no indication they will slow anytime soon. While it may be easy enough to calculate your basic construction costs — materials and labor — don’t forget to take the costs you will incur as your property sits unoccupied. While your hotel may fall shy of covering its operating expenses right now, note that a vacant property still has significant costs — and zero revenue to offset those losses. That said, there are many financing options available for conversions that may be a good fit for your project — but you should have a good idea of your loan-to-cost ratio before going for a loan.
Calculate Your Conversion's Loan-to-Cost Ratio
Plug your project cost and ideal loan amount into our calculator below. Note that most lenders may balk at an LTC ratio above 75%, particularly if you're relatively inexperienced. That doesn't mean financing at a higher LTC isn't possible — it just means you may need to shop around a bit for your best option.
Remember not to limit yourself based on your previous experience with financing. There may be loan programs and lenders you haven't encountered before — and we can help with that.
Property Management Expense Projection
Also, consider property management costs. Hotel and multifamily properties operate very differently, and if you do not have experience in the apartment industry, find a reputable company that does. While it may scale your upfront and ongoing costs substantially, ensuring you have a well-run and well-occupied multifamily community is the best way to realize the best returns on investment.
5. What’s Your Exit Strategy?
Will you sell the property once it’s finished? Once it’s finished the lease-up phase? Or are you planning to make the community part of your long-term portfolio? If you are part of a joint venture, is everyone on board?
It’s important to identify how you plan to exit the investment before investing the time and capital to convert the building. Any potential buyers will size your structure up in terms of all the previously discussed factors, so be sure to be extra diligent — and this applies even more so should you plan to continue operating the asset yourself.
Related Questions
What are the key factors to consider when converting a hotel to an apartment building?
When converting a hotel to an apartment building, there are five key factors to consider:
- The Cost of Conversion
- The Quality of the Property
- The Location of the Property
- The Amenities Offered
- Your Exit Strategy
The cost of conversion will depend on the quality of the property, the amenities offered, and the location of the property. The quality of the property should be assessed to ensure that it is suitable for conversion. The location of the property should be considered to ensure that it is suitable for the target renter base. The amenities offered should be considered to ensure that they are attractive to potential renters. Finally, your exit strategy should be identified before investing the time and capital to convert the building. Any potential buyers will size your structure up in terms of all the previously discussed factors.
What are the advantages and disadvantages of converting a hotel to an apartment building?
The advantages of converting a hotel to an apartment building include the potential to increase rental income and the ability to capitalize on the existing infrastructure of the hotel. The disadvantages include the potential for higher property management costs and the need to ensure the property is well located for the new renter base.
It is important to consider the location of the property when converting a hotel to an apartment building. A business hotel may be adjacent to an office district, while a multifamily asset might feel out of place. Additionally, housing demand in the market may be highest in the suburbs, so converting a hotel in the city center may not do much to attract the same renter base.
Property management costs should also be taken into consideration. Hotel and multifamily properties operate very differently, and if you do not have experience in the apartment industry, it is important to find a reputable company that does. While it may scale your upfront and ongoing costs substantially, ensuring you have a well-run and well-occupied multifamily community is the best way to realize the best returns on investment.
What are the most important legal considerations when converting a hotel to an apartment building?
The most important legal considerations when converting a hotel to an apartment building are to check the zoning laws or ordinances in effect at your property, as well as any other legal issues that may arise if your hotel is a registered landmark or on a historic register of buildings. Additionally, it is important to consider the location of the property and whether it is well-suited for an apartment building.
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What are the most important financial considerations when converting a hotel to an apartment building?
The most important financial considerations when converting a hotel to an apartment building are calculating your conversion's loan-to-cost ratio and projecting property management expenses. Most lenders may balk at a loan-to-cost ratio above 75%, so it's important to shop around for the best option. Additionally, it's important to consider property management costs and find a reputable company with experience in the apartment industry. This may scale your upfront and ongoing costs, but it's the best way to realize the best returns on investment.
What are the most important design considerations when converting a hotel to an apartment building?
When converting a hotel to an apartment building, there are several important design considerations to keep in mind. These include:
- The size and layout of the units
- The amenities offered
- The quality of the finishes
- The property's location
- Your exit strategy
The size and layout of the units should be designed to meet the needs of the target renter base. Amenities should be tailored to the local market and the quality of the finishes should be high enough to attract tenants. The property's location should be suitable for the target renter base and your exit strategy should be identified before investing the time and capital to convert the building.