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On a conceptual level it sounds good. But, it’s going to be deal specific. I’d pay attention to how sensitive the returns are to hard cost over runs, and evaluate more of the science/ease of conversion of a motel. Housing supply/demand metrics will be your friend in evaluating the macro need for multi over the current use in any particular area. Sounds interesting- can you elaborate more on what the motels are like? Garden or mid rise?
While its not a 'dumb' time to invest in RE, it is a 'difficult' time to invest in RE, so I'd be extra cautious about the returns they are promising, the assumptions they are underwriting etc...
For this particular strategy I think you really have to understand the area. If it's near a large city with a bunch of different employers I think it could be a great play. But if these properties are more rural I think motel style rooms are gonna be hard to lease vs SFH and true Class B apartments.
100% agree on very location specific and migratory and socioeconomic trends, but, it sounds like this is an affordable housing play which is a massive massive gap needing to be filled. Of course comes with different risks and opex/Capex, but there's a huge gap in affordable new units post crisis in development since margins aren't there. Depending on absorption rates it could be a good opportunity. IMO I feel like there's adverse selection and potential for significant reno costs, not to mention securing a tax and zoning approval change which can be a HUGE pain in the bootyhole
If you have to come on here and ask this question then yes, it is a 'dumb' time to invest in real estate. High-level, there are a lot of headwinds right now for real estate investment. Opportunities will always be deal specific so while there are opportunities out there, you need to be in a position to evaluate them with a discerning eye.
Aggressive lol
I came here to get a read from more experienced people in this asset class. It penciled when I did the math & looked at it, just want to make sure it isn't a totally stupid strategy from a high-level...
I'll argue the reverse of everyone else for the sake of it - if you find a deal that pencils in this interest rate environment, it's probably worth doing. Especially since this seems easily replicable and is targeting an asset class which is (relatively) easily converted into MF and is probably trading at a huge discount right now
Obviously all of that assumes that you're building in appropriate contingencies, doing your diligence on the sponsor, etc.
Starting to see a lot of hotels/motels being converted to SFH/apartments lately in my area (SoCal). Ozymandia had mentioned - it's worth looking into if you're able to pencil deals in within this current environment. Cities are also purchasing hotels and converting them essentially into transition housing for the homeless/low income.
Thanks guys, sounds like I am good to go. Ran my analysis initially with most of the above already in mind. I like that the GP has executed on a decent amount of similar value-add before and in the same geo, so shouldn't be much risk floating around in there.
I know conversions have accelerated since the pandemic took out many shopping centers. While the interest rate hikes have slowed things down a bit, I think it's still a viable option if you know what you're doing.
From what I understand, distressed properties are going to be coming on the market in higher quantities as the year goes by and into the next year assuming they keep rates this high so there might be more opportunities down the road to pick up properties for conversion.
If you can cobble together funding and find value-add opportunities with locations that demand it, then it sounds like you've got a viable idea.
It's not my idea, it's a fund I am investing in that has done it a few times! I don't know much about REPE. Just looking for more exposure to RE as an asset class through new managers. :)
Gotcha, misread your original post. But my opinion still stands, just make sure you have access to all the due diligence. Do your homework on the locations and properties, get all the details on the value-add components, make sure the product-market-fit is existent for the conversions, and of course get all the numbers on the profit generation. Don't think I need to really tell you all that as I think you already know but figured I'd throw it in anyways.
With this strategy it is all about your exit analysis. I would see how my exit basis per SF (bc unit sizes are probably not applicable bc they’re too small) compares to true class C/B apts being purchased today.
The value-add operators usually bring to the table are their ability in executing a business plan; you say they’ve done this before, so they should know how to do the retro fit; know the floorplans and what issues are behind the walls; have contractors who can supply them at prices they are underwriting to; ensure code compliance and no issues with the muni; etc.
Outside of this it is totally up to you to determine if the plan is realistic… what are the rents being assumed? What are rents at class C/B properties down the street?
Are lenders lending on these assets? Have you spoken to the lender? Have you spoken to past investors? Are the returns you are receiving higher than what you can get in the SP500? This is not a low risk real estate investment; this will be like a development project where a lot can go wrong. Has the fund recorded success in delivering distributions to current / past investors?
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