Discover how to convert a motel into an apartment building, an extremely effective strategy for creating affordable housing with very strong returns. And you'll also meet my Protege, Jordan, and learn how he put this fantastic deal together, turning a 16 room motel rooms into 16 very profitable apartment units as well as acquiring 9 additional multi-family units and a separate 0.5 acre commercial lot.
3 Powerful Principles of Commercial Real Estate Investing
#1 - 1031 Exchange:To fund this deal, Jordan sold a single family house rental and did a 1031 exchange into a commercial property. It's a brilliant strategy you can learn more about in my video 1031 Exchange Step by Step Case Study. If you're sitting on single family investment with equity, this teaching will detail how to sell them and reinvest the profits into another property and defer capital gains taxes by doing a 1031 Tax Deferred Exchange. It’s a powerful tool to build wealth in real estate and increase your net worth and cash flow.
#2 - Win-Win Deals: When connecting directly with Sellers, you can structure truly win-win deals. As Zig Ziglar used to say, "If you help enough people get what they want, you’ll get what you want". You'll find out that this truly was a win for all parties involved.
#3 - All it Takes is One Deal: Sometimes just one commercial deal is all it takes to dramatically impact your financial life forever.
Meet the Buyer: Protege Jordan
Jordan is your typical middle-aged family guy with three kids. He had a career in commercial insurance, but a few years ago he successfully moved into residential real estate house flipping with the help of Freedom Mentor Phil Pustejovsky. While continuing to flip houses, Jordan is now taking his long term rental real estate investing endeavors to the next level by transitioning to commercial. For Jordan, houses make for great short term profit opportunities, but haven't made for effective rentals. By concentrating on multi-family, Jordan can acquire far more units that can be more efficiently managed. This motel to apartment conversion deal will eventually be 25 units, catapulting his cash flow and creating generational wealth for his family.
Meet the Seller: Janette
As usual, we taught Jordan how to find off-market deals and to take the time to learn a Seller's story and motivations. When Jordan first spoke with the seller on the phone, she mentioned how it was difficult finding and keeping staff to run the motel during COVID. As a result, she hired her adult children to help run the motel but now her children want to retire. This surprised Jordan, and through the conversation he discovered that Janette was eighty-four years old. Janette has a very sharp mind but over the last few years she developed cataracts and she couldn't manage the motel like she used to. Moreover, her main concern wasn't just for herself. She was also focused on leaving a legacy for her children.
Motel to Apartment Conversion Deal
Property: 16-unit motel/adjoining annex with a nine-unit apartment complex. It also has a separate half acre lot that is zoned commercial. The motel units are all one bedroom and ten have kitchenettes. Jordan has permit approval to add kitchens to 6 more units.
Purchase Price: $1.35 million which is $48,000 a door. Comparables in the area are $85-$95,000 a door. The numbers work for the conversion project and his Pro-forma is solid.
After-Repair Value: After stabilization and hiring the property manager, the projected property value is $1.8 - $2 million.
Down Payment: Jordan sold a single family rental and rolled those proceeds straight into the acquisition of the Motel property using a 1031 Exchange. Almost to the dollar, it was exactly what he needed for funding this deal.
Financing: Jordan attempted to get financing from a local bank but at the last minute, the underwriter killed the deal due to some issues with the property. Rather than panic, Jordan reached out to his commercial real estate mentors for help and what was recommended was to turn this into an Seller Financed deal. Jordan sat down with the seller to discuss the property issues and was able to successfully negotiate seller financing terms. These new terms were better for Jordan than a bank loan and Janette is happy because her family will be well taken care of too.
$100 Commercial 0.5 Acre Lot: As a result of moving to seller financing (and not having a broker in the middle to muddy up the deal), another detail that we uncovered was the importance of making the adjoining half acre lot a separate transaction to keep it unencumbered for future development. This would not have been possible with a bank loan, but with seller financing, we could pull this off. Therefore, for a nominal $100, the 0.5 acre lot became Jordan's parcel free and clear. After the motel to apartment conversion is stabilized, Jordan plans to develop the lot. The zoning allows for virtually any commercial business, but Jordon plans to either expand the apartments or add a mobile home park with eight mobile home pads.
Structuring a Win-Win Commercial Deal
Commercial real estate has so much profit potential that you can oftentimes create truly win-win deals whereby both the Seller and the Buyer both get exactly what they want. It doesn't have to be a "dog-eat-dog" business world with commercial deals. As this deal exemplifies, commercial real estate is ideal for creating win-win transactions.
Seller Wins: Janette felt that she won big on this deal. She received $300,000 at closing and will receive $6,000 a month, which will allow her to live comfortably in her retirement. Plus, Janette's two children will receive $800,000 in five years, providing more than she ever imagined for her kids.
Buyer Wins: Jordan is winning big too. He purchased his first commercial property for $1.35 million, which is under market value, so he is walking into this deal with built in equity. The price per unit was about $48,000 per unit. Comparable properties in the area are selling for $85-$95,000 a door. The after-repair value is $2 million, and that does not include the half acre lot and the potential development of it once the motel conversion is stabilized. This deal is creating generational wealth for Jordan, just like it did for the Seller.
Here’s what Jordan had to say about the Protege Program:
“I'm extremely happy Peter. I couldn't have done this without you. I knew when I transitioned into commercial, I knew hiring a company, a coach, a mentor is important. There are things that you don't even know that you don't even know when you're looking at commercial versus single-family residential. An impactful relationship with you, Peter, and the team. I couldn't be happier and just very thankful to be working with you guys.”
“Going forward, if we could knock down two properties a year, trade up if you will, with more of these 1031 exchange transactions. They are just incredible for acquisition, to get that down payment in place. Also, cost segregation from a tax perspective is huge, so there's just a lot of positives. I think the future is very bright.”