Latest / Financial Survival Network / Transforming Motels into Modern Affordable Housing - Ryan Sudeck #6183

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Transforming Motels into Modern Affordable Housing - Ryan Sudeck #6183 · Financial Survival Network

• 0:00
  Speaker 1: And so we don't see a lot of competition with
• 0:02
  Speaker 1: developers looking to buy these properties. We do see other
• 0:05
  Speaker 1: hoteliers that might want to take them over and upgrade
• 0:07
  Speaker 1: them and maybe you know, take them from a Hampton
• 0:10
  Speaker 1: into a Mariad or you know, get them, get them rebranded.
• 0:14
  Speaker 1: But we typically find that are like, we're the best buyer.
• 0:18
  Speaker 1: We're the best buyer for these assets, and the sellers
• 0:20
  Speaker 1: want to work with us because we can pay a
• 0:22
  Speaker 1: little bit more than that hotelier is willing to. Because
• 0:25
  Speaker 1: hotels are worth three to five times the revenue that
• 0:28
  Speaker 1: they generate, whereas an apartment building is worth seven to
• 0:31
  Speaker 1: twelve times the revenue that it generates.
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  Speaker 2: You are listening to Carrie Let's's Financial Survival Network, where
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• 0:56
  Speaker 3: Ever, And welcome. You are listening to and watching the
• 1:03
  Speaker 3: Financial Survival Network. I'm your host, Carrie Lutz. Interesting person
• 1:08
  Speaker 3: you're about to hear from. Interesting investment approach. I don't
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  Speaker 3: think you're going to find anything like it. Basically, what
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  Speaker 3: they're doing is taking small motels hotels across the country
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  Speaker 3: converting them to residential, affordable residential. When I think of
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  Speaker 3: affordable housing, this seems to be the way to go.
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  Speaker 3: It's a private approach, they're not taking government money to
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  Speaker 3: do it, and they can produce more units probably in
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  Speaker 3: a year.
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  Speaker 4: Than many of the.
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  Speaker 3: Housing authorities around the United States do in a decade.
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  Speaker 3: A name of the person that you're about to hear
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  Speaker 3: from is Ryan Sunday. Ryan, it's great to have you
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  Speaker 3: on the show. So affordable housing. All we hear about
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  Speaker 3: is that, you know, affordable housing, we don't have enough.
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  Speaker 3: Government's got to build.
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  Speaker 1: More of it. But you seem to be offering a
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  Speaker 1: different approach. Yeah, that's exactly right. Thanks for having me,
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  Speaker 1: Kerry your intro on a spot on. We're shipping, you know,
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  Speaker 1: one hundred to two hundred units at a time of
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  Speaker 1: affordable housing, naturally affordable housing, and it only takes us
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  Speaker 1: about six to twelve months once we buy a property
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  Speaker 1: until we can start running it out to tenants so
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  Speaker 1: we can we can get units to market and address
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  Speaker 1: the need a lot faster than any ground up developer
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  Speaker 1: could or certainly you know, a government authority could.
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  Speaker 3: Yeah, so you've gone from eleven hundred units in twenty
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  Speaker 3: to eighteen hundred units last year. I assume the year
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  Speaker 3: that's pretty furious pace. I mean, just dividing by three,
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  Speaker 3: you do in two hundred thirty four units a year.
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  Speaker 3: I assume that pace is increasing. For twenty four it is.
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  Speaker 1: Yeah, we're at about twenty five hundred units total. Now,
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  Speaker 1: you know, we've had some sales in the portfolio, but
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  Speaker 1: there's a lot of acquisition opportunities out there for us,
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  Speaker 1: and you know, you kind of couple the distress and
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  Speaker 1: hospitality with the insatiable demand for the affordable housing, and
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  Speaker 1: we feel like we're onto something. So we see no
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  Speaker 1: shortage of opportunities. And you know, our plan is to
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  Speaker 1: do about ten, ten to twelve projects per year so
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  Speaker 1: that we can execute on them pretty well.
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  Speaker 3: Well, I've got a place that you should definitely buy.
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  Speaker 3: It's in Kassimi, Florida, right by Disney World. It's a
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  Speaker 3: welfare hotel and I'm sure the neighbors would welcome you
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  Speaker 3: taking it over. And it's got a pool, parking and
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  Speaker 3: I once had the misfortune of staying there when I
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  Speaker 3: fled from a hurricane, and there are guys with like
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  Speaker 3: prison tattoos there.
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  Speaker 4: It was a scary place. Yeah. I hope the.
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  Speaker 1: City of Kassimi can work with us on some of
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  Speaker 1: the change of use, permitting and zoning. We've had some
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  Speaker 1: challenges breaking into that market, but we know, well, we're
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  Speaker 1: trying to do some work down the street in Orlando,
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  Speaker 1: and that is one of the biggest challenges with these
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  Speaker 1: conversions because we're changing the use from a hospitality asset
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  Speaker 1: to a residential asset and we have to you know,
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  Speaker 1: the jurisdictions and the zoning and permitting folks have to
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  Speaker 1: basically let us do that.
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  Speaker 4: Yeah, but so is that considered an up zone or
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  Speaker 4: a down zoned?
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  Speaker 1: I would consider you know, we're moving it to its
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  Speaker 1: highest and best use, so I'd considered it an up zone.
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  Speaker 1: Usually we're not changing the underlyings zoning for the property itself,
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  Speaker 1: because most jurisdictions won't allow for what's called spot zoning.
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  Speaker 1: But we're going to the city and we're asking them
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  Speaker 1: to change the definition of the zone to allow for
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  Speaker 1: residential use or you know, there are other potential exception processes.
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  Speaker 1: In states like Washington where I live, where we're based
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  Speaker 1: as stage, they've actually legislated, effective June of twenty twenty five,
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  Speaker 1: that all commercial buildings can be zoned by right to
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  Speaker 1: so there isn't basically the local municipalities can't get in
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  Speaker 1: the way of it. And so it's a different approach
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  Speaker 1: than some other states. You know, some other states just
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  Speaker 1: roll out the red carpet to try to, you know,
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  Speaker 1: get us through. And then in some other states, you know,
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  Speaker 1: they've actually legislated to make these conversion projects a little
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  Speaker 1: bit easier.
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  Speaker 3: Yeah, they really should, because you know, if you watch
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  Speaker 3: an episode of Cops, you could definitely find a lot
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  Speaker 3: of prospective properties there because it seems like nothing good
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  Speaker 3: is happening in these rundown, low life motels and bad
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  Speaker 3: parts of town.
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  Speaker 4: And all that. And here you.
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  Speaker 3: Redo them, make them new, and you get like tax
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  Speaker 3: payers in there.
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  Speaker 4: That's exactly right. You know.
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  Speaker 1: We've had some good success with this, especially in the
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  Speaker 1: Hasmer district of Tacoma. We bought four properties on one
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  Speaker 1: street on Hosmer Street. Hasmer Street used to be responsible
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  Speaker 1: for ten percent of all the murders in the state
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  Speaker 1: of Washington, Hosmer is in Tacoma, which is just south
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  Speaker 1: of Seattle for those not from with the Northwest. And
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  Speaker 1: you know, since we've taken over these properties, we've eliminated
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  Speaker 1: violent crime. The police officers used to send three patrolmen
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  Speaker 1: for every call that was made from one of these properties.
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  Speaker 1: Now they only send one. So it's really it's a
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  Speaker 1: really unique opportunity where you know, we're kind of doing good,
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  Speaker 1: but it's also good business. Right. The underlying fundamentals of
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  Speaker 1: the investment are pretty sound as well.
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  Speaker 3: So like in Florida, a lot of these older rundown motels,
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  Speaker 3: they just knocked them down and put up the high rise,
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  Speaker 3: you know.
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  Speaker 4: So so I.
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  Speaker 3: Guess that's kind of your competition, the people that want
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  Speaker 3: to come in and knock them down and put up
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  Speaker 3: a residential tower.
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  Speaker 1: Yeah, and there's fewer and fewer developers that are starting
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  Speaker 1: right now, I think hermits the difference between housing that's
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  Speaker 1: being created and housing that's being permitted has never been
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  Speaker 1: wider in history than it is right now. Just because
• 6:54
  Speaker 1: inflation has been running rampant, the cost of labor materials
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  Speaker 1: is so high, the cost of debt is so high,
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  Speaker 1: a lot of ground up developers have just pulled out,
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  Speaker 1: and so we don't see a lot of competition with
• 7:04
  Speaker 1: developers looking to buy these properties. We do see other
• 7:07
  Speaker 1: hoteliers that might want to take them over and upgrade
• 7:10
  Speaker 1: them and maybe you know, take them from a Hampton
• 7:13
  Speaker 1: into a Mariad or you know, get them get them rebranded.
• 7:17
  Speaker 1: But we typically find that are like, we're the best buyer.
• 7:21
  Speaker 1: We're the best buyer for these assets, and the sellers
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  Speaker 1: want to work with us because we can pay a
• 7:25
  Speaker 1: little bit more than that hotelier.
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  Speaker 4: Is willing to.
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  Speaker 1: Because hotels are worth three to five times the revenue
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  Speaker 1: that they generate, whereas an apartment building is worth seven
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  Speaker 1: to twelve times the revenue that it generates, and so
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  Speaker 1: you know, there's a bit of an arbitrage in there.
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  Speaker 1: Obviously there's a lot of hard work to capture their arbitrage,
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  Speaker 1: but it allows us to pay more than a hotel
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  Speaker 1: operator would.
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  Speaker 4: Right, And so is there much competition for this out? There?
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  Speaker 4: Are there other companies.
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  Speaker 1: Doing what you're doing less than ten I'd say they're
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  Speaker 1: doing it repeatedly. There have been some that have pulled out,
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  Speaker 1: some folks that unfortunately overpaid, and you know, we're kind
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  Speaker 1: of coming into to grab those assets at a discount.
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  Speaker 5: As I say, there's.
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  Speaker 1: Really probably three or four groups that I'm aware of,
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  Speaker 1: including ourselves, that are that are trying to do this repeatedly,
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  Speaker 1: you know, ad scale in multiple markets.
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  Speaker 3: Interesting. Interesting, So how did you wind up getting into this?
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  Speaker 3: By the way, Brian, great question. My interest in real
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  Speaker 3: estate started at an early age growing up. My dad
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  Speaker 3: was a pilot but had a small portfolio of real
• 8:25
  Speaker 3: estate in my hometown of Medford, New Jersey, and so
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  Speaker 3: I spent the weekend swinging hammers and installing, installing toilets
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  Speaker 3: and snaking.
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  Speaker 5: Drains with him.
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  Speaker 1: And you know, a nine to eleven hit, you know,
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  Speaker 1: he lost his pension and took a big pay cut,
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  Speaker 1: and you know, I saw the insurance policy and the
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  Speaker 1: stability that investing in real estate gave to my parents,
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  Speaker 1: and so I always knew I wanted that.
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  Speaker 4: One day.
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  Speaker 1: Fast forward, I went to college out on the West Coast,
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  Speaker 1: ended up having a corporate career in mergers and acquisitions,
• 8:53
  Speaker 1: you know, helping big companies by smaller companies. Worked for
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  Speaker 1: Amazon and Samsung and Redfit and a few just just
• 9:00
  Speaker 1: to name a few companies. But then start building my
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  Speaker 1: own portfolio on the weekends doing it and doing a
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  Speaker 1: similar thing where you know, I bought a six unit
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  Speaker 1: and renovated it, then an eight unit, then a sixteen,
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  Speaker 1: at a thirty eventually. Ask forward to twenty twenty and
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  Speaker 1: Sage Investment Group got started and that's where I'm now
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  Speaker 1: the CEO. I was still working in my corporate job
• 9:19
  Speaker 1: at the time, but I decided to move my properties
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  Speaker 1: into Sage in exchange for shares of our fund and
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  Speaker 1: then just became a passive investor in real estate.
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  Speaker 5: I decided to outsource the hard work.
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  Speaker 1: You know, to the folks at Sage, and you know,
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  Speaker 1: I ended up joining the company full time as CEO
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  Speaker 1: mid last year, so in mid twenty twenty three.
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  Speaker 4: Very cool story. So I never looked back.
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  Speaker 3: I think you said there's seventy thousand of these like
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  Speaker 3: mom and pop motels around the country.
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  Speaker 4: That's exactly right.
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  Speaker 1: Yeah, in markets that we're interested in because we're looking
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  Speaker 1: for wage growth, population growth, and we're also looking for
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  Speaker 1: properties with about one hundred to two hundred units because
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  Speaker 1: we want enough where we get economies of scale on management.
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  Speaker 1: We can have an on site manager that you know,
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  Speaker 1: it's kind of governs the low end and then on
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  Speaker 1: the high end. We don't want to ship too many
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  Speaker 1: studio units in any one market. So you know, we
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  Speaker 1: don't want to take over four hundred unit property and
• 10:12
  Speaker 1: ship four hundred units of studio housing because that would
• 10:15
  Speaker 1: oversaturate the market.
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  Speaker 4: Right.
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  Speaker 5: Are these units furnished r Typically not.
• 10:20
  Speaker 1: We only have one of our twenty four properties that
• 10:23
  Speaker 1: is furnished. We're actually just starting to lease it now
• 10:27
  Speaker 1: and where we're going to see how it goes. But
• 10:29
  Speaker 1: typically unfurnished units, but they have full, full kitchens for folks. Yeah,
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  Speaker 1: So what's the biggest challenge you see in this market?
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  Speaker 5: Say, there's probably three challenges.
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  Speaker 1: The first is working with the local municipalities that you
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  Speaker 1: know need to basically approve our change of use of
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  Speaker 1: the buildings to give us the permits to you know,
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  Speaker 1: convert these properties. That takes a long time, on average,
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  Speaker 1: at least six months. And you know, some of those
• 11:01
  Speaker 1: municipalities treat this differently, and you know, maybe they assess
• 11:06
  Speaker 1: us impact fees because they think that we're going to
• 11:09
  Speaker 1: use more city resources, whether that's water or sew or parks,
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  Speaker 1: and we have to work with them and educate them
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  Speaker 1: on you know, hey, these are only amenitized properties. You know,
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  Speaker 1: there aren't you know, families here, so we're not hurting
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  Speaker 1: the school system. And then we also have to work
• 11:24
  Speaker 1: with them to figure out, you know what code they're
• 11:27
  Speaker 1: going to hold us to, you know what code book
• 11:29
  Speaker 1: they're going to hold us to. The energy codes are
• 11:31
  Speaker 1: ever changing, and sometimes we get curveballs thrown at us,
• 11:35
  Speaker 1: you know, on what requirements we're going to be held to.
• 11:37
  Speaker 1: So I'd say that's kind of challenge number one. Challenge
• 11:39
  Speaker 1: number two is just the development itself. It's certainly not
• 11:42
  Speaker 1: easy to do the work that we do. We just
• 11:44
  Speaker 1: started our nineteenth conversion project, so we certainly learned a
• 11:47
  Speaker 1: lot along the way, both in the diligence period and
• 11:51
  Speaker 1: also the process of you know, doing the renovation. And
• 11:56
  Speaker 1: then the third is just you know, sources of capital.
• 11:58
  Speaker 1: You know, we're always out there raising equity to fuel
• 12:01
  Speaker 1: our growth, and then also you know, finding lenders to
• 12:04
  Speaker 1: partner with to help you know, secure the properties as well.
• 12:09
  Speaker 3: Interesting, you would think that most municipalities would be looking
• 12:13
  Speaker 3: to upgrade the quality of the properties. And thereby, because
• 12:18
  Speaker 3: I assume that after you get done with your renta,
• 12:21
  Speaker 3: your rehab, the realistic tax is going to go up
• 12:24
  Speaker 3: a little bit, They go.
• 12:25
  Speaker 5: Up a lot of bit.
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  Speaker 1: Now the city loses the hotel tax revenue, and so
• 12:31
  Speaker 1: I haven't actually done the math recently, you know, on
• 12:33
  Speaker 1: one of our projects to see what they net out
• 12:35
  Speaker 1: to be.
• 12:35
  Speaker 5: But certainly, you know, we pay a.
• 12:37
  Speaker 1: Lot more in property taxes after the renovation, you know,
• 12:40
  Speaker 1: because we see typically least a fifty percent increase in
• 12:44
  Speaker 1: value over what we pay between the acquisition and the development,
• 12:48
  Speaker 1: but it's usually at least double what the property was
• 12:52
  Speaker 1: worth as a hotel.
• 12:53
  Speaker 3: Well, you'd think if a place is an in by
• 12:55
  Speaker 3: ten out by two type of situations, thiseople are paying cash.
• 13:01
  Speaker 3: I don't know that a lot of them don't even
• 13:03
  Speaker 3: take credit cards. And nobody wants to leave a trail
• 13:06
  Speaker 3: that they were actually in this place, so probably they're
• 13:10
  Speaker 3: not getting their full full ride on the hotel. And
• 13:16
  Speaker 3: you know resource tax that accounty like in Florida, it's
• 13:20
  Speaker 3: like those are huge taxes to twenty percent many places. Interesting,
• 13:26
  Speaker 3: interesting business model. Obviously you'll be busy with this for
• 13:30
  Speaker 3: a long time to come, and we appreciate you coming
• 13:34
  Speaker 3: out just to tell us. Anybody wants to connect with you,
• 13:37
  Speaker 3: follow you how do you do that?
• 13:39
  Speaker 1: Yeah, you can go to Sageinvestment dot com. You can
• 13:43
  Speaker 1: book a meeting with me there. You can also email
• 13:45
  Speaker 1: me at Ryan at Sageinvestment dot group, where we've got
• 13:49
  Speaker 1: a LinkedIn account. You can certainly follow us there as.
• 13:51
  Speaker 4: Well, excellently.
• 13:52
  Speaker 3: Well, there'll be a link in the show notes to
• 13:55
  Speaker 3: this interview on Financial Survival Network dot com, so you
• 13:58
  Speaker 3: just have to click it you find out at all
• 14:00
  Speaker 3: about Ryan and Sage Investment Group and the fund. If
• 14:05
  Speaker 3: you got a question for Ryan, shoot me an email
• 14:07
  Speaker 3: kl Atcarrie Lutz dot com. And while you're at the site,
• 14:12
  Speaker 3: please sign up for your free newsletter. Ryan, been a pleasure,
• 14:15
  Speaker 3: Thanks for stopping by. Thanks so much for having me.
• 14:17
  Speaker 2: Erry, Thanks for listening to Carrie Lutz's Financial Survival Network,
• 14:22
  Speaker 2: your solution to today's trying times. For the latest, go
• 14:26
  Speaker 2: to Financial Survivalnetwork dot com. Financial Survival Network
• 14:31
  Speaker 4: Now more than ever,