Andrea Foley is the CEO/CFO of Generational Wealth Capital, which specializes in reimagining hospitality for long-term wealth. In this episode, she discusses how she is building wealth by purchasing mom-and-pop hotels in smaller towns and converting them into multifamily apartment buildings.
Andrea Foley | Real Estate Background
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CEO/CFO of Generational Wealth Capital, which specializes in reimagining hospitality for long-term wealth. She is currently on her second hotel-to-multifamily conversion and also owns and plans to grow short-term rentals.
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Portfolio:
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GP of two properties with a total of 175 units
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Reinvesting all LP funds into her own projects at the moment
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Based in: Omaha, NE
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Say hi to her at:
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Best Ever Book: Never Split the Difference by Chris Voss
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Greatest Lesson: You must be flexible, resilient, and extremely creative to have low risk and high success. After almost going bankrupt in my retail business, I was able to pivot, triple my revenue, and sell my business.
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TRANSCRIPT
Slocomb Reed: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomb Reed, and I'm here with Andrea Foley. Andrea is based in Omaha, Nebraska. She has Generational Wealth Capital, who specializes in reimagined hospitality for long-term wealth. She is currently a general partner in two projects, a total of 175 units, and she also invests funds in her own projects as a limited partner. Andrea, can you tell us a little bit more about your background and what you're currently focused on?
Andrea Foley: Yeah. So as far as real estate goes, my husband and I started back in 2005, and we did live-in flips, we house-hacked, we did single-family rentals, and then in 2017 kind of sold off our portfolio and took a break, and I ran my business by itself. I ran a retail business for the last 15 years, and I took a break from real estate, and then in 2020, of all years, wanted to get back into it, and started looking, and found an amazing hotel to convert into multifamily. I got that closed in 2021, and then just closed on another one on Halloween this year. So we're gonna do the same thing. It was 150-unit hotel, and we're turning it into a 142-unit apartment building.
Slocomb Reed: Andrea, what appeals to you about this niche of converting hospitality into long-term rentals?
Andrea Foley: With our experience in single-family rentals and flipping, we knew what the returns were, we knew what we could expect, and it just didn't seem feasible to grow that in a quick way, like we wanted to. We wanted to build wealth, we wanted to use this to our advantage... So when I started underwriting hotels and converting them, their market value as a hotel - and typically, we're looking for mom and pop hotels. So we're not talking about Hiltons or the Westins; we're talking about smaller towns, the mom and pops have owned them for years, and there's no flag on them, and there's just so much competition for them that they're just not making any money.
So they have a lower market value, so then for us, our acquisition cost is extremely lower than what your standard multifamily acquisition cost is. So when you couple that with the redevelopment costs, it ends up being way more affordable than either buying an existing multifamily or building a brand new multifamily. And brand new builds would be $200,000 a unit, at least here in Omaha that's about what they're running... Whereas we're purchasing and completely remodeling and redeveloping ground-up for $50,000 a unit. And then they're worth 100k, 150k a unit. So there's just so much more value-add in this type of property, from what we've underwrote, than in standard multifamily.
Slocomb Reed: That's really interesting, Andrea. Let me see if I can - not really summarize what you just said, but let me tell you what I'm hearing while you're talking, and then you can tell me what I got right and what I got wrong for the sake of our listeners. Mom and pop hotels, not the ones with a flag on them, like you said, because of the competition they face in the hospitality space, they are generally underperforming assets, or at least you're targeting the ones that are underperforming; in the hospitality space, your value is so closely linked to your NOI that an underperforming hotel can be purchased at a steeper discount than an underperforming apartment building, because long-term residential apartment buildings tend to be closer-tied to the cap rates of the market of the moment, but also the geographic market where they're found. So you're able, by identifying underperforming mom and pop hotels, you're finding the opportunity to buy at a steeper discount, and get the same result of a solid cashflow in a long-term rental apartment building. Am I on the right page here?
Andrea Foley: Yeah, they typically tend to be even way better than existing multifamily.
Slocomb Reed: How so?
Andrea Foley: Because the market value of a hotel is so low, especially one that's underperforming... And then when you're adding in rentals, I'm sure you know that banks now - they look at multifamily and hospitality completely different, as far as underwriting and valuing them. So when they're switching their valuation from the way they value hospitality to the way they value multifamily, you're immediately getting hundreds of thousands of value without doing anything; just merely the fact that you're switching industries adds value. Obviously, you have to do the right things to make it function as a multifamily. And that's where the struggle comes in, that's where it's a challenge for a lot of people, and why there is a barrier to entry, is with all the entitlements that you have to go through, getting everything up to code, and just making sure it actually works, and that you actually have the demand for smaller apartments in that community... But just you're skyrocketing the value.
Our first one, we've had a purchase price of $700,000, and it just got appraised a year later, and it appraised at 2.65 million. So the value-add - we only put in $400,000 and we just almost tripled the value of that property... And merely we basically just switched it from a hotel to multifamily and upgraded it.
Slocomb Reed: Andrea, in this example of spending 1.1, the 700k to buy and the 400k to renovate, and ending up with a $2.8 million asset... First, let me ask, when did you buy this, and when was it appraised at 2.8?
Andrea Foley: Yeah, we just purchased it in last July, 2021, and we finished construction May of 2022, and then we had it appraised in August of 2022.
Slocomb Reed: Gotcha. So it was down for almost a year.
Andrea Foley: No. So when we purchased this particular property, there were already people living in it, like it was an apartment. So we were able to actually keep about 30% of the property occupied during construction. So we just put them into leases, which they were not in, and then we were able to keep them at a lower rate than what our final rent rate would be, during the entire construction process. Because they were already living there. That's how high the demand was in this community.
Slocomb Reed: So this is a fairly contemporary deal... Can you tell us, Andrea, what you think are the primary factors to that valuation of 2.8? I know you're changing asset classes, and changing asset classes is a big deal here. How many units were in this property?
Andrea Foley: That one's smaller and it only has 32.
Slocomb Reed: Okay, gotcha. So at 2.8 you're coming in close to 100k a door, whereas you purchased it for under 25 a door?
Andrea Foley: Yeah.
Slocomb Reed: Gotcha. So what are the primary factors leading to that valuation then? Is it simply that you changed the asset classes? Where is the friction in this business model?
Andrea Foley: The biggest value with switching asset classes is taking a volatile, transient asset class like hospitality, and putting long-term 12-month leases in place. And those leases alone are your value to an appraiser. Those are where the biggest shift in the value-add happens with these conversions. So definitely, that is the biggest part of why taking it from a hotel to an apartment makes such a big difference compared to multifamily, doing some value-add, and then increasing the value. That's why we can increase the value so dramatically, it's mainly because there are no leases in place, and now there are. I know that's an oversimplified example of it, but that's a big, big part of it.
Slocomb Reed: Well, you also said that getting through the entitlement process can be complicated... Do you have to get a new certificate of occupancy? How involved -- and I know that this will be market by market, state by state... How involved is Omaha or your regional authority in inspecting the property, getting you a certificate of occupancy to treat it like a long-term rental space?
Andrea Foley: Yeah, it is gonna definitely vary per city. Our first one's actually out in Colorado, so we don't have any properties in our hometown of Omaha, Nebraska. Well, we have one Airbnb, but that's all we have here. And then our second one's down in Branson, Missouri. So we have two very different regions, two very different cities... And even though both cities are about the same size and population, it all depends on infrastructure that the city has, who's running things, what they want to see, how many committees they have to take it to... So it's really dependent on that.
Our first project, it was basically one guy who made all the decisions for us. So every time we had a question, he'd come over to the property, we'd walk him through things, and he'd let us know what the expectation was, and ultimately it was his call; he didn't have to go through all these different committees and get approvals. And then Branson, it's been a different experience. There's a lot more -- I don't want to say red tape, but there's just a lot more people involved in that city, even though they're the exact same size.
So yeah, you have to look at zoning, obviously code upgrades, parking, density... And there have been plenty that I've underwritten that won't work, because hotels don't typically have the same density requirements as multifamily... So depending on if they'll give you a variance on that, you might not be able to make it work. Because some of these, if you have to combine every single room with the one next to it, you're cutting your unit count in half, and then you do your underwriting and it just doesn't work anymore. But if you had to do that, for the density requirements, and the city's not willing to work with you, then it's a no-go. We've ran into that, as well. So it's definitely kind of that first step, is making sure something like parking doesn't hold you up, or density, or zoning, or there might be different variances that you have to get from that particular city, or county, if it's outside of city limits.
Slocomb Reed: How many different markets are you looking for these deals in, Andrea?
Andrea Foley: So we were kind of looking all over the country originally, and then we've decided to really focus on the Midwest, so that we can build our team moving forward to stay together within this region. And I just say Midwest, so we're talking Missouri, Colorado, up to Minnesota, over to Ohio, kind of that whole collection of states. For us, if we can drive there in a day, then it's a good city to look at.
Slocomb Reed: That is a whole lot of local authorities though that you might have to navigate... So let's say you get a hold of what might look like a deal. Can you talk us through what your due diligence process looks like? And I really want to segment this question. How much do you need to know before you write your offer, or before you're willing to sign a contract, and then what does your process look like due diligence-wise between contract and close?
Andrea Foley: Well, I think comfort level is what determines how much you have to know before you'll close... But for me, I want to make sure that the city is on board with every potential impedance to making the conversion. So I want to make sure that they will agree to zoning changes if they're necessary, that we're getting approval on the density, we're getting approval on the parking requirements... Just covering all the bases of what they're going to say, "Well, this is what you have to have", and then making sure it's even possible.
Now, as long as you can get it in writing from the city that "Yes, we'll allow it", to me I think then that would allow you to close still on the property without doing the actual variance yet. I have talked to a couple people that have done these, that they actually got the current owner to allow them to do the variance before they even close on the property. I doubt that's going to be very common; it just depends on how desperate the seller is. But I think you're gonna have to wait until you close. For us, the ones we've actually purchased, we haven't ran into a ton of need to have those variances in place. They've already agreed to the density, or the parking, or the zoning, or we didn't have to rezone it, before we purchased it. So those are definitely the top three things that can derail a project. So I would want to know for sure and have meetings with the city before I would even come close to closing on a property.
Slocomb Reed: Can you give us that list of the top three things again?
Andrea Foley: Yeah. It would be zoning, whether the current zoning allows for multifamily. Parking requirements... Because if they don't have the parking for what multifamily parking requirements are, then you -- can you add parking? Can you restripe? Can you pour a parking lot? What's that going to look like, or will they give you a variance? And then density requirements... This is probably going to be the biggest one, and this one's the one that shut us down before looking at potential properties during the due diligence process, of how many units can you have in multifamily, in a square mile, or whatever their measurement is. So those are going to be your top three things to make sure that the city approves.
Break: [00:15:58.12] to [00:17:59.06]
Slocomb Reed: One more question and I want to transition our conversation a little bit, Andrea. I am an apartment owner-operator in Cincinnati, Ohio. A little bit more about me in a moment, but coming from my apartments background, having never done what you're doing, but having commercial apartment experience, the other big question for me here is what does your financing look like, or how are you funding these deals?
Andrea Foley: I think that's a little trickier. For us, it's been finding local banks that truly understand the demand in that market for housing, and they're willing to fight for you because of how bad that community needs it. And then it's a construction loan. So it's a purchase the property and get the construction loan all bundled into one. So the financing on these is a lot harder in terms of we have to get all of our bids, all of our quotes, the entire projects lined up, figured out, drawn out for the bank before we can even close on the property. So there's a lot more to it than just some standard value-add that you would with a typical multifamily. So there's just a lot more than the bank wants to see. But yeah, it is a construction loan, and then they'll convert it to permanent financing once the construction period is over.
Slocomb Reed: And you focus on local lenders who have a feeling for the demand in the area. I imagine you do a great job of making that narrative sound compelling when you're telling your story with banks... Andrea, last question before we transition - how long is your due diligence process, typically? How long from contract to close?
Andrea Foley: Yeah, I would say the last two have been about four months. Ideally, depending on the size of the property, if it is larger, five to six months would probably be better. This last one was pretty tight. It's a larger property, so we actually closed on just the building itself in four months, just to get the deal done, and then now we're closing on the construction loan separate. So we kind of have to work it however it works... But yeah, six months would be ideal for a larger project like this. Three to four months would be fine for [unintelligible 00:20:16.27] I would say.
Slocomb Reed: Three to four months. Gotcha. Andrea, like I was saying before, I'm in apartments guy in Cincinnati, Ohio. Let's pretend for the sake of conversation that I understand all things apartments, and I understand all things Cincinnati. I want to get started doing what you do; this sounds really compelling. I want to find my $1.1 million investment that I can turn into 2.8 in just over a year. How should I get started? What's the best way for me and our listeners to dive into what you're doing where we are?
Andrea Foley: The simplest way to get started is start getting on all the hospitality brokers email lists. So I do not receive any multifamily lists from brokers, I only receive hospitality. It's a completely different market, so you're going to be getting properties daily for you to underwrite and check out. Now, if it's one market in particular, I'm sure there's one to two local agents that you could really work with, and hone in what's going on with the hospitality, but I've also found in the hospitality market they don't typically use local agents, which is interesting. So they'll use a Marcus & Millichap, and those agents have never even been to the property, and they get the listing. So that's why I'm on national brokers' lists for hospitality.
I would say, getting those and just start playing with the numbers and underwriting them to see if it makes sense, and obviously, knowing your own market, putting in your rent numbers, putting in what you think you can get, and just starting that due diligence, just your pro forma; starting with a pro forma and see if it even makes sense, knowing that you're going to have to add anywhere from 15k to 50k in upgrades to it, depending on what the city's gonna require.
Slocomb Reed: That makes a lot of sense, and I've done this process before with other asset classes, non hospitality, where I'm pretty good at one thing, and I think about branching out into another asset class within commercial real estate, and I started getting in front of deals and trying to envision what that deal would look like -- envisioning with a spreadsheet, mostly...
Andrea Foley: Yes... [laughs]
Slocomb Reed: When you're analyzing deals that come to you from brokers, what are the questions that you're asking?
Andrea Foley: Obviously, I like the ones that don't have a flag; I really like ones that are exterior corridor, meaning you go into them from the outside, it's not an internal building. I think those feel more like a hotel, when you're going inside, and then going into the hotel rooms. Not to say that I wouldn't do one, I just haven't done one yet. I think those are harder to make them look not like a hotel.
So I do like the exterior corridor ones, if possible. And then definitely unit size. So if you're looking at one, you can figure out the rough math; if the building is 50,000 square feet, and it has X amount of units, you can do some math and get a good idea of what you think each unit size might be... Because most of the brokers don't put that in the OM. So it's information you've got to find out for yourself or just guess on it. So just doing simple math like that. Because if they're under 250 square foot a room, or even under 300, you're gonna have to combine some rooms. So then it really does take that, "Oh, this is a hotel that has 100 keys", in reality it might only be 50, because the rooms are like 200 square feet. So if that's the case, you're going to have to combine them. So then if it's only 50 rooms, your quick pro forma doesn't make sense for what you could charge for rent.
Slocomb Reed: Do your pro forma for what you can charge for rents. Do you have a good rule of thumb or some good metrics for penciling out a deal at the beginning on the cost for the kind of work that will be necessary for getting through zoning and entitlements?
Andrea Foley: I would say that's the hardest part of all of this, because it is so incredibly variable. So the cost to get through just the zoning - that doesn't really cost you anything, at least not up front. You can start those conversations and know what you're gonna get into, obviously, for free. But the harder part to determine -- if you know what you're looking at, you can determine rents, talk to some property managers... But it's really going to be the construction costs, because you can kind of count on the municipality requiring a sprinkler system. So if your building already has it, that right there is going to save you hundreds of 1000s of dollars. So that can be a real deal-breaker there. So finding out if it already has them, and if it doesn't, trying to get an estimate on that, because that's going to be one of your biggest expenses, along with electrical upgrades and plumbing upgrades. Electrical is going to be the biggest thing, because we're adding kitchens to these. So you have to have a whole new set of electrical for the power that a fridge pulls, the power that a cooktop pulls, the power that a regular microwave pulls... Most hotels are just set up with a mini fridge and a countertop microwave, so they just don't have the capacity to run what it takes to run an actual kitchenette.
So really, if you understand construction, and you feel competent, you could roughly pencil in numbers on each aspect of -- almost like a new build. So break it down to almost every component of a new build, and see the property, spend the money to go there, see the property, what you think needs to be done cosmetically, and then run your numbers. So that's kind of what we do, is "Okay, let's roughly pencil in these numbers and see what we think it's going to cost per unit for plumbing. They all need new toilets. What's that gonna cost? They all need new light fixtures. What's that gonna cost?" and breaking it down. So that's the hardest part of budgeting and moving forward. So if you can do that, and it's still looking really good, then it's time to move forward, for sure.
Slocomb Reed: Skills that would translate well into what you're doing, understanding how to navigate government authorities, and understanding construction, and how to project rehab costs. That makes a lot of sense. Andrea, are you ready for the best ever lightning round?
Andrea Foley: Yeah, let's do it.
Slocomb Reed: Awesome. What is the best ever book you recently read?
Andrea Foley: Recently, I would say "Never split the difference." I just finally read that one. And even though it's a negotiation book, it's like a life skills book. It's really good. So if you haven't checked that one out yet, if it's on your wish list, I would highly recommend getting it done.
Slocomb Reed: Yes, that's a great book. Chris Voss is an excellent author. What is your best ever way to give back?
Andrea Foley: I actually started building into our underwriting and our pro forma a 1% giving fund for the community. So out of our cash distributions, we will actually take 1% of those distributions first, and donate them to local charities for whatever community that we're in for our projects, and then do the distribution. So we're very upfront about it with our investors, and wanting to know -- if we're getting three times our money back on this investment, I think it's okay to donate to the local community before we do that.
Slocomb Reed: That makes a lot of sense. That's awesome. Andrea, thus far with your hospitality conversion deals, what is the biggest mistake you've made, and the best ever lesson that resulted from it?
Andrea Foley: The biggest mistake... Hiring a residential contractor for a job like this. We thought a custom homebuilder who had done this for years and years would be capable of running a project like this, and we've found out pretty quickly it does not work that way. So we had to fire him, hire a new contractor who understood commercial construction, and that every day we had a unit down it was costing us money... Whereas residential contractors - they're working with people who they know they'll wait for them, because it's more of an emotional build... Whereas for us it's all money.
Slocomb Reed: Meticulous detail, and... Yeah.
Andrea Foley: Yeah. So knowing they can actually handle the capacity that you're about to present to them. I think that's the biggest mistake that we learned from.
Slocomb Reed: The lesson being hire the right contractor for the job and the style of job, so that when you're focused on your dollars, you know, you're working with a contractor who's getting your units online quickly. That makes a lot of sense. Andrea, what is your best ever advice?
Andrea Foley: Oh... I would say let your faith be bigger than your fear. If something new scares you and you feel you do all the things that make sense to underwrite it and evaluate it and it just looks awesome and you think you can do it, then do it.
Slocomb Reed: Awesome. Thank you, Andrea. Best Ever listeners, thank you as well for tuning in. If you've gained value from this conversation about success in hospitality conversions to apartment buildings, please do subscribe to our show. Leave us a five-star review and share this was a friend who may be as interested as I am now getting into this investing strategy. Thank you, and have a best ever day.
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