January 16, 2022

JF2693: The Secret Strategy for Turning Motels into Profitable Long-Term Housing with Andrew LeBaron

Andrew LeBaron decided he needed to niche down his real estate strategy. That’s when he had the idea to convert motels into long-term stays. Varying slightly from an apartment, Andrew’s motel conversion strategy allows him to cut certain costs and hurdles that typically accompany multifamily properties. In this episode, Andrew walks through the benefits of long-term stays over apartments, the budget differences between motels and multifamily, and how he’s created his conversion strategy.

Andrew LeBaron | Real Estate Background

  • Syndicator, Apartment Motel Owner. His business model is reviewing small to midsize motel/hotel assets, underwriting the deal, purchasing, converting, and refinancing.
  • Portfolio: GP on motel assets: 42-unit, 13-unit, 22-unit, and an 18-unit.
  • Upcoming deal for a 129-unit Motel that he will convert to apartments.
  • Based in: Phoenix, AZ
  • Say hi to him at: buymoretime.com | Facebook and Twitter: @andrewinvestor
  • Best Ever Book: Raising Capital for Real Estate by Hunter Thompson

Click here to know more about our sponsors:

Deal Maker Mentoring

Deal Maker Mentoring






Follow Up Boss


Follow Up Boss


Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed. This is the world’s longest-running daily real estate investing podcast. Today we have Andrew LeBaron with us. Andrew, how are you doing?

Andrew LeBaron: Excellent, man. How are you?

Slocomb Reed: Doing great. Good to be here. I’m excited about this interview. Andrew is a syndicator and apartment, motel owner. His business model is reviewing small to mid-sized motel and hotel assets, underwriting the deal, purchasing, converting, and refinancing. In his current portfolio, he’s the GP on 42, 13, 22, and 18-unit motel assets. He’s got an upcoming deal for a 129-unit motel that he will convert into apartments. He’s based in Phoenix, Arizona, doing a lot of work in Show Low, Arizona. What got you into real estate Andrew?

Andrew LeBaron: A long time ago I used to work for Chase Bank. I was in the mortgage department, customer service, making a whopping 40,000 bucks a year… And I took a call from a gentleman who said he needed the payoff quote for 10 of his Santa Monica or SoCal real estate properties. I noticed that his name was not on the loan. Now, he had 10 properties he owned on the deed, but his name was not on the loan. So I thought something fishy was going on. I said, “What’s going on?” He said, “Well, I took over payments on these 10 properties.” And I realized that he only owed a third of the value of the Santa Monica, SoCal properties. So he instantly made 6 million bucks, just about seven years ago, by taking over payments on these properties that were struggling, and then sold them to another investor. And I thought I’m in the wrong niche, I’m in the wrong business; I need to stop doing what I’m doing and learn real estate. That’s when I just started…

Slocomb Reed: Or at least you’re in the wrong seat at that table.

Andrew LeBaron: That’s exactly right.

Slocomb Reed: Gotcha. Now, your niche is motels?

Andrew LeBaron: Yes.

Slocomb Reed: Cool. You convert them… Am I correct in assuming that means that you’re buying properties that are currently operating as motels and then converting them into long-term apartments?

Andrew LeBaron: That’s correct. I source C class, B class motels that could be long-term or apartment assets, and they need to be in areas where housing is needed. It’s an interesting niche, actually. It actually works really well, because there is a huge need for housing. After COVID, a lot of these motel owners took a huge hit. COVID really stymied their business, their operations; they had to shut down — if they had a pool at their motel, they shut that down; if they had continental breakfast, they shut that down. So it really messed up their operations as far as just running it as a motel short term. So I found that opportunity as “Hey, why don’t we pick these up? Why don’t we add some basic needs like kitchenettes, add a stove range top, add a microwave, add a refrigerator? Why don’t we turn these into longer-term stays?” It’s been working really, really well. The price that you pay for a motel and the cap rate that it turns into when you put long-term people in there is wild. Motels are significantly cheaper than apartments.

Slocomb Reed: What is the difference in cap rate there?

Andrew LeBaron: It doesn’t make any sense, honestly… So here’s a good example. If I have a 20-unit in Phoenix or a 20-unit in Arizona, investors are going to purchase these properties at 130,000 to 140,000 bucks a door, which might bring you around a six to 8% cap rate. A 6% to 8% cap rate is a pretty decent target for multifamily. For these motels, what we’re paying for 20 units might be… I paid $690,000 for 22 units, and each unit brings in 1,250 a month. So just outlandish cap rates when it’s all said and done.

Now, cap rate also includes [unintelligible [00:05:02].08] your vacancy rate and capital expenditures or operating expenses, right? We don’t really put much into these buildings. I think it’s just because the market is so hot, we don’t need to, and everybody needs a place to live that’s affordable. We’re hedging alongside inflation, so people don’t even care if there’s a kitchenette; they’ll live there, they’ll live there long-term now. We need to be good stewards of our guests and residents, so we’ll add what we need to add there for people to be comfortable… But I guess that’s the big difference between motels and apartments as far as cap rates.

Slocomb Reed: Andrew, what I think I just heard you say is that you can buy motels in your area for between 30k and 40k a door. If they were traditional apartment buildings, they’d be worth 130k to 140k a door, and you’re not putting all of that much money into converting them. It sounds like a dream come true, right? So what other issues, other hang-ups do you come up against? Do you have any trouble dealing with local government authorities getting certificates of occupancy? Do you have to do that for this kind of conversion?

Andrew LeBaron: You don’t have to do that. Now, we could go down the route of rezoning. In fact, on one we’re about to put under contract – it’s a 129-unit – and that will be converted into 82 units when we’re done, but getting a zoning attorney to zone it multifamily high-density would be wise. In Arizona, we don’t worry about that. As far as we’re concerned, as far as our attorneys are concerned, there’s no issue with having a long-term stay option at a motel acquisition. We don’t have long-term leases; we don’t write leases, these are not lease agreements. We still treat this as a motel, but we allow them to stay on a month-to-month basis. Now, my attorneys have said, if you do introduce a lease agreement, then you are subject to the landlord-tenant act, and you are subject to formal eviction protocols. Right now, we’re not. If you don’t behave, if you don’t pay, you’re out; you’re trespassing. So it avoids eviction orders as well.

Slocomb Reed: Got you.

Break: [00:07:02][00:08:41]

Slocomb Reed: Andrew, I’m hopefully putting myself in the perspective of our Best Ever listeners… Mentally, I’m trying to figure out where are the problems, what issues do you face with this kind of strategy… Because it sounds amazing. I wonder if it’ll work in Cincinnati where I am, because if so, I’m going to go find some motels. But it’s pretty close to a BRRRR model of investing, it sounds like, where you’ve got a cash-out refinance on the back end to get your money out to go buy the next one. Do you come across any issues with the refi? Are appraisers and lenders treating this as an apartment building when you’re done, or are they treating it like a motel that just gets a lower cap rate?

Andrew LeBaron: Yeah, that’s the tricky part. You’re going to get a much better cash-out refi option, even up to 80% LTV, or LTC rather, loan to cost, which is completely different than LTV, as you, I’m sure, are aware, if you do rezone multifamily. If you rezone multifamily, your lenders are going to be happy. They’ll be much happier than if you say “Hey, I’ve got a motel.” You kind of lose them after that.

Where this comes in is you leverage private capital, you leverage fund capital, and you’re able to paint the picture. If you don’t rezone, your exit should still be able to allow you to cash flow, and/or sell, 1031 exchange, liquidate, refinance. Now the refinance, if you don’t rezone, from as far as what I’ve seen, unless there’s a lender out there that wants to help me out, I could use that; the refinance [unintelligible [00:10:15].00] And it’s a commercial loan, it’s around 6%, no cash out option, unless it’s below 50% of appraised value for this specific lender. They’re very conservative, they’re very safe, they’re very cautious. But yeah, hopefully in the future, we find another lender for our partners and it might work out.

Slocomb Reed: I’m trying to wrap my head around the basic numbers of a deal like this. Do you normally acquire between 30k and 40k a door?

Andrew LeBaron: No, it varies. Our best deal is 19,000 bucks a door. The yields per door are not as high, though. Of course, they’re still really decent, it’s still 900 to 950 bucks a month per door on a $19,000 a door, but they fluctuate. The reason why I’m attacking these motels is because — there’s gotta be some room. Now, you said, “Hey, it sounds too good to be true. What’s your problem? What’s the problem child?” Well, I’ll let you know. These aren’t subdivided units, so your utilities are still going to be combined. That’s problematic; some people don’t like that. I don’t mind it, as long as the name of the game has cash flow and equity. If I’m locking in equity and it has a really decent yield, then I’m not too worried about it. Of course, it helps me out too, because most investors that are in the multifamily – they want that subdivision big time. They want those utilities to be divided, electric, sewer, water, trash, and everything else. I don’t care; there’s less competition that way. I just wrap it all inside of one fee when they pay month to month.

Slocomb Reed: Did you ballpark how much you’re paying in rehab to put in these kitchenettes, to do the things you need to do to attract long-term — well, I guess we’re not calling them tenants, are we? Because they’re not on a lease. Long-term, month-to-month guests. Generally speaking, what does that renovation cost per door?

Andrew LeBaron: $8,000 to $14,000, depending on what the bid is. Honestly, we’re just leveraging the back bathroom wall. If you close your eyes and visualize this right now, you walk into a motel room, you see a bed, you see a TV, and you go to the far back – and hopefully, if these are larger motel rooms, you’ve got a bathroom; there’s a back wall that you tap into, and you got your drain, you’ve got your water supply. So you’re going to put in your bottom cabinets, you’re going to put in a small slim-line RV style dishwasher, you’re going to put a small 20-inch range stove… If you’re going to add a range stove, you need to add 220 electrical, which isn’t a huge issue. We could do it for pretty cheap, now we’ve done this for a little bit… You don’t have to do that either. You could say, “Look, there are no ovens in here, but there’s a flat top.”

We don’t need venting for a flat top. If you need venting for a flat top in a specific area, you just use a microwave hood. You put the microwave above the flat top, and they have those installed vent hood microwave combos, you just vent it up through the attic, to the roof. But that’s pretty much it, that’s all you’re doing, you’re creating studios.

Now you can combine rooms and you kind of have to evaluate, “Okay, if I combine two rooms to make an official one bed, one bath, or I can combine three rooms together and make it a two bed, two bath. Am I really going to get the bang for my buck? Is my IRR going to turn out better if I combine them or if I leave them as is? I think a healthy mix is wise, to have a healthy mix of all of them. Plus, it gives you a better resale value when you want to liquidate.

Slocomb Reed: It gives you a better resale value to have some of those one and two beds, as well as studios?

Andrew LeBaron: Correct.

Slocomb Reed: I assume that three studios would gross higher rents than one two-bedroom apartment. Am I wrong?

Andrew LeBaron: No, you’re correct. The only reason why we would do a combination is just diversification. You have different types of demographics of tenants and residents. Some of my partners really like the fact that you have a small family in a two bed two bath, then you have a bunch of single people in all the other studios. We actually separate them, we make sure that the families are maybe in one area, and the studios are in a different area. It’s an ecosystem. When you have an apartment complex or you have a multifamily, it’s an ecosystem. You’ve got to really think about that planning, and how you want people to interact with each other.

Slocomb Reed: Speaking of an ecosystem, there are very few investors operating at a high level like you, Andrew, who can say that they’re creating affordable housing. And there’s definitely a high demand for affordable housing right now, because that’s not what gets built ground-up. So finding opportunities like this, buying motels, converting them into what can be affordable long-term housing, there’s a definite need there, and I can see where it would be profitable. Coming back to me wrapping my head around the general numbers and bringing our listeners along with me… Your acquisition, let’s say it averages around 30k to 40k a door, and let’s say your renovation averages another 10k to 15k, you’re at 45k to 55k a door, an acquisition. And then assuming — let’s just talk about the studios, we’re not talking about combining units. The average rents that you’re seeing on these studios that you’re all in for 55k or less?

Andrew LeBaron: Yeah, it’s around $1250 a month.

Slocomb Reed: $1250 a month. And are you raising capital to buy these?

Andrew LeBaron: Yes. It’s funny, I’m in a very interesting transition. I recently spoke to Joe about this, too. I am in the transition of building a fund rather than just syndicating each deal one by one. That’s a very funny place to be. I’m re-pitching the same deals over and over again. I do give up equity in a lot of these deals, but the private investors that jump in get really excited when they see the price per door and the yield per property.

Now, you have to remember that I said $1250 a month on the studio, but that includes sewer, water, trash, and electric; it also includes gas. And what’s great, Slocomb, is I don’t compete with other apartments. There is no competing; I’m cheaper than them, and you don’t have to qualify for utilities, because I provide that. It even includes internet and cable. So it’s an all-inclusive price. Most people don’t like the hassle of calling up their cable company, or the internet company, and the utility company; it just takes time.

I also don’t charge deposits. So if it’s $1250 a month, it’s $1250 right off the bat. If you have a pet, there is a pet deposit and there is a pet fee. But I don’t charge one month’s deposit. If I need you out, I call the police and you’re out. I haven’t had to do that yet, but I think people behave much better inside of this type of setup, because they know the ramifications if they don’t comply.

Slocomb Reed: How long have you been doing these motel conversions?

Andrew LeBaron: A little over a year, not even that long.

Slocomb Reed: A little over a year. Okay. This may be a tricky question then, but what is your average length of stay? What’s your average vacancy? How long is it?

Andrew LeBaron: Yeah, that is a weird question, only because each asset is so different, they’re so unique. If I were to put them all together and give an average, I would say it’s under 10% vacancy. And the length of stay, I’d say four months.

Break: [00:17:33][00:20:30]

Slocomb Reed: Your average length of stay is four months. So when someone moves out, how long until you have somebody else in there?

Andrew LeBaron: It’s a line. We pre-sell spots all the time. We say, “We’ll hold it for you. Come on in, take a look.” “Oh, can I come now?” “No, we’re cleaning up. No.” Our management team make sure that there’s a healthy five to 10 people deep of people that want that backup broom when someone’s vacated it.

Slocomb Reed: I get that. One of my apartment buildings is in an area where there just aren’t that many apartments, so we just leave our marketing active year-round to attract people… And just because there’s much greater demand than supply in that area, we can get things filled up pretty quickly. So I’m sure the way that you’re running things, that’s not hardly an issue. Andrew, what is your Best Ever advice?

Andrew LeBaron: Make excellent relationships with sellers, with private money partners, and you’ll be just fine.

Slocomb Reed: Awesome. Well, Andrew, I know you’ve been a guest on this podcast before. Are you ready to go back through the lightning round?

Andrew LeBaron: Yes, let’s do it, man.

Slocomb Reed: Awesome. Let’s do it. Andrew, what is your Best Ever way to give back to the community?

Andrew LeBaron: I like to pick up the phone and just help people out. When they have a question, when they need help, when they say “Hey, I’m struggling to raise private capital, or I’m struggling to find a deal, or I kind of feel like I’m pushing too hard to make this deal work.” I give them my honest opinion and I tell them exactly what I would do. I’m not charging fees for it. Honestly, nothing against people that do that, nothing against people that charge coaching fees, nothing against that, but I’m just trying to help others because I know it’s going to come back. It’s just the law of reciprocity.

Slocomb Reed: Totally. What’s the best book you’ve recently read?

Andrew LeBaron: I really like Hunter Thompson’s book, Raising Private Capital for Real Estate. That’s a really good book. He talks about how the deal should come first, and then the money. That’s always a question. Should the money come first, then the deal? Well, if you have a great deal, great money follows. It doesn’t mean you could put the deal together, it doesn’t mean you really qualified the deal, because there’s talent in there, there really is connectivity and relationships that need to be built… But look and source great deals.

Slocomb Reed: What’s the most money you’ve lost on a deal?

Andrew LeBaron: I bought 45 houses in a portfolio, I paid $5.3 million dollars, and the deal… Get this, this is a great story. The deal was I went to a hard money lender, I [unintelligible [00:23:03].25] all my properties, my duplexes fourplexes, and everything, just to get the hard money loan. This was years ago, about four and a half or five years ago. I liened on my properties, got pretty much a title loan for 5.3 million, bought the 45-house portfolio, and we created a waterfall structure. For Best Ever listeners, that’s if I sell a property, all the proceeds have to go back to the lender first before I get paid. And it was a strict waterfall debt structure. I kept selling all these properties. I was actually wholesaling, not really wholesaling, because I had to close on them. So I bought them, sold them quickly, and I had a balance of $1.8 million left, and 13 properties left. And I undersold so many properties that I had a whopping 1.8 million left I owed the lender before I could make a dime.

The monthly payment on it was like 18k. After four months of paying 18,000 bucks, I just couldn’t do it anymore. I went to the lender; the lender is a friend of mine. I said, “I can’t do this anymore.” He’s like, ”Well, I’ve got to foreclose.” He’s a fund manager, so he says my partners can’t just [unintelligible [00:24:13].16] high and dry. I said, “Well, why don’t we do a deed in lieu?” He’s like, “Yeah, we could do a deed in lieu. That’s totally fine.”

So we do the deed in lieu foreclosure, I give him all the 13 properties back to him, he sells them, makes a profit for him and his investors, so I’m glad and I’m happy for him… I didn’t get any of my properties back that I liened; those were absorbed. So I literally started with zero, and I probably lost three million. That was a really sad story. But in real estate, you can rebound extremely fast.

Slocomb Reed: Tell me about that. Tell me about the most money you’ve made on a deal.

Andrew LeBaron: I’ve made a lot of money on equity that I haven’t realized yet, if that makes sense. We’re all sitting on equity, so I don’t know if that counts… But I’ve made a couple hundred thousand dollars on the flip on a six-plex flip. We bought the six-plex for 60k down, the seller agreed to a 3% interest-only payment, which is five years interest only. I only paid $1,350 a month on the six-plex. Each unit makes around 1,300 bucks a month, and I sold it for 200k more. I shouldn’t have sold it, now that I think about it. It bugs me that I sold it, but I sold it for 200k more just a year later, so I made over $200,000 on a really quick and easy seller carry purchase and sell.

Slocomb Reed: Nice. You’ve had some valleys for sure, but you’ve definitely had some peaks, too. Tell me a little bit about this 129-unit you’ve got coming up.

Andrew LeBaron: So the 129-unit – we are about to lock in a contract; the same owner that sold me the other motels is selling me this one. He’s already on board, we’re good to go. I submitted it just a couple of days ago. It is a 129-unit, 1976 roadway inn, an Econo Lodge. If you’re familiar with Econo Lodge, these are just motels that you see across the US; these are awesome boxes. This one’s in Phoenix, it’s two miles away from a 750-million-dollar development that investors are going to build. So I’m going to undercut their rates. Typically, when I source a deal, I look for activity in the area, and where I can kind of slide in, and be very competitive if this is a great deal. So we’re going to condense the 129 units to 82 units, we’re going to have 18 two-bedroom, two baths, 15 one bed, one bath, and 45 studios. We’re going to take the office, we’re going to blow it out, we’re going to make the office two-story, with a business lounge and amenity center. It’s going to have a hot tub and gym.

On the second floor, it’s going to have three residences with exterior stairs that get to the second floor, and then there’s going to be a rooftop lounge. We’re adding a dog park, which is crazy… One of my investors is like, “Dude, we need to add a dog park.” I’m like, “Why?” He’s like, “I’m telling you, people love their dogs. They travel with their dogs, they live with their dogs, and they need a dog park. But you won’t compete.” I’m like, “Okay. We’re going to do a dog park.”

But yeah, it’s an exciting deal. The total acquisition is five million; renovation cost and reposition all-in is close to four million, which includes a rezoning of about 100k rezoning. The rezoning should bring us to a valuation of 15 million when we complete it. So 82 apartments in Phoenix, that’s the comparable value after the appraised value. That’s a prospective appraisal, by the way; that’s not set in stone. But anywhere from conservatively 12 and a half to 15 million.

Slocomb Reed: Got you. And what does that look like? I assume that is planning for a five-year hold. What kind of return are you giving investors on that?

Andrew LeBaron: Yeah. It’s going to be 8% pref; I charge a 2% catch-up, and it’s going to be a 60/40 split on the back end. It’s an eight-year fund. But the exit on this particular one, hopefully, it’s going to be within five years. The goal is to sell and 1031 exchange into another asset.

Slocomb Reed: Well, this hasn’t been very lightning-y of a lightning round…

Andrew LeBaron: Sorry about that. [laughs]

Slocomb Reed: No, that’s fine. I’m the one who’s supposed to be in control, asking the questions. Where can people get in touch with you?

Andrew LeBaron: You can find me on Facebook. Just search Andrew LeBaron, I show up, I’m wearing a white shirt and tie. I probably should be more realistic, I don’t even wear a white shirt and tie usually. I’m on Facebook, or you can email me andrew@buymoretime.com.

Slocomb Reed: Awesome. Well, thank you for tuning in, Best Ever listeners. If you enjoyed this episode, be sure to leave us a five-star review and share this episode with someone you think could benefit from the best real estate investing advice ever. Don’t forget to follow and subscribe to our podcast so you don’t miss anything. Thank you and have a Best Ever day.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

    Get More CRE Investing Tips Right to Your Inbox

    Get exclusive commercial real estate investing tips from industry experts, tailored for you CRE news, the latest videos, and more - right to your inbox weekly.