How to Turn Motels into Multifamily Investment Properties

That rundown roadside motel you drive past every day might be more than just an eyesore. For a savvy real estate investor, it could be an incredible opportunity.

With a nationwide housing shortage that has reached unprecedented levels, cities and states are scrambling for creative solutions. Hotel-to-apartment conversions may offer real estate investors (REIs) a chance to combat this problem while potentially building significant wealth.

This niche of adaptive reuse is gaining serious momentum, with a surge of interest from experienced real estate investors looking to diversify their portfolio of multifamily properties.

One Missouri real estate investor shared on Reddit how they converted a 43-bed hotel with zero down payment, creating 42 rooms of affordable housing ($850/month/room) that was instantly leased and now receives 12 calls from potential renters weekly. 

But while the rewards can be high, REIs should understand that a motel to multifamily conversion is a high-stakes process that requires construction expertise, financial acumen, and the ability to navigate regulatory hurdles. So this strategy is best suited for experienced real estate investors. 

In this guide, you’ll get the step-by-step playbook you need to navigate this complex but potentially rewarding real estate investment strategy.

What is a motel-to-multifamily conversion?

At its core, a motel-to-multifamily conversion is a strategic repositioning of an asset. You are re-engineering a motel or hotel designed for transient guests into an apartment complex for permanent, long-term residents. This typically involves significant real estate renovation and reconstruction work, like the addition of new spaces (e.g. kitchens) and adherence to residential building codes.  

This isn’t a new strategy. During the COVID-19 pandemic, local jurisdictions from Missouri to New York converted vacant hotels into affordable housing to address the urgent housing shortage without having to build from the ground-up.

This strategy is catching on among real estate investors, since it sometimes achieves faster project delivery with lower costs compared to new construction projects. According to Multifamily Dive, hotel conversions now represent the second largest portion (34,000 out of 151,000) of ongoing adaptive reuse projects.

However, it’s a classic risk-reward scenario. Real estate investors that take on hotel-to-apartment conversion projects should be prepared to face hurdles with zoning laws and utility upgrades. Still, for REIs with construction experience and a well-mapped strategy, motel to multifamily conversions could present significant financial and logistical upsides.

Step 1 – Assessing feasibility: Is your motel a good candidate?

How do you know if a motel is a good candidate for conversion? You need to evaluate its potential both from a physical and market standpoint. Most hotel rooms range from 300 to 500 square feet, which is smaller than typical apartments. So you might need to combine or expand rooms to create functional units that meet market demands. 

You could save yourself a lot of time, money, and headaches by focusing your search on extended-stay hotels, which are already structurally suited for residential living. As noted in NAR hotel conversion case studies, their larger rooms and existing kitchenettes could significantly reduce renovation costs and complexity.

Location is critical. Is there solid local demand for apartment units in the area? And how close is the property to transit, jobs, and amenities? A good location supports strong rental demand, which could help ensure your investment is successful.

But a perfect building in a great location could still be a non-starter if you can’t get through the government’s red tape. 

Understand that not every parcel allows multifamily use, and the rezoning or permitting process can be lengthy and complex. Hence, the most crucial due diligence step when undertaking a motel to multifamily conversion project is investigating local zoning and permitting laws. This might save you headaches later.

The next due diligence step is a thorough inspection of the building’s physical systems, like plumbing, electrical systems, fire safety measures, and ADA compliance. Making upgrades to these systems is often very expensive and could gulp a big part of your project’s budget.

Once you've found a property with the right bones and done your due diligence, you've won the first battle. The next is often the most daunting as it has the power to stop your real estate development project dead in its tracks before you even begin: the bureaucratic process of turning a commercial property into a residential one.

Step 2 - Zoning, codes, and local regulations

Real estate investors should consider approaching zoning and regulations with caution, as this is the stage where some conversion deals can die. For example, if the property’s zoning flatly prohibits residential use, you might have to wait up to 12 months to get it rezoned. This alone could completely derail your plan.

But even with the right zoning, you might still have to deal with a host of complex and costly code updates that are triggered by changing the building’s use from commercial to residential. 

Common code upgrades for hotel-to-apartment conversion projects include occupancy caps, parking minimums, and fire and safety upgrades. Investors should consider budgeting for these things. 

The regulatory compliance involved can be more or less strict depending on your city and local government. A detailed analysis by NYU’s Furman Center on New York City conversions highlights the challenge of commercial-to-residential conversions in the city.

In New York City, you may face hurdles like mandatory light and air requirements for every habitable room, accessibility requirements for people with disabilities (while hotels already meet certain accessibility standards, conversion to multifamily housing introduces new accessibility rules), and strict residential fire code updates. 

These seemingly small rules can have massive financial and logistical consequences that could determine the feasibility of your project.

The good news is, some municipalities offer incentives or “fast-track” programs to encourage affordable housing development. So if you plan to undertake this type of real estate development project, look for cities that offer these kinds of incentives, as their cooperation could be the key to your project’s success.

Also, you don’t need to navigate the bureaucratic maze of a conversion project alone. Consider engaging with city planners and experienced legal counsel to determine a clear path to getting the approval you need.

Step 3 – Underwriting the conversion: the real costs

Underestimating fundamental MEP (Mechanical, Electrical, Plumbing) costs is the single biggest financial mistake you could make when budgeting for a motel to multifamily conversion.

For each unit, the major expenses you have to budget for include new plumbing for kitchens equipped with sinks and dishwashers, a new electrical panel and meter (each unit), and proper ventilation for gas stoves. You may also have to upgrade the fire suppression systems to comply with multifamily building codes. 

You should consider creating a detailed pro-forma that includes these hidden costs and also build a robust buffer into your plans from the beginning. 

This not only helps avoid costly surprises, but is essential for securing financing. Lenders want to see precise loan-to-cost calculations and detailed budgets before approving financing. 

Step 4 - Layouts, amenities, and tenant appeal

During the reconstruction phase, your goal should be to create functional units that appeal to tenants while keeping real estate renovation costs and complexity as low as possible. 

So, how do you achieve this? Many architects and developers recommend the “two-rooms-into-one” approach, where you combine two hotel rooms into a single one-bedroom unit to save on reconstruction costs.

Also consider creatively repurposing common areas. For example, upgrading a former lobby into a resident lounge or co-working space could help build a sense of community that will attract and retain long-term tenants.

With that said, understanding your target market will serve as a strategic filter for every design choice you make. 

For example, a project targeting workforce housing might need to prioritize affordability and function, while student housing or one aimed at young professionals in a high-cost area may focus on high-end finishes for smaller “micro-units.”

Investors should clearly define who they are building for, whether it's students, young professionals, seniors, low-income residents, or the workforce, as this will dictate everything from the unit size to the quality of finishes.

Step 5 - Financing your project

A hotel-to-apartment conversion project requires the ability to build a sophisticated, layered financing strategy from multiple sources. Investors can consider traditional bank loans, bridge loans or private financing options.

Many real estate developers also tap into local and federal incentives like the Low Income Housing Tax Credit (LIHTC) to improve project viability and subsidize some of their units. To secure these government incentives, you’ll often need a proven track record, a meticulously detailed plan, and well, lots of patience.

Being accurate and transparent in your pro-forma boosts lender confidence and may improve your chances of securing financing. 

You should also be financially prepared to contribute a portion of the project's total cost—sometimes 25% or more—out of your own pocket, as lenders generally want loan-to-cost (LTC) ratios around 75%.

Step 6: The management model – beyond collecting rent

If a project serves low-income tenants, real estate investors should view themselves not just as a landlord but also a community builder bolstering the local community. 

The REI who shared his hotel conversion to affordable housing story on Reddit (the project was called “Anchor House of Warren County”) highlighted partnerships with local community groups for attracting new tenants 

"There was a local workforce grant that has on-site job training and is connecting people with entry jobs. It’s paying $12 an hour… community meals are every Thursday, with big monthly celebrations for birthdays during one or two weekends a month."

Similarly, if the property is focusing on student housing, consider partnering with the nearby university to offer academic support programs like study skills workshops. 

If you’re focusing on young professionals, consider partnering with non-profits like Hopeworks, which trains young adults in skills like web development and helps them build professional skills. 

By providing these resources for tenants, REIs could help make a direct impact on the community and potentially increase long-term profitability of their investment property.

Best practices

Before moving forward, real estate investors should consider keeping three things in mind:

1. This strategy is not for everyone. These projects are best suited to experienced real estate developers. If you don’t have strong rehab and complex project experience, consider starting with a smaller-scale project, such as a fix-and-flip or a duplex project. 
2. Work with proven partners. The unique architectural and operational challenges involved require a team with a deep multifamily track record.
3. Run the numbers. Whether you plan to hold for cash flow or sell at stabilization and convert another property, your numbers should support a clear and profitable investment strategy.

Conclusion

Motel-to-multifamily conversion projects aren’t for real estate investors with low risk appetites. The complexity involved, with potential zoning battles and budget overruns, can be a challenge for even experienced real estate investors. 

But for the prepared REI who meticulously vets properties, understands local regulations, budgets for the unexpected, and plans for the human element of management, it could be a “home run.”

Found a property that might be a good fit for a conversion? Don’t let financing hold you back. Start your application.

FAQs

1. Can you turn a hotel into apartments?

Yes. Converting a hotel into apartments is definitely possible. But success would likely depend on three things: finding the right type of property (like an extended-stay hotel), having a skilled team to handle legal and renovation challenges, and securing financing for the project.

2. What are the pros and cons of converting motels to multifamily properties?

Pros:

• Faster delivery of units than ground-up construction.
• Potential for lower per-unit costs.
• Addresses housing shortages by reusing existing buildings.

Cons:

• You may face significant zoning and regulatory hurdles.
• High costs for electrical and plumbing upgrades.
• Difficult to finance with traditional loans.