Exploring the World of Motels and Inns - Part 1 | Ep 7

James: Welcome to the Furlo Capital Real Estate Podcast, where we dive into the intricacies of passive real estate investing. And our mission is to equip people to invest wisely in both property and residence so that we can improve our wealth and build housing. No, how's that? So we can build our wealth and improve housing together.

Yeah, that's it. I got it that time. I'm James and this is my wife, Jessi. Yeah. Nothing like improving wealth and building housing. I guess that's a thing, but that's development, but that's not what we're about. We're more about classic real estate investing.

Jessi: I see what you did there. Yeah. Building wealth and improving housing.

James: Yeah. That's how it's supposed to say.

Jessi: Improving wealth and building house. Yeah,

James: yeah. So that's a very different podcast, though, for the record, or interestingly today or this afternoon, I got to spend some time doing some property maintenance, which isn't building, but definitely did some building. It was kind of interesting two things specifically.

The first one was it was super easy. I had a roof that some shingles had blown off of because of a recent wind storm. And so I just had to go up and They were just, they were just sitting there up on top and they were fully intact. They were in good shape. It was kind of weird that they popped off.

Very strange. Makes me honestly a little concerned. Like, how is these not tacked down? Whatever. I happen to have some roofing nails with me, so I just went put them all down and it was good to go. And then the second one was probably more interesting. So my tenant, he's on HUD and so they get to participate in the government paying for some of his rent.

And part of what they do with that is they do an annual inspection. And so screening for someone who's on HUD is fairly easy, like you don't have to worry about what you have to worry less about the income side, but all the other stuff still matters. But then again, like that, the unit itself has to qualify and there are certain.

Restrictions. And a lot of them, like they make sense. There has to be a fire alarm somewhere in the building or in certain spots. Sure. There has to be running water, that

Jessi: kind of stuff. There's like minimum standards for making a

James: place livable. Yeah. Yeah, exactly. That's what HUD has decided. Interesting one is that there needs to be proper ventilation in a bathroom, which could either be a window or a fan.

And in our apartment building, there actually are a couple of bathrooms that are in the middle that don't have proper ventilation. So even though a person might qualify, the unit itself doesn't.

Jessi: Interesting. Yeah. So they couldn't rent that particular unit. Correct. So, why, if HUD has decided this is what makes a unit livable, why?

Do units exist that don't

James: meet that criteria? Oh, cause when this one was built, it was before all that happened, essentially. Yeah, and why someone hasn't added a fan because it's, well, second floor in the first floor in the middle. Yeah, it's just super difficult. There's nowhere to vent it out. Because ideally you have some sort of ventilation because the water causes a problem in it and it does for us and it has to have regular cleaning.

But yeah, super fascinating. Anyways, they do these, they do these inspections and this particular and one of the When they do the inspection, they send you a letter. Everything is like on paper letter. They don't do anything over email. It's just, it's documented. It's classic type of stuff. Government system?

Yeah. And so I got this letter that says, Hey, we did the inspection. There are a couple things that need to be fixed. One of them happened to be They're like, he needs a new fire alarm. I was like, oh, okay, good to know. And like, and his heater doesn't, it's not, it's not good. I was like, oh, interesting. So I actually called him up and was like, tell me more about this heater situation.

Like, what do you mean? And he was like, yeah, it's just not like. It's just in a bad spot because it's really tight. There's a lot of stuff. He's like, what you need to do is like install a new one that's higher up on the wall so that it can have heat and it's not covered by stuff. So I go and I check it out today and I tell him, I'm like, you have a fire alarm.

Where is it? He goes, Oh, it's behind the television that I put up. He goes, so it's not accessible. It's like. All right. Thanks. So I just, I installed a new one and I was like, well, whatever, if that one ever goes off, so be it. I guess you have to figure that out, but here's the one that is accessible and testable and all that stuff.

Yeah. And then I was looking at this heater and he put his bed over the baseboard heater. The heater works totally fine. There's no problems with it. And I just thought it was super interesting that the inspector, instead of saying. Hey, you're covering up this heater in an unsafe manner. Move your stuff.

Instead, he came back to me and said, Hey, you need to move the heater.

Jessi: Yeah, why is that a solution if there's a functional heater in the

James: unit? Yeah, I feel like I've met my end of the criteria piece here. Right. And instead it's going to cost me a few thousand, I don't know if it's going to be a thousand, but it might be 1, 500 to buy the materials and hire an electrician to move this thing and make sure it all works to code.

It's kind of a pain when I'm like, there's a heater. And it works. And the

Jessi: problem is, is there like no other spot where he could possibly put his stuff?

James: No, I mean, he'd have to rearrange his things. Here's the other really weird part. He's been living there and on HUD for 12 years. And in the time that we've owned it.

This, like, it's never come up as an issue. They've done inspections before? Yeah. Well, they do it every

Jessi: single year. So they got

James: a new inspector? I don't know. No, he's, I don't know. It's super weird. So, I'm going to make a call on Monday and be like, hey Here's the dealio. What's up with the heater? I feel like this criteria is met.

It works. Like, this isn't on me. And so, anyways, we're going to have that conversation. The

Jessi: reason why it's not functioning is because the tenant has things in front of it.

James: Yes. Oh, I mean, the reason why it is considered unsafe. Cause it is functioning, but yeah, I mean, the heater works, like you can turn it on.

So it's considered

Jessi: unsafe cause, cause there's stuff in front of it, which is what the inspector

James: said. Cause he put his bed. So it's a, it's a baseboard heater that's on the wall and he put his bed in the corner up against the wall. And so like, so his mattress, it's not his mattress, but his bed frame is above it.

His headboard specifically is above the heater. Yeah. Hmm. Yeah, that was, that was my reaction. Like, Oh, all right. So I get to have that phone call in the morning and just kind of figure out like with HUD or with,

Jessi: yeah, with HUD. Yeah, yeah, yeah. Cause you already talked to Mike, to

James: your tenant, to my anonymous tenant.

I mean, yeah, it's kind of interesting and that is not at all what I wanted to talk about in this podcast, but yeah, just kind of interesting what you're going to talk about. So I'll just go with it. It's just kind of, yeah, anyways, just kind of an interesting, like, all right. That's something that. You have to deal with when you have HUD tenants.

I mean, it is nice because they, you do get a check on the first of the month, every single month for whatever percentage of it, it is that is nice, but then he used to get weird stuff like this, which is like, okay, it's got to deal with that, which I'll admit, like it's an older unit and he's lived there the entire time.

So I've only gotten, I have only gotten in and I fixed up. I've never gone through and like, I'm going to make this thing better. Like that hasn't happened yet. But again, I think in this case, I'm like, ah, this isn't on me. Like the future is fine. Anyways, just kind of fascinating. I have also in the last couple of weeks looked at a couple of other properties to purchase and in this particular case, both of them were motels.

And so a little bit different than what I normally look at. Well,

Jessi: motels is like a loose definition of that second one, right?

James: I guess it's used as a motel. It's a motel. I don't know. In my brain. Okay. Quiz time. Quiz time. What is the official definition of a motel? What makes something a motel versus, say, a hotel?

What's the difference between the mo and the ho tel? Gotta be careful there. We gotta keep this a clean podcast. Yeah, do you know? Let's see if people are screaming at the answer right now.

Jessi: Yeah, they probably are. Go ahead. A hotel is like based on nightly rent. And a motel is based on more short term.

James: How do you get more short term than nightly?

You're talking about like hourly? No, like,

Jessi: no, I, I mean like, not more short term, but it's like short term rental, like multiple days. Oh. Versus like, okay. Oh, I just say like, you might rent out a week and night. Yeah. You rent out a week or, oh, okay. Like a weekend or, okay. No, that's not the answer. But a motel in my brain seems like it's less of like shared property, you know?

Like you wouldn't call a Sun River house a motel. Correct.

James: All right, what's the definition? So, okay, yeah, fair enough. It's very simple. On a motel, all the doors are on the outside, and you can park your car in front of your door. In a hotel, you can't. It's more dormitory style. Although, there's hallways and everything, and it's just a normal parking lot.

Jessi: Okay. That's it. That's the only

James: difference. That's the official difference, yeah. So, like, with either one of them, you can rent it for a night, you can rent it for a week. No big deal. Now you might have different size operators who say, Hey, yeah, if you want to stay for a month, cool. No big deal. And people will tend to do that with a motel because, well, they can park right in front of it and treat it as if it's kind of their own little unit, as opposed to having to go through the lobby and take an

Jessi: elevator or whatever.

What if it's a combination? That's just a hotel. Yeah, like some of the units you can access from the inside and some you can access from the

James: outside. Yeah, those are usually, that's like a hotel, I think. Yeah, interesting. Yeah, you're thinking Yeah, I guess we've been to some like resort esque places. Yeah, like

Jessi: the place that I just stayed this past weekend.

Yeah, okay. It was like a conference center type thing. Huh. And they had several different types of buildings that they had kind of accumulated or, yeah, bought over time. Huh. I mean some of them were like, yeah, you, you park and then you, like motel style. Oh, interesting. But then some of the buildings were definitely more hotel style.

Okay. You have to walk into the

James: lobby and it was officially called retreat center. So neither of those. Neither of those. Okay.

Jessi: But they still, they rent it out. They don't, they run it more like a conference center. I guess they don't rent out individual rooms to random people. Yeah. I don't, at least I don't think

James: they do.

Okay. So we'll put that in the neither category. It's its own thing. So the first one that I went and looked at was a 60 unit motel with a restaurant attached to it and it has some interesting features about it. Number one, it was in a very small city that was near Grants Pass but it was on a like a highway that's leading out to the coast.

How big of a city? 10, 000 people? Yeah, it's like 10 to 15. But it's been growing like 10, 20 percent year over year for the last few years. So it's like, it's growing. What's the

Jessi: industry there? I don't think I ever asked that. I

James: don't know. Like, logging, fishing? I never got far enough to find out. Is it, because it's

Jessi: near Grants Pass, but

James: It's like 20 minutes outside of Grants Pass.

Is it like,

Jessi: Okay. I'm going to show people how lame I am on direction and sense of direction. Is that like near the coast or

James: inland or? Yeah, going towards the coast. Towards the coast. Yeah. But not like on the water. Correct. Okay. No, it's still like a half hour from the water. Okay, cool. It's

Jessi: like in between.

I'm just wondering, I'm just trying to like, is there fishing

James: or is there? Nope, just dry land. That's all it is. There's a highway that goes through. There you go. But it's the main pass to the coast. Yeah. So another interesting feature about this particular one, oh, there's a restaurant that's attached to it and the motel itself is condemned completely.

And it was four years ago, like boarded up everything. If you look at it on Google maps from 2018, it looks totally fine. Like a normal fully functioning looks great. Cause obviously that was more than four years ago, but now it's like, there's a fence that goes all the way around it. Everything's bored.

You

Jessi: know, like what the turning point was?

James: Yeah, I do. It was yeah, actually they shared this story and so they had some maintenance stuff that go in and it had something to do with like. They needed a new water boiler heater system and they ended up putting one in that was too small for what it should have been which caused a problem to begin with and then apparently what happened was She hired some electrician, unofficial kind of guy to do it.

He didn't do it right. And what happened was the inspector was there checking on the work and he put his hand on a panel and got electrocuted because it wasn't grounded properly. Oh my gosh. Yes. And so that was the trigger. How does this happen? Well, you don't hire a professional.

Jessi: Yeah,

James: that's a problem.

And so he ultimately was like, no, this is not safe. This is a not safe place. He's like you need to shut this down and tell us thing gets remedied. Sure. And apparently there was enough other stuff that was going on that needed repairs that they couldn't afford it or she just decided not to. She just shut it down instead of just getting it fixed and hiring the right person.

From what I was able to gather from the owner, she was the kind of person, this wasn't the first place that has been condemned on her. And she would figure out like, okay, what's the minimum maintenance? And I'm going to do less than that. And part of that was by, again, just not hiring professionals. We had two guys who gave us a tour of this place and they clearly were like, dude, just random guys who were like, I can swing a hammer and and they were doing all the maintenance work and yeah, it was very, they were talking to maintenance.

Yeah. Yeah. Previously. Yeah. Cause obviously not much has been going on for the last few years. Interesting. And so she's in foreclosure has also had A a stroke and not, she's not a foreclosure. She's going through bankruptcy. Oh. And so this is part of her. Like, I just got to try to get rid of some assets to help with the bankruptcy problem, I guess.

So what's going on? This was sad. It was priced at, I think it was 1. 2, 1. 3 million, which for a 60 unit place. Plus a restaurant is a fantastic deal, which is why I found out about it. And I was kind of like, all right, well, let's see how bad it is. And my thought was to go in and say, well, maybe let's turn it into like standard apartments, like maybe 30 apartments or something like that and turn it into more like maybe affordable housing type stuff.

And and I liked the fact that there was this restaurant cause it was, they were paying 5, 000 a month and I went, well, you know, if, oh, and she owned it free and clear by the way. So I was like, well. Maybe if I can structure the, this in such a way where the seller financing is able to have low enough payments where I can, I can afford to essentially, I can afford all the holding costs while doing the rehab, go and make this place better, fix it up.

And then at that point it's like I'm going to refinance the thing and then going to hold it for a few years before selling it was kind of the plan. Four years is a long time for a building to go without being, without anybody in it. It's kind of interesting. You wouldn't think it would be a problem.

Yeah. But yeah, houses need to like be lived in and things need to happen and, and fresh air needs to go through and things need to be dried and heated and cooled and like all that stuff. So like. There were a lot of signs of, well, rodent activity for one, mold, moisture, and then apparently there were some people who were in there, some homeless folks got in and just started fires in some of the units to like, not to burn the units, but to stay warm.

Like they would bring in wood somewhere and just burn it to stay warm and stay dry. All that stuff. And so, like, the, the ceilings and the walls were just all blackened, and, which made it really hard to take pictures, because there's no electricity, because it's all shut down. Or, as you can imagine, they turn the electricity off on that thing, when that, when that catalyst happens.

So, okay,

Jessi: just out of curiosity, I, I, I'm pretty sure you told me this before. Let's say you were going to rehab this thing. Yeah, okay. How much money are we talking about to take it from its current state to a livable state and how much, like how much money and how much time?

James: So there's a couple other issues with this property that inflate those numbers.

For one, all the drywall was used, made, was made with asbestos. Layed in drywall. Mm hmm. So you can't just tear that out and start over you actually have to do a remediation process Four years ago. They were quoted a quarter of a million dollars to do it That was four years ago without all the inflation all the inflation and all the other stuff My guess is that that's more like a half a million dollar job Especially given all of the mold everywhere.

Yeah. So it's not just about the asbestos anymore. And so So, that's an expense that like, would have to happen. But when I first got into it, I was, I wasn't anticipating that. I didn't learn that until I got there. Right. I was like, oh, okay, that's kind of a problem. Yeah. And so maybe I didn't, I just forgot.

But

Jessi: So, with the All right, if you were to like crunch the numbers.

James: My guess when I was kind of looking through it and figuring out what would have to be done. Oh, it also became very clear that each of the units were divided by brick walls. So my idea of combining suddenly wouldn't work anymore. So you'd have to keep it as 60 units, which in some ways keeps it easier.

But now, like, now we're talking about going from essentially Hotel rooms that don't have kitchens or any appliances to like, okay, now we're going to add 60 Stoves and refrigerators and yeah to make them apartment stuff. Yeah and cabinets and all that stuff And so and they're gonna be small like efficiency studio like super small and just all of a sudden those numbers Like they just balloon really quick.

Yeah, my guess was this was gonna be This is a huge range, but a one to two million dollar Project. So the rehab cost. Yeah, that's after you remediate to the point where, Oh, and by the way, when we got to see the restaurant, it was also in disrepair. There were leaks everywhere. There were deferred maintenance everywhere.

And it was bad enough that the restaurant owners hadn't been paying rent since March because they were just like, no, we refuse to until you fix this. And she never did. So this was a real money pit. And so I got done and went, honestly, the best thing to do here is the bulldoze it and start all over.

That's the cheapest route to go. Cause you're going to end up redoing all the siding, you're going to redo all the windows, you're going to redo all the doors, you're going to redo all the insides, like the roof needed to be replaced. At this point you're like, and given all the moisture damage, I don't even know what the framing looks like.

Sure. So, and it's a slab, the entire thing, which means all the plumbing goes through the concrete. So if you want to change anything, yeah. So at that point you're like, might as well just start all over. So

Jessi: as a development project, yeah. How, how much would the, I mean, obviously you have to do all the remediation like you would anyways, because of safety issues.

But then let's say you remediate it and how you just want to. Bulldoze the other garbage off and and do a

James: yeah, I don't know but it's a few hundred thousand dollars

Jessi: to do it To like tear down a building. Yeah, and then you got you have all the development

James: costs Yeah, a lot of it's just off hauling it to the dump.

That's the big expense. It's tearing it down. It's not that hard Right just smash it, but it was on a big lot And so that was my other like let's get rid of this building because it had just a bunch of wasted space in the back yeah, to a developer or that's what you do. You build and just actually use the entire lot up is how you would approach it.

Interesting. But I don't have the, not, I don't have the funds for it. I don't have the experience for it all that stuff. And so I looked at it. Sad day. Yeah. I thought potentially for like half a second, I was like, well, maybe I could wholesale this thing. What if I bought it? Went through the hard part of figuring it all out and then maybe not get it shovel ready, but like pretty close to it and sell that to a developer and say, and really my thought was not to just sell it for cash, but to go, Hey, I have this thing it's ready.

This is my contribution into the deal. you pay for the actual development stuff and the people and all the materials, this would be my contribution for some percentage of it. And then cause I think you could make a, like, I bet you could add 80 units on the slot. It's pretty big. And if you're talking about something like that in today's economy, that could be like worth like 18 million.

So like, here's the math, right? All right. If I have. Let's say I put, I buy it for a million dollars and let's say that I put another half million dollars into it for the remediation, which I'm kind of like, dude, I don't care. Just tear it out. It doesn't have to be careful. And let's just say that's also, I don't know, I spend another let's say I end up spending like 1.

8 million to buy it and to just turn it into dirt again. And that's working with the city and figuring out a plan and getting it shovel ready. You then could turn it to a developer and say, Hey, I want 20 percent of whatever this final thing is. That's my contribution. I'm bringing to this. And let's say that it is worth 18 million when it's all said and done, I would effectively double my money.

You know, once it's built six, seven years from now, right?

Jessi: Which I mean, if you divide out a couple million dollars over six, seven years, that's still

James: not bad. Yeah, no, totally. But I also think there's just better opportunities out there. Because doubling your money every seven years is not, like, not that amazing.

Yeah. It's good. You can do other deals.

Jessi: Yeah, yeah, exactly. Better return quicker.

James: So that was one. I passed. I went. Passed. I'm good. I've got another one that is technically in the works. We shall see. It's another motel.

Jessi: Which now I know means the doors are all on the outside and you can park in front of them and just go in.

Yes. Like your

James: own separate unit. Technically though, this one is called an inn.