Hotel-to-Housing Conversions: Creating Affordable Housing & Investor Returns

Ryan Sudeck (00:00)

I think the most important thing to understand is hotels are fundamentally worth different than apartment buildings are. If a listener is familiar with cap rates, a hotel might trade at a 12 cap versus a six or seven cap in the same market on the apartment side. Or if you think about just a multiple of the revenue that it generates, a hotel might trade for between three to five times the revenue it generates versus an apartment building, which will trade for seven to 12 times the revenue it generates. And that’s because investors like multiple

family more than hotels.

Kristen Knapp (02:03)

Welcome back to the Real Estate Pros Podcast. I’m Kristen and I’m here with Ryan Sudeck, is the CEO of Sage Investment Group. We’re going to talk about affordable housing. They function in multiple states, so I’m excited to get into it. Thank you for being here, Ryan.

Ryan Sudeck (02:16)

Thanks so much for having me, Kristen.

Kristen Knapp (02:17)

Yeah, so let’s go back to the beginning. How did you fall in love with real estate? How did you get into the industry?

Ryan Sudeck (02:23)

Yeah,

man, we can go back pretty far when it comes to my story. So as a kid, ⁓ on the weekends I was swinging hammers with my dad. He was a pilot by trade and had a small portfolio of real estate properties in our hometown, always doing the renovation work himself. And so I’d help him out on the weekends. And post 9-11, the airlines all went bankrupt. He lost his retirement, his pension, took a big pay cut.

And my parents kept their house and we kept our lifestyle because of the passive income that came from those real estate investments. So it was a very formative experience for me. I knew I wanted that one day. I was lucky enough to have a corporate career and started on the weekends investing in multi-family real estate. Again, doing a lot of the work myself. ⁓ know, pulling out lot of the old, hiring people to make it new again. ⁓ I wasn’t so good at that. ⁓

That kind of got me, you know, that was my start, right? It started at a young age and yeah, I was blessed to be able to start doing it, you know, in my kind of mid-20s on my own.

Kristen Knapp (03:31)

And what did that, because I mean, obviously when you’re starting to invest, it’s a very rocky road, or it can be at least, if you’re very, very lucky. ⁓ What did that look like? Because I know that you were really interested in real estate for the stability and how it could provide for yourself. that ever, were you ever nervous starting out, seeing the reality of how difficult it is?

Ryan Sudeck (03:54)

I’d say my wife was probably a bit more nervous than I was. I had an example, right? I had seen family members do it in the past. So yeah, the first property we bought was a sixplex in Tacoma, Washington. So I lived just outside of Seattle, Washington. So it’s about 45 minutes, an hour from where I live.

Kristen Knapp (03:57)

Right.

Ryan Sudeck (04:13)

and this place was listed on the market, had a bunch of foundation issues. We were able to negotiate a good deal. We fixed those issues, rented it out, and ⁓ the power of being able to renovate, fix something up, see its value increase, and then do a cash out refinance, we moved on and took all of our investment out and went and bought an eightplex. So, ⁓ I think my wife was a little skeptical at the beginning, but seeing the proof point and the power there, she quickly jumped.

on board but it certainly took a lot of blood sweat and tears for that first project. Really any project takes a lot of blood sweat and tears especially when you’re doing a lot of construction work to it.

Kristen Knapp (04:47)

sure. Yes.

Yeah, when you’re doing a lot of it yourself, mean, it’s really impressive to start. I’m always just so impressed with people who just go right into it and find success. And then let’s transition, how did you get involved with Sage Investment Group?

Ryan Sudeck (05:55)

Yeah.

Great question. So after buying that sixplex and then the eightplex, I sold both of those, ended up buying a 16 unit and a 30 unit with a couple partners. With all of those transactions, I was working with my now business partner, Ross Hubbard. Him and his wife, Emily, started Sage Investment Group back in 2020. Prior to that, they were helping folks like myself transact on real estate, get matched up with contractors, all in the Seattle area and beyond.

And so fast forward, you know, had the 16 unit and the 30 unit. Sage got started in 2020 through an up-rate. So what had happened is Ross had been working with these other groups, kind of formed individual property syndications, know, between the two that I had and the ones that he had, were 14 total properties. And so we actually brought those together to form Sage Investment Group and issued shares to all of the folks who had invested in those individual deals so that they got to participate in all of the properties.

And then that’s how Sage was formed. So we started this Evergreen Fund in 2020. Had been doing value-add multifamily deals at that time. And around a similar time, starting in 2019, we started our first hotel conversion project in Tucson, Arizona.

Kristen Knapp (07:08)

on.

Ryan Sudeck (07:10)

And that was an interesting story that I’m happy to go into. But once we delivered that in 2020, leased it up, sold it in 2021, it was the inspiration for us really focusing on this model that we’re doing today. And now we’ve done, and we’ve started our 25th hotel conversion project now.

Kristen Knapp (07:14)

Yeah.

Wow, and so that was a really formative period in the company. Talk about what made that different, what made that interesting for you guys.

Ryan Sudeck (07:37)

Yeah, so…

I think the most important thing to understand is hotels are fundamentally worth different than apartment buildings are. If a listener is familiar with cap rates, a hotel might trade at a 12 cap versus a six or seven cap in the same market on the apartment side. Or if you think about just a multiple of the revenue that it generates, a hotel might trade for between three to five times the revenue it generates versus an apartment building, which will trade for seven to 12 times the revenue it generates. And that’s because investors like multiple

family more than hotels.

I think the most important thing to understand is hotels are fundamentally worth different than apartment buildings are. If a listener is familiar with cap rates, a hotel might trade at a 12 cap versus a six or seven cap in the same market on the apartment side. Or if you think about just a multiple of the revenue that it generates, a hotel might trade for between three to five times the revenue it generates versus an apartment building, which will trade for seven to 12 times the revenue it generates. And that’s because investors like multiple

family more than hotels.

Hotels have you have to employ cleaning staff, you have to maintain the furniture, you’re washing sheets every night. ⁓ Occupancy is usually around 63 % at least in our area of the country. Compare that to an apartment building where you might have one to three staff for a hundred to two hundred unit building. Occupancy is usually above 90%. Expenses are lower, there’s a lot less complexity and so investors pay more. So if you just look at that

first

project we did in Tucson Arizona it cost us all in about 11.7 million dollars to create 175 studio units in Tucson and we were able to sell it within 19 months for 18.9 million dollars.

And so that’s just the power of taking something that was not functioning at its highest and best use, that had distress, was valued as a hotel and converting that into a beautiful community that tenants wanted to live in that’s just worth more. We typically see at least a 40 % increase in the value of what it costs us to acquire and renovate a property to what it’s worth as an apartment building. So that’s really attractive from an investment perspective.

But more than that, we’re focused on helping address the affordable housing crisis.

Everyone in America is probably acutely aware of just how expensive housing has gotten and what we’re creating at the end of the day by repurposing these hotels is a fully amenitized usually a studio unit that rents for three to five hundred dollars less per month than the luxury buildings that most developers are building and we’re able to create these units for about a hundred thousand dollars per unit on average which is about half of what it would take to build them from the ground up. So that’s been that’s been our strategy.

You know, we see this insatiable demand for this naturally affordable housing and couple that with a really strong investment thesis. That’s why we have so much conviction in it.

Kristen Knapp (11:16)

That’s amazing. And you guys function in six different states, correct? Which states are you in?

Ryan Sudeck (11:20)

That’s correct, yes.

So, Washington State, it’s our backyard, we know it well. It’s also a really strong real estate market. We’ve got mountains and water everywhere, so people have to drive pretty far to find housing price relief, similar to places like the Bay Area. ⁓ So we’re in Washington State, we’re in Texas, we’re in the Carolinas, both North Carolina and South Carolina. We’re in Alabama and Indiana right now. We’re planning to go into Colorado and Florida later this year.

Kristen Knapp (11:52)

Wow, that’s really impressive. And how do you manage all of the different, I’m sure there’s different zoning laws and different just in general with affordable housing, different laws. How do you manage all of that?

Ryan Sudeck (12:04)

Yeah, with a big team. We’ve got 30 folks on our team now at Sage. ⁓

You know, in the early days, when I joined a little over two years ago, were about, I think we were little less than 10 folks at the time. So we’ve grown, we’ve evolved a lot. The bulk of our team is focused on that development effort, as you mentioned. You know, we have to go in, we have to talk to the city, the planning department, the zoning department, because ultimately we’re taking a building that is functioning as a commercial property and we’re asking the city to let us, or whatever the jurisdiction is, asking them to allow us to have

it as a residential use and that looks different in any market. So if we’ve been in the market before we know the playbook a bit, we know the parties involved, but most of the time our head of community relations, Whitney, and our head of planning, Jeff, are talking to the city, they’re talking to the politicians, the city council members, the head of HOAs ⁓ to educate them on what we’re doing and what we’re not doing, right? We are trying to meet a need for the missing middle, the folks who need an affordable great place to live and

And they also come and say, we’ve done this 25 times before. We know what the code book says. We look a little different. So let’s have an active dialogue about what requirements you’re going to hold us to. Here’s what we’ve seen other cities hold us to. Do you agree? And so it changes the conversation. Because in the early days, we were just figuring it out. We went to the city and were like, all right, we’re going to do this. Give us a permit. And we got burned by that. We had to learn about how

Kristen Knapp (13:30)

Yeah.

Ryan Sudeck (13:37)

how

they were gonna apply the energy code to us or parking ratios and other requirements. And it’s just totally changed, flipped on its head now where we can have that proactive conversation well ahead of when we’re getting under contract to acquire the property and it just really mitigates the risk ⁓ in a big way.

Kristen Knapp (13:55)

Yeah, and have you ever had a situation where they just flat out don’t want it to be residential apartments?

Ryan Sudeck (14:01)

We have, yeah.

There’s a bit of, you know, there’s a lot of tax revenue that comes in from hotels that I think some cities might want that. ⁓ I’d say politically, no matter what party affiliation a politician might be with, everyone wants more affordable housing.

We’re all suffering from it right now, but how that gets implemented is a challenge. Other cities haven’t overtly denied us the ability to do it, but there are…

programs in place that have made it, you know, just put up too big a barrier. So for example, in some places they charge impact fee, what are known as impact fees, when you build a new property. Well that doesn’t matter if you’re building a…

Kristen Knapp (15:17)

Right.

Ryan Sudeck (15:27)

10 bedroom, 10,000 square foot mansion, they treat it the same as a 300 square foot studio efficiency unit in our conversion project. And so, you know, if they’re gonna put 15, $20,000 in impact fees, it just makes the financial, you know, the financials of the project untenable. So we’ve walked away from deals in that scenario before too.

Kristen Knapp (15:48)

I mean this model is so cool. I imagine getting people involved as investors because you not only see a really great return but you also get to have a social impact.

Ryan Sudeck (15:57)

Yeah, it’s true. feel like, know, certainly I’m talking my own book here, but I feel like we have the best of both worlds. You can kind of have impact but not have to compromise on the returns. You said it super well, Kristen.

Kristen Knapp (16:09)

Yeah, absolutely. I it’s so cool. And so now you’re scaling your team. I would love for you to talk about kind of how you even go about hiring, what have been some maybe early on mistakes that you’ve learned from, just what’s your strategy with getting good people around you?

Ryan Sudeck (16:24)

Yeah, let’s start with the mistake side.

When you’re scaling, folks have to wear a lot of different hats and you’re working with few resources, you’re learning. I think in the early days, we had the same people working on construction management as trying to help lease up the building through an asset management function. And then at some point, we had folks specialize, but making that leap is hard, right? Being able to not just ⁓ capture the learnings from the individuals who are doing it all end to end, but then breaking it apart and have

this end-to-end process from permitting and planning to design to going out to bid to a number of construction companies to then managing those construction folks then getting the property the right property manager and then holding them to account to a budget. Now we have the specialization of roles and we’re really blessed to have strong leadership across asset management and construction management our general counsel is fantastic planning and design and now we’ve got these leaders who

have done this other places and brought those learnings to Sage and that’s really given us the ability to plug in more, you know, other more junior staff that can help us scale as we’re going into new markets. So on construction management, know, Chris leads construction management, has construction managers, you know, under him and we can staff against, you know, the right ratio of projects to CMs and then as we go into new markets hiring construction managers in those new markets and we’ve had some

great partnerships with recruiting firms that are specialized to real estate to help us find that talent and help us scale that way.

Kristen Knapp (18:04)

Amazing and you being CEO, are some of like the fundamental, like how do you create culture within the company?

Ryan Sudeck (18:11)

That’s a great question. My background’s in ⁓ &A, and so I’ve…

Culture’s been such a fascinating study for me because when you bring companies together through a merger and acquisition, you usually have a clash and you gotta figure out, all right, what are we gonna preserve from each other? And I feel like culture is never a static thing. It’s something we’re always continuing to evolve. ⁓ Here at Sage, I think in-person time, ⁓ you know.

leading with authenticity and transparency, I think is really important. ⁓ And we’ve started trying to work in core values to our vernacular, ⁓ but it’s really the way in which we conduct ourselves that define the culture. And I wouldn’t say we have it perfect or right. And I think when we were a 10 person company versus a 30 person company, it was very different. ⁓ Now that we’re more of a distributed team, looks very

different, know, as hopefully we have the privilege to go from 30 to maybe 100 people one day. think our culture will also look very different. So it’ll be an evolution. It’s something that, you know, as a leader, I think about a lot. Transparent, they’ve been under investing my time in that area, and knowingly like want to invest more of my time into it. Because it helps, you know, it helps us all just work better together.

Kristen Knapp (19:36)

Of of course. And then what are your guys’ scaling plans? I know you have big goals for the next five years.

Ryan Sudeck (19:42)

We do,

we do. ⁓ currently have about 3,000 units in our portfolio. We love the impact that that’s having on communities and being able to offer this naturally affordable housing. Our goal is to scale to 15,000 units over the next five years. We think that we’ve got the path and the plan to do so, that this strategy is gonna be around at least for the next five years, if not longer. It’s hard to project much longer than five years. ⁓

Some days it feels hard to project even five days. ⁓ But our big, hairy, audacious goal is to get to 15,000 units of impact over the next five years.

Kristen Knapp (20:15)

Right.

Amazing. Well, you guys are doing such good work in all these communities and I’m sure it really is a trickle effect where the work you’re doing really helps the surrounding community.

Ryan Sudeck (20:31)

It does. Yeah. Some, if I could share just one case study, I mentioned Tacoma being the city that I bought my first real estate investment in. It’s also a place where as Sage, we’ve purchased a number of hotels and there’s one street and one district called the Hosmer district, Hosmer street, where we’ve now purchased four hotels and renovated them. The first one we bought was in 2022. And

Kristen Knapp (20:35)

Of course.

Ryan Sudeck (20:58)

That area post-COVID really fell on hard times. A lot of these hotels were harboring criminals, just looking the other way in exchange for criminals paying cash to stay there. And it grew to be represented, to be accountable for about 10 % of the murders in the state of Washington. It’s pretty tragic.

And so we came in and since 2022, there hasn’t been any violent crime. We’ve seen overall crime reduced by 50 % in that area. The police used to send three officers to respond to any call in that area. Now they only send one. And it’s been really cool to see the revitalization of that street and the real impact that’s been had there.

Kristen Knapp (21:39)

That’s incredible, because that influences so many people, obviously the community and the city, but also the police, they’re using less resources to come out. I mean, that’s incredible. ⁓ So you’ve given us a lot of good information about affordable housing, building your business, Sage investment seems like such a great investment. Tell people how to get involved with Sage.

Ryan Sudeck (21:51)

So much.

Yeah, certainly reach out to me. You can find me on LinkedIn. You can reach out to me via our website too. Our website is sageinvestment.com. You can fill out the form there. But yeah, I’d welcome the chance to chat with anyone who’s interested in what we’re doing or joining the team.

Kristen Knapp (22:20)

Well, thank you so much, Ryan.

Ryan Sudeck (22:22)

Thank you, Kristen. Appreciate you having me.

Kristen Knapp (22:24)

and thanks for everyone for listening and I hope you learned a lot and we’ll see you back next time. Bye.