Hotel to Multifamily Conversion: Unlocking Value in Distressed Hotels

Hotel to multifamily conversion is emerging as a creative real estate investment strategy for investors looking to acquire properties below traditional multifamily pricing while addressing the growing demand for affordable housing. On Lifetime Cash Flow Through Real Estate Investing, economist and real estate investor Alexander Cartwright explains how his team identifies distressed and underperforming hotels, converts them into multifamily housing, and creates value through a combination of low acquisition costs, strategic renovations, and strong market demand. The strategy is especially compelling in expensive markets where traditional multifamily acquisitions can offer limited margins for error.

Why Hotel to Multifamily Conversion Can Create a Competitive Advantage

Alexander Cartwright began exploring hotel conversions after seeing multifamily cap rates compress significantly in 2021 and 2022. Instead of competing for traditional apartment buildings at increasingly expensive prices, he began looking for a different strategy that could create more margin and downside protection. The key insight was that hotels can sometimes be acquired at a dramatically lower cost per unit than comparable multifamily properties, creating an opportunity to renovate and reposition the asset while maintaining a much lower cost basis.

One of the most important lessons from Cartwright’s approach is to quantify complexity rather than automatically dismiss it. A hotel conversion may involve rezoning, construction, unit reconfiguration, financing, and leasing, but each challenge can be analyzed as a financial problem. In one example discussed during the podcast, a property purchased at approximately $30,000 per unit could require another $30,000 to $50,000 per unit in renovations while still maintaining a significantly lower basis than newly developed housing. That lower basis can provide both upside potential and downside protection.

How Investors Convert Hotel Rooms Into Multifamily Units

Hotel to multifamily conversion requires careful consideration of unit layouts, local demand, construction costs, and the eventual financing strategy. A hotel room can potentially become a studio, while two adjoining hotel rooms can be combined to create a one-bedroom apartment. However, the most profitable configuration is not always the one with the highest theoretical rent. Investors must also consider how quickly units can lease, what renters in the market actually want, the future refinancing strategy, and the needs of the eventual buyer.

In one Houston project, a 250-room Holiday Inn had already been converted into approximately 120 extended-stay units with one-bedroom layouts. The project continued operating as an extended-stay hotel while renovations were completed, allowing the property to remain occupied during the construction process. The renovation included expanding existing wet bars and small refrigerators into full kitchens, while the overall project was designed with a future HUD refinance in mind.
A successful conversion also requires adapting the property to the target demographic. In some projects, one-bedroom units may include individual washers and dryers, while studios may use shared laundry facilities. The right design depends on the neighborhood, the target renter, and the existing architecture of the hotel. In a Denver project, for example, Cartwright described plans to convert a 310-room hotel into a combination of studios and one-bedroom apartments, with the larger units receiving individual laundry facilities.

The Importance of Buying at the Right Basis

One of the biggest advantages of hotel to multifamily conversion is the potential to acquire existing structures at a cost that would be impossible to replicate through new construction. Cartwright described a Denver property purchased for approximately $29,000 per unit that was expected to have an all-in cost in the low $80,000s per unit after renovation. The property was also located in an opportunity zone, adding another potential consideration for investors evaluating the overall investment structure.

This low-cost basis can create a meaningful competitive advantage in markets where new apartment construction is extremely expensive. A converted hotel may offer smaller units than a traditional apartment development, but the lower cost structure can allow the owner to offer housing at a more accessible price point while still maintaining attractive economics. Cartwright explains that the strategy works best in markets where housing is relatively unaffordable and renters are willing to accept a smaller unit in exchange for a lower price and strong amenities.

Choosing the Right Market for a Hotel Conversion

Market selection is critical to hotel to multifamily conversion. According to Cartwright, the best opportunities are often found in markets where housing costs are high, rents are expensive, and traditional multifamily cap rates are compressed. Markets discussed in the conversation included Denver, Phoenix, parts of the Texas Triangle, northern New Jersey, Philadelphia, and the broader Mid-Atlantic region. More affordable markets can be more challenging because converted hotel units may have difficulty competing on price against larger traditional apartments.

The strategy also depends on understanding the specific demand drivers in a market. For traditional multifamily, investors often focus heavily on population growth, job growth, and income growth. Hotels can operate according to different economic fundamentals, with demand potentially driven by airports, casinos, hospitals, tourism, or other major destinations. Understanding why a hotel originally succeeded, why it declined, and whether the underlying demand remains can help investors determine whether the property is a candidate for conversion or another investment strategy.

Why Distressed Hotels Can Become Conversion Opportunities

A major part of Cartwright’s investment thesis centers on the unique economic life cycle of hotels. Branded hotels are often required to complete expensive property improvement plans, commonly known as PIPs, to maintain brand standards. As a property ages, these required upgrades can become increasingly expensive. If ownership cannot justify the capital investment, the hotel may lose its brand, decline in quality, reduce rates, and eventually enter what Cartwright describes as a hotel death spiral.

This decline can create an opportunity for a different type of investor. A hotel may no longer be competitive as a hotel but could still have valuable physical infrastructure, a desirable location, and a building that would be prohibitively expensive to construct from scratch. The hotel to multifamily conversion strategy seeks to identify those situations where the property’s existing use has deteriorated while the underlying real estate still has significant potential.

Financing and the Role of HUD Loans

Financing is another important consideration in hotel to multifamily conversion. Cartwright discussed the potential use of HUD financing for qualifying multifamily properties, including long-term financing that can extend up to 40 years. However, the process also includes significant regulatory, disclosure, property management, and compliance requirements. His team works with consultants, architects, and property managers to ensure the converted property meets the necessary requirements for the financing strategy.

The financing strategy can influence the physical design of the property from the beginning. For example, a diverse unit mix may be strategically useful when pursuing certain financing options, even if a different unit configuration might produce a higher theoretical rent. This highlights an important principle for real estate investors: the best renovation plan is not always the one that maximizes immediate income. It should also consider the property’s financing, operations, long-term ownership strategy, and potential exit.

A Hybrid Strategy for Real Estate Investors

Cartwright is also exploring a strategy that combines hotel conversion investments with traditional hotel investments within a single fund. The rationale is that hotel conversions can require 24 to 36 months before a refinance or other liquidity event, while an operating hotel can potentially provide more immediate cash flow. Combining the two types of assets may create a portfolio with both near-term income and longer-term value creation potential.

For investors, this approach demonstrates how different real estate strategies can potentially complement each other. A conversion project may offer significant upside but require patience and substantial execution. An operating hotel may provide current income but expose investors to different operational risks. Understanding how assets with different cash flow profiles can work together is an important consideration when designing a real estate investment strategy.

Alexander Cartwright’s Background in Economics and Real Estate

Alexander Cartwright is an economist and former professor who taught economics for approximately ten years, including MBA and undergraduate courses. His academic background informs the way he evaluates real estate investments, market inefficiencies, pricing, and risk. After spending years teaching and maintaining an interest in real estate, he transitioned into full-time real estate investing and developed a specialized focus on hotel acquisitions, hotel to multifamily conversion, and the economics of alternative real estate strategies.

During the conversation, Cartwright also applies his economic perspective to broader questions involving inflation, money supply, technological innovation, and artificial intelligence. His central argument is that investors should be cautious about making overly confident predictions about complex economic events while also recognizing the long history of markets adapting to technological change. For real estate investors, these ideas reinforce the importance of focusing on fundamentals, understanding risk, and remaining open to opportunities created by structural changes in the market.
Hotel to multifamily conversion represents a highly specialized investment strategy, but the broader lessons apply to investors across commercial real estate. Look for assets where the current use no longer reflects the property’s highest and best potential, quantify the complexity instead of automatically avoiding it, and focus on the relationship between acquisition cost, renovation cost, market demand, financing, and long-term risk. If you want to hear the full conversation and detailed insights, watch the podcast video or read the complete transcript below.

What Is Hotel to Multifamily Conversion?

Hotel to multifamily conversion is the process of transforming an existing hotel into residential apartments or other multifamily housing. Investors may acquire hotels at a lower cost basis, renovate rooms into studios or one-bedroom apartments, add kitchens and other residential amenities, and reposition the property to serve long-term renters.

Why Is Hotel to Multifamily Conversion an Attractive Real Estate Investment Strategy?

Hotel to multifamily conversion can be attractive because investors may acquire existing buildings at a significantly lower cost per unit than the cost of developing new apartments. When the acquisition and renovation costs remain below the cost of new construction, the project can offer both upside potential and downside protection while helping meet demand for more affordable housing.

How Do Investors Convert a Hotel Into Multifamily Housing?

Investors typically evaluate the existing hotel layout, zoning requirements, construction needs, local housing demand, and financing options. Hotel rooms may be used as studios, while adjoining rooms can sometimes be combined into one-bedroom apartments. Renovations may include expanding wet bars into full kitchens, adding electrical capacity, installing laundry facilities, and making other improvements required for residential use.

What Types of Hotels Are Best for Hotel to Multifamily Conversion?

The best candidates are often distressed or underperforming hotels with a strong location, usable physical infrastructure, and a potential mismatch between the property’s current use and the market’s housing demand. Hotels that have declined because of aging facilities, expensive brand improvement requirements, changing demand drivers, or increased competition may offer conversion opportunities when the underlying real estate remains valuable.

Where Does Hotel to Multifamily Conversion Work Best?

Hotel to multifamily conversion may work best in markets with high housing costs, expensive rents, and limited affordable housing options. Markets such as Denver, Phoenix, parts of the Texas Triangle, northern New Jersey, Philadelphia, and other expensive areas may create opportunities because renters may accept smaller units in exchange for lower rents and desirable amenities.

How Does Hotel to Multifamily Conversion Create Value?

The strategy can create value by acquiring an existing hotel at a low basis and repositioning it into a product that meets stronger residential demand. Investors may increase the property’s value through renovations, improved unit layouts, higher occupancy, and a more efficient use of the existing building. The ability to create housing without paying the full cost of new construction can be a significant competitive advantage.

What Are the Biggest Challenges of Hotel to Multifamily Conversion?

The biggest challenges can include zoning and regulatory requirements, construction costs, unit design, financing, property management, and the need to lease the property to residential tenants. Investors must also carefully evaluate whether the local market supports the proposed unit sizes and rents. The complexity of the conversion can be significant, but that complexity may also create a barrier to entry for competitors.

Can Hotel to Multifamily Conversion Qualify for HUD Financing?

Some converted properties may be eligible for HUD financing depending on the property, financing program, and applicable requirements. The process can involve extensive regulatory and compliance requirements, as well as the need for qualified consultants, architects, and property management. Investors should evaluate the financing strategy early because it can influence the property’s design and renovation plan.

What Is the Difference Between Hotel and Multifamily Investment Risk?

Hotel investments can offer higher cash flow potential but may have less durable income streams than traditional multifamily properties. Multifamily investors often benefit from the ability to increase rents over time, while hotel performance can be more sensitive to changing demand, competition, brand requirements, and management quality. Hotel to multifamily conversion can potentially reposition an asset from one risk profile into another.

Is Hotel to Multifamily Conversion a Good Strategy for Real Estate Investors?

Hotel to multifamily conversion can be a compelling strategy for experienced real estate investors who understand acquisition, construction, zoning, financing, and property operations. The strategy is not suitable for every property or market, but investors who can identify distressed hotels with strong underlying locations and convert them into housing at a competitive cost basis may uncover opportunities that traditional multifamily investors overlook.

00:00:26:28 – 00:00:50:22
Rod Khleif
Welcome back to lifetime cash Flow through real estate investing. I’m Rod Khleif and I’m thrilled you’re here. Very interesting guest today. Interesting in the fact that I love what he’s doing. So very excited to get into it. His name is Alexander Cartwright and he’s an economist, a PhD in economy and economics. I would take it and converts hotels to workforce housing.

00:00:50:23 – 00:01:05:22
Rod Khleif
Welcome to the show, brother. Thank you. Thanks for having me. You bet. Well, why don’t we start by having you really kind of give us some background? You’ve definitely done a shift from your education to what you’re doing now, so maybe we can. You can talk about that a little bit. Yeah.

00:01:05:24 – 00:01:21:18
Alexander Cartwright
This is one of the first years that I haven’t gone back to school in the fall, so I’m adjusting. I used to joke with my students that I went from undergrad to grad school, went from grad school to being a professor, and so I had a lot of summer breaks, but spent a lot of time in the classroom.

00:01:21:18 – 00:01:46:03
Alexander Cartwright
And I taught economics for ten years at a state school in Michigan, taught a lot of MBA classes, and of course, to the undergrad. And it was was fulfilling. I loved being people’s introduction to economics, which is not everyone’s favorite subject, but I love defending capitalism and the free market and talking about how prices are formed and what governments can and can’t do, and economic history.

00:01:46:04 – 00:01:55:10
Alexander Cartwright
It was an energizing and fulfilling career, but always had one hand in real estate and finally decided to to make the jump and do it full time.

00:01:55:11 – 00:02:28:13
Rod Khleif
Wow. Wow. Yeah. My father was a PhD in sociology and so was my stepmother. And and I actually had four, three uncles besides my father. Two were PhDs as well. So been around the academe for a long time. And my father always wanted me to teach. And sadly, he died before he saw, you know, me teaching and, but yeah, now I, you know.

00:02:28:15 – 00:02:29:05
Alexander Cartwright
Plenty of teaching.

00:02:29:07 – 00:02:31:07
Rod Khleif
You got plenty of influence teaching now, but but.

00:02:31:08 – 00:02:32:11
Alexander Cartwright
You don’t have to give out grades.

00:02:32:13 – 00:02:56:15
Rod Khleif
I didn’t, I didn’t back then. Yeah. No. The grades have to worry about getting the grades of the student success. And I’m blessed to say our success exceeds everybody else combined by a lot. Student success, that is. But but yeah. Awesome. So. So when did you decide? Because you buy distressed hotels. We do. And you convert them to affordable, affordable housing, which of course the cities love to see.

00:02:56:23 – 00:02:57:09
Alexander Cartwright
I would most.

00:02:57:09 – 00:03:03:15
Rod Khleif
Times, most of the time. Yeah, yeah I guess it would. So talk about your first deal. Let’s go there. Talk about.

00:03:03:18 – 00:03:06:02
Alexander Cartwright
The on the hotel conversion side just in general.

00:03:06:03 – 00:03:11:21
Rod Khleif
Well, if it if it would help to talk about something in general to start, we could start there.

00:03:11:22 – 00:03:36:15
Alexander Cartwright
Sure. Well, I’ll start by saying that I was doing more and more multifamily and wanted to do bigger and bigger deals, and had done some consulting with a couple big groups that no doubt your listeners would know and and wanted to do it myself. But I watched in 2021 and 22, these cap rates go straight down, and there’s just not a lot of margin for error.

00:03:36:15 – 00:03:58:10
Alexander Cartwright
When you’re buying something at a four and five cap could be a great asset. You could be great operators. It’s not a lot of margin for error. And I thought markets are efficient right. And who am I to get a really good deal. The only way I was going to get a good deal is to find something off market and, and kind of get lucky, and maybe that was a little bit of a sour mindset.

00:03:58:10 – 00:04:05:10
Alexander Cartwright
And I did get lucky a few times and found something, but I went, but I knew that I needed a strategy that was different.

00:04:05:14 – 00:04:09:22
Rod Khleif
So my multifamily number one and what size asset classes were you buying?

00:04:09:23 – 00:04:14:12
Alexander Cartwright
This is like like 1 to $3 million multifamily in West Michigan okay.

00:04:14:13 – 00:04:15:25
Rod Khleif
Oh in West Michigan okay.

00:04:15:26 – 00:04:21:19
Alexander Cartwright
I was living in Grand Rapids, was a professor at Ferris State University in. West Virginia. Okay.

00:04:21:21 – 00:04:24:03
Rod Khleif
You flew in from Texas today. That’s why I asked, are you serious?

00:04:24:04 – 00:04:27:14
Alexander Cartwright
Well, now we’re based in in Dallas. Okay. But you see me in West Michigan.

00:04:27:15 – 00:04:27:25
Rod Khleif
Gotcha.

00:04:27:27 – 00:04:49:05
Alexander Cartwright
Okay, so I actually went to a conference and a broker said to me, hey, why don’t we go and see a hotel that’s for sale in your neighborhood? I think it makes for a great conversion to multifamily. And I had, I guess, heard of it, but I’d never really thought about it. And I thought, this sounds like an enormous pain in the rear end.

00:04:49:06 – 00:04:50:22
Rod Khleif
So how many keys was this hotel?

00:04:50:22 – 00:04:51:11
Alexander Cartwright
That was 100.

00:04:51:11 – 00:04:52:11
Rod Khleif
And 40, 150.

00:04:52:17 – 00:05:03:24
Alexander Cartwright
Right. So most economy, it’s called limited service hotels, meaning there’s no banquet center, no restaurant. Right. Just kind of your no frills. Think about your Marriott Courtyard type hotel.

00:05:03:25 – 00:05:07:11
Rod Khleif
Okay. They might they might have a, like a breakfast area.

00:05:07:13 – 00:05:24:09
Alexander Cartwright
Might have a breakfast area. Exactly. But there might be a pool. But other than that, the hotel service is just the room. Gotcha. So that’s called the limited service or select service. So those kind of hotels are rarely over 150. They’re usually 120 250. Right. The economics really break down afterwards because they’re so labor intensive.

00:05:24:10 – 00:05:29:17
Rod Khleif
Got it. Okay. And you know, so so you went and looked at this hotel.

00:05:29:18 – 00:05:29:26
Alexander Cartwright
I went.

00:05:29:26 – 00:05:30:06
Rod Khleif
Into the.

00:05:30:06 – 00:05:47:22
Alexander Cartwright
Story and I thought, this is just an enormous pain in the butt, right? We’re going to tear this hotel apart. We’re going to rezone it, which I didn’t know anything about doing. And then after all this construction, we’re going to lease it up from zero. But of course, as a good entrepreneur, you just got to put prices on these different problems numbers.

00:05:47:23 – 00:06:06:24
Alexander Cartwright
And it’s just numbers, right? Right. Like, you don’t say this house is too ugly to flip. You sit down and try and put a number on every problem. And I learned that when you can buy something at $30,000 a door, right. Even if you spent 30, 40, $50,000 a door on renovation, you’ve got a cost basis. A third of what the guys down the street have.

00:06:06:25 – 00:06:29:20
Alexander Cartwright
And that gives you not just upside potential, but downside protection. And nobody can develop something at that basis. So you’re you’re able to supply housing at a price point where no one else, no new development is competing with you. And I thought, this is so complicated that the complexities of virtue, you’ve got to do some homework on the front end, but that’s a barrier to entry.

00:06:29:22 – 00:06:36:11
Rod Khleif
Let me let me speak to that for one second. Sure. You know, I tell I tell my students if you see.

00:06:36:14 – 00:06:44:07
Rod Khleif
One, if you see something that’s complex or you see something that you don’t have all the information, get excited because everybody else gives up at that point.

00:06:44:09 – 00:06:45:00
Alexander Cartwright
100%.

00:06:45:00 – 00:06:47:28
Rod Khleif
Right. Okay. So I just wanted to hammer that piece, that piece there.

00:06:47:29 – 00:06:51:16
Alexander Cartwright
Yeah. That doesn’t mean that it’s easy. Right? Right. Or that doesn’t take time.

00:06:51:18 – 00:06:52:22
Rod Khleif
But but is it worth it?

00:06:52:22 – 00:07:00:02
Alexander Cartwright
But is it worth it? Yeah. Right. And you don’t always know at first, at first blush, that maybe it’s not as hard as you think it is, and everybody else has given up.

00:07:00:04 – 00:07:05:03
Rod Khleif
So. So drilling down a little bit. So did you do that hotel or.

00:07:05:03 – 00:07:12:13
Alexander Cartwright
We ended up we ended up not doing that hotel but but learned a lot of things okay. And and moved on to the next one.

00:07:12:14 – 00:07:15:28
Rod Khleif
So what was what was the first one you did? First I’d like to ask some questions about it.

00:07:15:29 – 00:07:27:14
Alexander Cartwright
Yeah, sure. We bought a 250 unit Holiday Inn in Houston, Texas that had been that had every room combined. So it’s 120 units.

00:07:27:16 – 00:07:29:00
Rod Khleif
Gotcha. It’s already been combined.

00:07:29:01 – 00:07:34:11
Alexander Cartwright
It already been combined to like an extended state product. So they were all true one bedrooms. Perfect.

00:07:34:12 – 00:07:40:06
Rod Khleif
Perfect. Because I was going to ask you if that’s what you did. Literally that was my question. Did you combine rooms so they’d already been done?

00:07:40:07 – 00:07:56:14
Alexander Cartwright
It’s a pretty complex question on do you combine rooms? How many do you combine? Because think of it like this. When you’ve got a studio, right. If you take that’s a hotel room, we can a big hotel room, we can make a studio. Right. So you can take two hotel rooms and make a one bedroom. But you’re never to Xingu.

00:07:56:14 – 00:08:16:12
Alexander Cartwright
The rent going from studio to one bedroom. No. Right. So the NY is always highest. If you can do a hotel of pure studios. But the numbers aren’t everything. We’ve also got to think about how quickly can we get these things least we got to think about what kind of refinancing program can you get? If you’ve only got one kind of unit and you’ve got to think about your end buyer at some point in time.

00:08:16:12 – 00:08:18:03
Alexander Cartwright
So figuring out the unit.

00:08:18:11 – 00:08:22:19
Rod Khleif
I think it’s more than that, honestly. You also got to think about what that demographic needs in that area.

00:08:22:22 – 00:08:23:27
Alexander Cartwright
It might not be demand for all.

00:08:24:03 – 00:08:40:05
Rod Khleif
I’m going to tell you something. My experience with studios is a lot of turnover. People don’t love those small units. So but I guess it would depend on the price point exactly depending on the price, price point and the demographic. If they can’t find anything else, they’ll stay.

00:08:40:08 – 00:08:58:05
Alexander Cartwright
If you’re if you’re the best price in the market and you’re delivering an all bales paid type experience, right, and you’re in the right location, then people are really sticky. But just because we’re 15 to 20% cheaper than the cheapest thing they’re able to find, which we can do because of the basis.

00:08:58:06 – 00:09:07:05
Rod Khleif
Gotcha, gotcha. So you bought that 250 basic 125 unit. Did you make any did you make any of them bigger than one bedrooms. Did you stick with all one bedrooms.

00:09:07:07 – 00:09:24:18
Alexander Cartwright
We did put a couple two bedrooms in okay. And only because with with that one we’re going for a HUD refinance, which I can dig into if you’re interested. And they like to see a diverse unit mix there. Like to be able that we can check the box. We’ve got some two bedrooms. So not for an economic reason purely.

00:09:24:19 – 00:09:26:06
Alexander Cartwright
We’re kind of a strategic refinish.

00:09:26:06 – 00:09:41:07
Rod Khleif
For the refund. So what sorts of things did you have to do to that? I mean, it already been, you know, some heavy lifting have been done. If they converted it, you know, if they combine units when they combine the units, did they just have the doorways like you see in adjoining rooms? Exactly right. That’s all it was.

00:09:41:08 – 00:09:41:18
Alexander Cartwright
That’s all.

00:09:41:18 – 00:09:44:04
Rod Khleif
It was. Did you have did you open it up or did you leave it like that?

00:09:44:06 – 00:09:46:09
Alexander Cartwright
No. We left, so we left the.

00:09:46:12 – 00:09:47:23
Rod Khleif
Living room and then you’d have the bedroom.

00:09:47:23 – 00:09:57:18
Alexander Cartwright
Got it. And so one where you’ve got two hotel rooms next to each other, where you’ve got the adjoining door, one bathroom was removed and that plumbing and that space is used for the kitchen.

00:09:57:20 – 00:10:01:10
Rod Khleif
Oh. Got it, got it, got it. Now they didn’t do that already. You had to do that.

00:10:01:10 – 00:10:14:25
Alexander Cartwright
They did that. Oh they did that. And they just had a little wet bar and small refrigerator in there. So we expanded that kitchen. We’re always adding circuits for electrical. Every major appliance needs its own circuit. Right. And expanded that into a full kitchen.

00:10:14:26 – 00:10:24:19
Rod Khleif
Gotcha. Okay. Got it. Yeah. I mean, I’ve rented I usually sleep in a sweet and it’s usually got it’s usually the two rooms put together like that. You’ve got a little living room and you’ve got the bedroom.

00:10:24:20 – 00:10:25:01
Alexander Cartwright
Exactly.

00:10:25:03 – 00:10:31:14
Rod Khleif
Okay, okay. And and when was this. When did you do that in Houston.

00:10:31:15 – 00:10:33:24
Alexander Cartwright
That. We started that in 24.

00:10:33:26 – 00:10:39:27
Rod Khleif
Okay. Oh, recently. Wow. And is it filled up now? I mean, your occupancy is good.

00:10:39:28 – 00:11:01:27
Alexander Cartwright
Where that one. We continue to run it as an extended stay hotel as we remodel because it’s cosmetic. Okay. And and so that’s available has been occupied. Okay. Because it’s such a desirable product in the market. And we’re about three quarters of the way through the construction.

00:11:01:27 – 00:11:02:14
Rod Khleif
I see.

00:11:02:15 – 00:11:05:07
Alexander Cartwright
And charging toward our refinance toward the end of the year.

00:11:05:08 – 00:11:13:16
Rod Khleif
Okay. So you plan to try to refight HUD once you’re once you got it going, which is about as good as it gets as far as financing, although it’s a pain in the ass, but it’s about as good as it gets.

00:11:13:18 – 00:11:20:12
Alexander Cartwright
Yeah. Another another barrier to entry, right? You just got to sit down and find the consultant and learn partners.

00:11:20:13 – 00:11:26:09
Rod Khleif
Yeah. If you’re doing head. By the way, guys, HUD financing, is it 40 years or 35 years.

00:11:26:09 – 00:11:29:08
Alexander Cartwright
So they they’ll go up to 40. They’ll go up to 40.

00:11:29:11 – 00:11:45:28
Rod Khleif
And it’s but it’s what. But it’s also fixed interest as well. Your interest isn’t going to and there’s no term. It’s the full term. Like you know most most commercial real estate has a term five, seven, ten years, meaning a balloon payment in five, 7 or 10 years. And without you don’t have that, which is fantastic. But there’s a lot of regulatory components.

00:11:45:28 – 00:11:50:25
Rod Khleif
There’s a lot of disclosure requirements, even on an ongoing basis, I think.

00:11:50:26 – 00:12:00:18
Alexander Cartwright
And you got to have a HUD compliant property manager, and we brought in a HUD consultant to work with the architect to make sure we’re doing things just so to comply with what they require.

00:12:00:19 – 00:12:04:22
Rod Khleif
So these these rooms all have the mini splits, I take it.

00:12:04:23 – 00:12:06:07
Alexander Cartwright
They call it tack unit.

00:12:06:09 – 00:12:23:03
Rod Khleif
Your tax. That’s right. They all have tax just like in senior. Yeah I mean listen I love that model. I’m doing it right now on a senior housing project, six assisted living facilities in Texas. And I’m paying including Dallas. I’m paying 40,000 a unit and you can’t build them for less than 250. Right. So, I mean.

00:12:23:03 – 00:12:24:07
Alexander Cartwright
It’s the same model.

00:12:24:09 – 00:12:32:13
Rod Khleif
Say it really is. It just is different. Different product. So what’s your second one? I’m just curious if there’s if you’ve come across any other complexity. I’m just curious.

00:12:32:15 – 00:12:54:09
Alexander Cartwright
Yeah. So then we we then tried to look for it. Got another one in Houston. Extended stay property. Another one okay. And that one was was actually being remodeled as an extended stay. And before they signed a 20 year franchise agreement with the flag, we found the property, bought it, remodeled, added sprinklers, and then just leased it up so.

00:12:54:12 – 00:12:56:25
Rod Khleif
Close to be able to do that. It’s one of the things.

00:12:56:25 – 00:12:57:27
Alexander Cartwright
You need for multifamily.

00:12:57:29 – 00:13:13:04
Rod Khleif
For multifamily, by the way. Flag Guys is like Hilton Holiday Inn. You know, it’s it’s these big franchise brands of hotels. You know, you think they’re all owned by that brand? No, they’re using the name and they get a business model and all that, just like a franchise.

00:13:13:05 – 00:13:18:12
Alexander Cartwright
That’s right. I slip up using the lingo. I didn’t even recognize it right then. We just say the flag Marriott.

00:13:18:15 – 00:13:27:16
Rod Khleif
And it’s not doors and hotels, it’s keys as well. So you got to know the nomenclature, the verbiage. But so so how big is that one is that is that.

00:13:27:18 – 00:13:45:21
Alexander Cartwright
That’s 100 units we took to 109. That’s a big thing in the hotel conversion space is you can really crank the value. If you can squeeze in a few more units by converting commercial laundry space or some meeting space or some storage space. Hotels have a lot of extra space for multifamily. Just want it.

00:13:45:22 – 00:14:00:07
Rod Khleif
Need that makes sense. You know, they have closets. They have. They’ve got the linen rooms, they’ve got the all that stuff. Very interesting. Now are you putting laundry facilities in or is it, I mean, in the unit or are you doing like a laundromat kind of thing?

00:14:00:09 – 00:14:23:19
Alexander Cartwright
It depends on the neighborhood, right. Who we’re going after as a demographic and the architecture of the building. So for example, we’ve got another property in Denver, and in that property it’s 310 unit hotel. Wow. We put 91 bedrooms. Every single one bedroom is going to have its own washer dryer. But the studios will have a common area washer dryer.

00:14:23:19 – 00:14:25:25
Alexander Cartwright
But we have them on every single floor.

00:14:26:00 – 00:14:29:08
Rod Khleif
Well, just out of, you know, because I know Denver like the back of my hand. Where is it at?

00:14:29:09 – 00:14:33:12
Alexander Cartwright
This is on Quebec Street, right across from where there was the Stapleton Airport.

00:14:33:14 – 00:14:50:08
Rod Khleif
An airport. So around around 38th, 40th up in maybe further north than that. Yeah. No, my my dad worked for Continental Airlines for 36 years. So I went to Stapleton all the time. Okay. Yeah. And I had a bunch of houses there in Park Hill. It’s called that area is called Park Hill. Yeah, yeah, I had a bunch of houses there, so.

00:14:50:10 – 00:14:52:16
Alexander Cartwright
Well, you know, it’s so Stapleton airport.

00:14:52:17 – 00:14:54:01
Rod Khleif
I may know the freaking hotel.

00:14:54:02 – 00:14:57:18
Alexander Cartwright
Sure you do. This is the. It’s one of the large hotels. The big one.

00:14:57:18 – 00:14:59:27
Rod Khleif
Right there. Yeah. No, I know that would be.

00:15:00:01 – 00:15:00:21
Alexander Cartwright
A big in the.

00:15:00:24 – 00:15:02:28
Rod Khleif
Middle of the street. It would be on the west side of the street.

00:15:02:28 – 00:15:03:13
Alexander Cartwright
Side of the street.

00:15:03:19 – 00:15:13:02
Rod Khleif
I know the hotel, I swear I know the hotel. In fact, I think I went to my class reunion at that hotel, believe it or not. Oh, cool. Yeah, yeah. That’s funny. I don’t remember the the flag, but.

00:15:13:04 – 00:15:14:16
Alexander Cartwright
Well, we bought as a Holiday Inn.

00:15:14:17 – 00:15:16:22
Rod Khleif
No, no, it was something else back before.

00:15:16:24 – 00:15:20:00
Alexander Cartwright
It was built as a Howard Johnson that.

00:15:20:03 – 00:15:22:21
Rod Khleif
God, I could be wrong. Maybe it wasn’t the same hotel.

00:15:22:22 – 00:15:34:00
Alexander Cartwright
But this hotel, it’s got a great big atrium. Okay. It’s a Levon stories tall. Wow. Balconies on every room. You can’t build 11 stories tall. Yeah. That’s cool. If I could mention for a moment with Stapleton Airport. Right.

00:15:34:01 – 00:15:37:23
Rod Khleif
So what do they. What do they convert it to? I haven’t been back there in years, so. Well.

00:15:37:23 – 00:15:42:25
Alexander Cartwright
It’s just become a new planned development, right? It’s beautiful. So a lot of new housing in there and retail.

00:15:43:00 – 00:15:43:22
Rod Khleif
Retail in there too.

00:15:43:24 – 00:15:50:17
Alexander Cartwright
But you think you’ve got a 310 unit hotel, right. And then the airport closes and moves further outside of the city grows.

00:15:50:19 – 00:15:52:29
Rod Khleif
You’re screwed. Yeah. It’s a long way away.

00:15:53:01 – 00:16:02:21
Alexander Cartwright
You got it. So, 310 hotel. That’s not quite downtown, nor is it at the airport. Just didn’t make sense. Right. And hence we could buy that for $29,000 a unit.

00:16:02:22 – 00:16:04:12
Rod Khleif
29,000 a unit.

00:16:04:17 – 00:16:06:06
Alexander Cartwright
Wow. And they’re all and most.

00:16:06:09 – 00:16:08:23
Rod Khleif
Are you paid for 300 and some units though. So it’s.

00:16:08:29 – 00:16:09:06
Alexander Cartwright
Three.

00:16:09:07 – 00:16:13:25
Rod Khleif
Ten, three, ten. So what did it work out to once you paired it down?

00:16:13:29 – 00:16:17:12
Alexander Cartwright
We are all in for in the low 80s.

00:16:17:13 – 00:16:20:24
Rod Khleif
Well that’s a good deal in Denver. Yeah, that’s a good deal in Denver. Wow.

00:16:20:25 – 00:16:23:01
Alexander Cartwright
Right. And it’s in an opportunity zone.

00:16:23:02 – 00:16:39:24
Rod Khleif
Yeah I was I was just telling Alex that, you know, I can still name every street across the whole town because they’re all alphabetical. And I owned 500 houses there at one time. You want to hear something painful? If I hadn’t sold those 500 houses, I would be netting $1 million a month right now. Bottom line. Net. Yeah, yeah.

00:16:39:26 – 00:16:52:28
Rod Khleif
But yeah, a lot of other things wouldn’t have happened. So no regret. But that’s that’s the truth of it. I sold them to buy 1300 here in Florida. Cool. So. So yeah, the Denver one sounds exciting. So you’ve got a bunch of these in the works right now.

00:16:53:01 – 00:17:11:21
Alexander Cartwright
We’ve got a little over 500 units being converted right now okay. About 1000 in the pipeline. What we’re starting to do is work with some hotel operators that are maybe underwater on their hotel or banks that have got a hotel loan that’s gone bad, right? Kind of partner with them on getting them converted because they put.

00:17:11:21 – 00:17:20:06
Rod Khleif
The finance on all that. Yeah. Sure, sure. So you do these as 5 or 6 indications, I take it. We do. Yeah.

00:17:20:07 – 00:17:47:20
Alexander Cartwright
Yeah we do. Just like single asset syndications. It’s not not fancy on that side. Right. Okay. I don’t mean to jump around too much. One of the things that we’re, we’re starting to do is pair the conversion with a traditional hotel investment in a single fund, because the hotel conversion doesn’t provide any immediate cash flow, like we’re going to refinance, get all our money back, but may take 24 to 36 months if we compare that with a with a hotel.

00:17:47:21 – 00:17:48:05
Rod Khleif
That’s still.

00:17:48:07 – 00:17:50:22
Alexander Cartwright
Operating, that’s still operate to.

00:17:50:25 – 00:17:53:14
Rod Khleif
Operate, continue to operate it while you’re doing the conversion.

00:17:53:15 – 00:17:58:22
Alexander Cartwright
No, no, the separate product. So a separate property that works best as a hotel.

00:17:58:24 – 00:18:02:16
Rod Khleif
Oh. So you’re actually you’ll combine a working hotel with one of these.

00:18:02:17 – 00:18:06:05
Alexander Cartwright
Working hotel not on the same parcel. Right. Just in the.

00:18:06:05 – 00:18:08:23
Rod Khleif
Same same same fund. Right. Okay.

00:18:08:23 – 00:18:14:23
Alexander Cartwright
You’ve got immediate cash flow and you’ve got the upside. And we’ve got the team that understand.

00:18:14:25 – 00:18:17:21
Rod Khleif
Something like that working already where you’re managing a hotel.

00:18:17:23 – 00:18:31:08
Alexander Cartwright
We are. So we’ve partnered with a group that is built 110 hotels ground up and does hotel investment. And so we’re just about to launch our first where we’ve got hotels and conversion offered in one product.

00:18:31:15 – 00:18:38:16
Rod Khleif
That’s a lot of it’s a lot of plate spinning on that. I’m just going to say to run a hotel while you’re doing that. Well.

00:18:38:17 – 00:18:39:26
Alexander Cartwright
Not not the same team, right?

00:18:39:26 – 00:18:40:01
Rod Khleif
Yeah.

00:18:40:03 – 00:18:42:18
Alexander Cartwright
That’s third party management runs the hotel.

00:18:42:19 – 00:18:53:23
Rod Khleif
Okay, okay, okay. Interesting, interesting. And where else are you looking? You say you’ve got 1000 that you’ve in that that are at the top of the funnel where we’re at. Curious.

00:18:53:23 – 00:18:54:12
Alexander Cartwright
So there’s.

00:18:54:14 – 00:18:55:29
Rod Khleif
I don’t want you to give anything away.

00:18:56:00 – 00:19:05:02
Alexander Cartwright
No no no no. And I’m glad to talk about so in general, the better the market, the less the less affordable the market, the better it is for hotel conversion.

00:19:05:07 – 00:19:06:21
Rod Khleif
Because Denver, for example.

00:19:06:22 – 00:19:26:11
Alexander Cartwright
For example, because people are putting up with a little bit smaller unit right now in Denver, that property is going to be highly amenities. We won’t we won’t lack any amenity that the A-Class guys across the street have. Okay. But it’s a smaller unit. So and you’re not having a bunch of walk in closets for example. So you’ve got to compensate for that with a lower price point.

00:19:26:16 – 00:19:45:20
Alexander Cartwright
Now in an Oklahoma City or in Indianapolis. Or even Houston, right. It’s relatively affordable. You got larger units. You got to really compete on price to fill rooms in those kind of cities. Whereas if you’re in a northern new Jersey, for example, people are already accustomed to a little bit smaller unit and the rents are high and the cap rates are low.

00:19:45:21 – 00:19:55:05
Alexander Cartwright
So where there’s we’re I like to say we’re a free market solution to affordable housing. So we like markets that are unaffordable, meaning income relative to the.

00:19:55:05 – 00:20:00:21
Rod Khleif
Community generally or or Denver for sure. Phoenix. Phoenix.

00:20:00:27 – 00:20:13:23
Alexander Cartwright
So we love Phoenix Denver. We love the Texas Triangle in the right neighborhood. Yeah, we’re working on northern new Jersey, Philadelphia, Mid-Atlantic. But the more affordable markets in the center of the country, not as good.

00:20:13:24 – 00:20:41:23
Rod Khleif
Of a tougher. Yeah, tougher for sure. Interesting, interesting. So, yeah, you’ve got a very unusual niche, which is why I wanted to talk to you. One of the things that I’m sure you’re encountering is price differentials between multifamily and hotel. As an asset class, why are you able to buy these hotels? I mean, I could if you if I, if I ask you this question around Covid, I’d know the answer.

00:20:41:23 – 00:20:47:28
Rod Khleif
But right now. Why are you able to buy these hotels at a discount. Yeah. Compared to like a multifamily asset.

00:20:48:00 – 00:21:00:15
Alexander Cartwright
That’s great question. So I’ll back up for a second. Like what? Fundamentally, what we’re doing is an arbitrage between a hotel cap rate and a multifamily cap rate. Like we we want to get the property.

00:21:00:18 – 00:21:01:12
Rod Khleif
Economist answer.

00:21:01:15 – 00:21:21:15
Alexander Cartwright
This is the economist answer. But then but then the question is, okay, I can understand why. Maybe there’s one cheap hotel, but why are there a whole bunch of cheap hotels? In other words, why isn’t this arbitrage competed away? If you can buy low and so high? Why is there anybody doing that right? So the answer really lies in the nature of the hotel business.

00:21:21:18 – 00:21:41:19
Alexander Cartwright
Hotels have what I like to call limited economic life. So let’s say you open up a hotel, a marriott Courtyard Marriott comes in. They do an inspection because like you mentioned, it’s a franchise. And they say, okay, you’ve got your Marriott approved staff, you’ve got your Marriott approved linens and soap and breakfast and all the stuff.

00:21:41:19 – 00:21:42:02
Rod Khleif
Right.

00:21:42:03 – 00:21:54:00
Alexander Cartwright
And in five, seven years, they’re going to come back to you and they’re going to say you need to do what they call a Pip property improvement plan. And you need to buy the latest and greatest Marriott.

00:21:54:02 – 00:21:55:02
Rod Khleif
Stuff, stuff.

00:21:55:09 – 00:22:17:00
Alexander Cartwright
Furniture and our tile and have our new facade on your building, etc. so that Pip is expensive, right? Especially if it’s a big property. And especially as it gets older, the pips become more and more expensive. So if your hotel is not running well, or if you have not managed it well and saved for the Pip, or.

00:22:17:01 – 00:22:21:08
Rod Khleif
If times have changed in that geographic area and it’s the demand.

00:22:21:08 – 00:22:22:09
Alexander Cartwright
Is down like the airport.

00:22:22:09 – 00:22:22:27
Rod Khleif
Moves, right?

00:22:22:28 – 00:22:25:04
Alexander Cartwright
Right, right. Or a new hotel was built down the.

00:22:25:04 – 00:22:26:06
Rod Khleif
Street, which is common.

00:22:26:07 – 00:22:35:06
Alexander Cartwright
Which is very common. Then you might say, you know what, I am not going to do this expensive Marriott Pip. I might slip to Western.

00:22:35:08 – 00:22:35:22
Rod Khleif
Or Best.

00:22:35:22 – 00:22:41:18
Alexander Cartwright
Western holiday, right? You name it. And then five, seven years go by I might slip to super eight.

00:22:41:19 – 00:22:41:27
Rod Khleif
Wow.

00:22:41:28 – 00:23:01:12
Alexander Cartwright
And then pretty soon it’s Bob’s pretty good hotel. We call them independent. There’s no flag, right. And there are no brand standards. So some of those are fine, but some are low quality because there’s no brand standards. So then you get in what I like to call the hotel death spiral. They drop the rates, brings in a rougher crowd, sure get bad reviews.

00:23:01:12 – 00:23:19:17
Alexander Cartwright
You got to keep dropping the rates to fill up the hotel. And by this time, Marriott or Hilton has got a new hotel down the street. So in multifamily, you can always kind of keep upgrading your unit and your rents will kind of float upwards over time. But in the hotel world, the supply of new hotels can expand on you.

00:23:19:17 – 00:23:32:18
Alexander Cartwright
And guests always want to stay at the latest, greatest hotel. And if you’re just somebody with a Dazn or a Best Western, like the brand is okay. But fundamentally you’re competing on price. So if there’s a new one, customers just go somewhere else.

00:23:32:19 – 00:23:52:15
Rod Khleif
Yeah, yeah. If the new ones competitive in pricing. Yeah. It just reminds me I used to stay at the Mandarin Oriental in Miami and they blew it up. But that’s this different scenario. They’re going to put condos there. But yeah. No I understand that death spiral. That absolutely makes sense. I’ve actually got a great friend that does hotel refurbishment.

00:23:52:19 – 00:24:11:18
Rod Khleif
And so I know a little bit more than enough to be dangerous about it. But no, that absolutely makes sense. So you’re looking for these these these ones that have started that death spiral but still have the bones are good, but the area is good enough or good. Like if you if you can find one of those in Denver, that’s a home run.

00:24:11:18 – 00:24:35:23
Rod Khleif
Phoenix. Even Tampa, parts of Tampa. Yeah. You know any of these major cities that that have, you know, very, very expensive rents, obviously New York, but you know, that that might be too much. But interesting. So, you know, when you play monopoly, okay, you buy the houses and then you buy the hotels, right? So there’s might be something to be said for hotels.

00:24:35:23 – 00:24:38:17
Rod Khleif
Do you ever keep the hotels. Well.

00:24:38:20 – 00:24:56:07
Alexander Cartwright
Occasionally, but stuff that we’re looking to invest in as a hotel. Right. We’re really are looking for different things than you’d look for in a multifamily like, well, for example, in multifamily, it’s very important to see that you’ve got job growth and you’ve got population growth.

00:24:56:08 – 00:24:57:24
Rod Khleif
Income growth. All right.

00:24:57:26 – 00:25:21:11
Alexander Cartwright
And and as a hotel investment, those things are secondary I see you’re really looking for what’s a core demand driver. You may have a hotel next to an airport or next to a casino, a hospital in a town with a population or job growth that’s declining doesn’t mean the hotel business is deteriorating, for example. Interesting, right? So you’re looking for different trends, but hotel business can be a good business.

00:25:21:11 – 00:25:29:02
Alexander Cartwright
For example, right now you can buy a Hilton Home two suites, which is very nice.

00:25:29:04 – 00:25:43:27
Rod Khleif
I stayed, you know, I had I had a property in Shreveport and that was the nicest hotel in town I could stay at was a home, two suites, which is not saying a lot, but and I yeah, I don’t even want to fly over Shreveport airspace if you live there, you know what I’m talking about.

00:25:43:28 – 00:25:47:11
Alexander Cartwright
But I just drove through. I thought the same thing.

00:25:47:13 – 00:25:53:02
Rod Khleif
Oh, good God, I could tell you horror stories about that asset. But no, home to suites is nice. Sorry. Interrupted.

00:25:53:04 – 00:26:11:25
Alexander Cartwright
Fine. Yeah, yeah, but. So think about you could buy right now. Home to suites. You are tied to the Hilton brand. You’re tied to the Hilton distribution and point system, right? You can buy those at a nine and a half to ten cap. No shit. Right. So think about you put 30% down. Right. Get a 6.5% interest rate.

00:26:12:02 – 00:26:23:18
Alexander Cartwright
It’s almost 20% cash on cash. Wow. Now you’ve got to have the right operator. You hire a third party management, and you’ve got to make sure you set money aside for a pimp. But in terms of cash flow, it absolutely cranks.

00:26:23:18 – 00:26:24:07
Rod Khleif
Interesting.

00:26:24:07 – 00:26:38:15
Alexander Cartwright
So the question is why are the cap rates so high? Right. And it’s because with multifamily, we know we’re going to be able to bump up rents to 3% almost every year, especially over a 1015 year ownership period. Right.

00:26:38:16 – 00:26:42:28
Rod Khleif
This is look at history inflation the dollar going down. Yeah.

00:26:42:29 – 00:27:00:26
Alexander Cartwright
Right. That’s just not the case with a hotel I mean that the hotel may go to zero after 20 years right. It may become the Holiday Inn that I’m buying at $29,000 a door. If you’re not a good manager, if the market shifts on you. Right. So you’re getting paid to take different kinds of risk and you’re being compensated.

00:27:00:26 – 00:27:03:27
Alexander Cartwright
More cash flow, no guaranteed appreciation.

00:27:03:28 – 00:27:06:02
Rod Khleif
The biggest factor in cap rate is risk.

00:27:06:04 – 00:27:06:16
Alexander Cartwright
You got it.

00:27:06:18 – 00:27:06:22
Rod Khleif
Yeah.

00:27:06:23 – 00:27:16:10
Alexander Cartwright
I like to think the cap rates fundamentally a measure of how durable the income stream is. So in the hotel world, income streams really high. But it’s not durable.

00:27:16:12 – 00:27:44:24
Rod Khleif
You know. And how much management is involved and these other things. Yeah. Can we go global for a minute? I mean, what are your thoughts? I mean, you’re an economist, for God’s sakes. I might as well take advantage of that degree for a minute here. So what are your what are your thoughts on where we’re at with inflation and all the money supply and the fact that, you know, I had an economist sitting there and he told me that 80% of the US currency was created during the Biden administration.

00:27:44:25 – 00:27:49:24
Rod Khleif
It was a 20% up to that point. 80% more got created where wondering why there’s inflation. I mean, hell.

00:27:49:27 – 00:28:07:23
Alexander Cartwright
I know, I know, it’s just I just roll my eyes. When I heard the fed chair get on TV a couple years ago and say, we’re not even thinking about thinking about raising rates. And the inflation is transitory and it’s supply chain issues. It’s like you don’t need a PhD in economics to think about these first principle things.

00:28:07:24 – 00:28:32:11
Alexander Cartwright
Right. And the money supply is not the only driver of inflation, but let’s call it 95 to 95, 95 to 99% of what cause inflation is the money supply. And you’re right, they printed almost $400 million an hour for almost two years without stopping. I wish we had a chart of this. So if you look at the money supply M2 and you look at kind of growth, that’s pretty normal.

00:28:32:11 – 00:28:55:05
Alexander Cartwright
And we get to 2008, 2009 financial crisis just spikes. And we had the biggest jump in the money supply that basically we had ever seen. And now if you look at that chart with 2020 on there, you can’t even see that 2009 on the trend line. You can barely see it. Wow. I mean, it just I don’t have words to explain the amount of money that has been printed.

00:28:55:05 – 00:28:58:17
Alexander Cartwright
And we see how painful it’s been raising rates.

00:28:58:17 – 00:29:00:10
Rod Khleif
And the fraud that we’ve seen.

00:29:00:12 – 00:29:05:26
Alexander Cartwright
And the fraud that we’ve seen, and they’ve only brought the money supply down back a little bit. So it’s.

00:29:05:26 – 00:29:10:07
Rod Khleif
Like the end game here from an expert. Alex, what’s the end game in your opinion.

00:29:10:08 – 00:29:11:19
Alexander Cartwright
In terms of what will happen.

00:29:11:20 – 00:29:16:27
Rod Khleif
Yeah. Economically where are we headed for a for a for a big crash. What do you think is going to happen here.

00:29:16:28 – 00:29:50:04
Alexander Cartwright
Well that’s just anyone digital. I will I will answer the question. I just want to say anyone that sounds very confident about predicting recessions. In my opinion, you should be immediately skeptical of because it’s just so complex, right? Like, who can predict something like a Covid or a war, right? They’re just exogenous shocks. But in terms of just credit markets in general where you have pumped up the money supply, so much, does that ultimately go away without a problem?

00:29:50:05 – 00:29:52:15
Alexander Cartwright
Of course not. Right, right.

00:29:52:16 – 00:29:59:03
Rod Khleif
I have to think something’s going to got to get a got a break here. I don’t know if AI will help, you know, massage.

00:29:59:06 – 00:30:19:28
Alexander Cartwright
We hope it does. Right. We hope that that just causes productivity to grow so much. Right? Then we and we just become so much. We become so wealthy that we effectively end up paying down the debt and neutralizing some impact of the money supply. That’s that’s what’s happened historically. But of course, there’s no guarantees that kind of thing happens, which is why it’s scary to think about.

00:30:20:00 – 00:30:34:14
Rod Khleif
Yeah, yeah. Wow. Well, it’s you know, I’m not a doom sayer, but I, I do think about it a lot and, you know, and then you think about the impact of AI on jobs and, and ability of people to pay.

00:30:34:14 – 00:30:35:04
Alexander Cartwright
Rent.

00:30:35:06 – 00:30:37:17
Rod Khleif
You know. And he thoughts on that? Yes.

00:30:37:18 – 00:31:01:02
Alexander Cartwright
Okay. A lot of thoughts I’ve been thinking about a lot lately. So I think this is way overblown. Okay. All right. All right. Let me just give you a story. Okay. The very famous story. Have this professor at Stanford studying biology. You have this professor at University of Illinois is an economist. Okay. And they. And this one guy, Stanford writes a book called the The Population Bomb.

00:31:01:07 – 00:31:22:27
Alexander Cartwright
And he writes about this was published in the late 70s, early 80s. Okay. We’re going to run out of food. We’re going to over populate the Earth. In other words, there’s not going to be enough stuff to go around and we’re going to get poorer. And the economist says, why don’t we make a bet? Because in economics we like to say that a bet is a tax on bullshit.

00:31:22:28 – 00:31:43:15
Alexander Cartwright
So he says we’re going to make a bet, okay. And I bet you that the price of all these different commodities, Mr. Biologist, goes down. You name the commodities, because if we’re going to run out of stuff, we would think the price would go up. As they get more scarce. So he says, let’s take all let’s take silver.

00:31:43:15 – 00:31:55:20
Alexander Cartwright
Copper. They picked out all these commodities okay. And they made this bet. They made kind of a public show of it. And you go ten years in the future, 15 years in the future, 20 years in the future. What happened to the price of all these? They went down.

00:31:55:21 – 00:31:56:03
Rod Khleif
Did they?

00:31:56:03 – 00:31:58:15
Alexander Cartwright
Right. And they went down. And I’ll give you an example of one.

00:31:58:21 – 00:32:00:01
Rod Khleif
Doesn’t make any sense with inflation.

00:32:00:06 – 00:32:07:10
Alexander Cartwright
Oh, well, even with so an injustice they went down. But even with inflation the price of these things go down.

00:32:07:11 – 00:32:08:06
Rod Khleif
Okay.

00:32:08:08 – 00:32:37:00
Alexander Cartwright
I’ll give you an example. Copper. Copper prices 1920s 1930s or going straight up because telephone is becoming widely available. We’re running copper wire to everyone’s home. And that high price is a signal to entrepreneurs. Hey, we need to find a substitute for this copper wire. And copper ultimately comes back down in price. Why? Because we invent fiber optic cable, which is made of sand, which there’s no shortage of.

00:32:37:02 – 00:32:58:00
Alexander Cartwright
Right? Okay, so here’s here’s my point. Human ingenuity and creativity is unlimited. Even though our physical resources are scarce. So there’s always been these scares. We’re going to run out of jobs. We’re going to run out of food. We’re going to run out of oil. We’re going to run out of X, y, z. It just doesn’t pass. First principles of economics.

00:32:58:00 – 00:33:21:28
Alexander Cartwright
It’s actually never happened. Maybe for a few like for moments in time, prices have shot up. But long term that’s not been the case. Imagine a world where 80% of the country is employed in one industry, like farming. That happened, right? And people were terrified when power farming equipment came out. People were terrified of all the jobs that were going to be lost because of computers.

00:33:21:29 – 00:33:40:06
Alexander Cartwright
Right. You know, we used to have we used to pay people to operate telephones and even elevators. Those jobs are destroyed, right? And when we come out with jobs numbers every month and we show that we create something like 120,000 jobs a month, that’s net we destroy every month, hundreds of thousands of jobs and create hundreds of thousands of jobs.

00:33:40:07 – 00:33:43:27
Alexander Cartwright
That is a normal, growing, innovative economy.

00:33:43:28 – 00:33:48:25
Rod Khleif
Interesting. So you don’t think AI is going to impact it more than some of these other things?

00:33:48:26 – 00:33:50:13
Alexander Cartwright
Well, so I just want to be specific.

00:33:50:13 – 00:33:52:25
Rod Khleif
I don’t necessarily disagree with you. I have an abundance mindset.

00:33:52:26 – 00:34:10:29
Alexander Cartwright
People will lose their jobs. Right, right. But every single technological innovation has saved labor and therefore destroyed someone’s job. Right? There will be people that lose their jobs. Just like how we no longer have got certain factory workers in this country. We don’t have blacksmiths or.

00:34:11:01 – 00:34:16:09
Rod Khleif
Taxis in Miami with without drivers pulling into my parking lot. Great example.

00:34:16:11 – 00:34:16:25
Alexander Cartwright
Crazy.

00:34:16:26 – 00:34:17:27
Rod Khleif
Great example. Yeah.

00:34:17:29 – 00:34:40:21
Alexander Cartwright
And guess what? We will create additional jobs where people will get paid even more money because they will be paid to do something where they are, in fact actually productive, something that the machine cannot do that will be more economically fruitful. That is the history of economic growth. I know it’s hard to we can’t. What’s hard to believe about this story is it’s hard to remember.

00:34:40:22 – 00:34:48:28
Alexander Cartwright
Hundreds and hundreds of years of economic history. And it’s also hard because I can’t tell you what everyone who loses their job due to AI is going to do. Right?

00:34:48:29 – 00:35:06:10
Rod Khleif
Right. And there’s going to be a lot of there’s already been a lot of job loss. You look at some of the big tech companies, but these people, if they embrace AI, you know they’re there. They can they can figure it. They’ll figure something out. Yeah. Interesting. Well, listen, Alex, this has been a real treat. Completely different than I typically talk about on this show.

00:35:06:12 – 00:35:09:16
Rod Khleif
Good. You’re doing some good stuff. How can people reach you?

00:35:09:17 – 00:35:27:04
Alexander Cartwright
Our firm is called Hotel shift shift. And at hotel shift Capital. Okay. Always happy to chat about hotels and economics. Or somebody finds a hotel and they need some help looking over it. That’s our favorite thing to do is analyze hotels. Glad to be helpful.

00:35:27:05 – 00:35:29:26
Rod Khleif
Love it. Well, thanks for coming down. Appreciate you being here.

00:35:29:28 – 00:35:31:01
Alexander Cartwright
Yeah. Thanks for the opportunity.