Total revenue of the hotel industry in the United States will surpass $200 billion this year. In fact, the hotel industry is one of the world’s fastest-growing industries in the world.
If you want to buy a hotel, things are looking good for you. Read on for everything you need to about how to buy a hotel, secure hotel loans and more in this post.
Get Familiar with the Market Before You Buy a Hotel.
You need to have a deep understanding of the local hotel market before you consider hotel financing or anything else.
Before you do anything else, put together a list of all the hotels that are currently on the market in your area. Never go for the first (and only) hotel that comes across your lap, no matter how good it seems.
An even better business opportunity might be out there for you. If you don’t explore your options, you’ll never know.
You can use BizBuySell.com to search for hotels for sale in your area and price range.
Make sure to research the real estate market to get a sense of what you can expect during offers and negotiation.
Understand Startup Costs.
When you buy a hotel the costs include the purchase of the hotel, renovations and working capital to cover staffing, marketing and operation costs.
The cost of your new hotel greatly depends on the type of hotel you are buying (luxury or budget) and the size of the hotel. THere’s a big difference between a hotel with 25 rooms and one with 500.
So how are you going to fund buying a hotel? You will need a loan.
Commercial Real Estate Hotel Loans.
Loans for hotels are a mix of a real estate loan and a business loan.
The collateral you can offer is the hotel itself. That means that the hotel will need to be approved as a commercial real estate loan. Yet, you also need to prove that your hotel is a business.
Commercial real estate hotel loans can be used for buying the hotel from the previous owner, renovating the hotel or buying new equipment. Either way, there are 3 types of hotel loans.
Conventional Bank Loans.
These loans don’t have an upper limit. The interest rate is generally between 5 and 7%. The term of this loan can go up to 25 years.
Conventional bank loans work best for strong borrowers that already have a relationship with the bank they hope to get a loan from.
SBA 7a Loans.
SBA 7a loans can give you up to $5 million dollars on loan. The rates may be 5.755 or up to 7%. The term for these loans can go as high as 25 years.
These loans are great for smaller commercial hotels that don’t need a huge loan.
SBA 504 Loans.
SBA 504 loans have an upper limit of $20 million dollars.
These loans come partly from a bank and also from the Certified Development Company. Usually, the bank provides 50% of the loan and the CDC puts in 40%. The hotel buyer puts up 10% of the needed amount too.
The interest rate is split two ways. Around 5% goes to the bank and 3.7% is the CDC cut.
SBA 504 loans usually have a 10-20 years term. Though the interest is higher than conventional bank loans, it is a good option for those who struggle to be approved for a loan from the bank.
Your other option, maybe in conjunction with these loans is to get one or more investors. An investor will give you some of the funds you need in exchange for a percentage of the ownership or the profits.
Just make sure you avoid these 5 common mistakes when you are pitching to investors.
This section just skimmed the surface of everything you need to know about financing a hotel. Get more information here.
If you use a third-party person or company to help you find and secure the deal when you buy a hotel, you will need to pay a finder’s fee.
Make sure you negotiate this fee based on how much work that finder did. There’s a different cost between making a simple introduction and helping you to write a summary selling document.
Of course, the fee will also depend on how large the investment is.
Generally, you can expect to pay 5% of the first million and one percent less for each million after that.
Look at Occupancy Rates.
Before you buy a hotel, check the hotel’s occupancy register so you can have an idea about the number of guests you can expect every month.
At the same time, look at the monthly expenses. You want to make sure that the hotel you are buying is profitable already.
Compare the current rates to the hotel’s competitors to see if accommodations are priced accordingly. Chances are that at stay at the hotel is over or underpriced.
Once you own the hotel you can make changes to the expenses and the rates. And you will aim to increase the number of guests. But before you buy it is a good idea to get a sense of where the finances are currently.
Review Licenses and Permits.
Another vital thing you must do before buying a hotel is ensuring that the property has the proper licenses, permits and has adhered to the state requirements to operate.
Take a look at the paperwork for proof of proper documentation. Make sure that the hotel is up to date with property taxes and has property insurance.
Find out how much their current coverage is and what the insurance premiums are. If you don’t like the policy, you can always switch once you own the hotel.
Lastly, do research to make sure that the current hotel owner is not involved in any legal or tax-related troubles. That is something you really don’t want to get mixed up in.
We hope this guide has helped you get more information about what it takes to buy a hotel.
Remember, before you sign on the dotted line, the most important thing you must do is do your research. Then, once you are sure it is a smart investment and that you can finance it, go for it.
Next, check out these tips for success in your first business venture. Good luck with your new hotel.