Buying a hotel is, or at least can be, a hugely complicated process for even the most experienced of investors. Not only are you buying a piece of real estate (which has its own complicated set of variables to consider) but you are also buying a business. Here are 3 tips to help you get a handle on the financial process involved in buying a hotel.
Calculate Your Price Range/ Comfort Zone First
Hotels can run from the budget friendly to the palatial, and their purchase price often runs along those same lines. Before you start looking for a hotel property, it’s important to understand what you want. Are you simply looking for an investment that you want someone else to manage, or do you want to purchase a property to manage or oversee yourself? What you want will partially determine your price range, but the other determining factor is how much of a down payment you can afford. Down payments generally range from 5% to 20%. If you are taking out a bank loan, they will generally require a 20% down payment, but if you are using private financing, then it is up to the seller to determine what kind of down payment they require.
When calculating your price range, remember that you will have other expenses such as closing costs, legal expenses and working capital for the hotel itself, which you will also need to have money set aside to cover. It is a good idea to designate 25% of your investment capital for these expenses.
So, if you have $180,000 in investment money and you set aside $30,000 for expenses, that leaves you with $150,000 for a down payment. With that, you can afford:
- A 5% down payment for a $3 million hotel
- A 10% down payment for a $1.5 million hotel
- A 20% down payment for a $750,000 hotel
Develop a Good Business Plan or Take a Very Close Look at the Business Model of a Working Hotel You are Considering Purchasing
Whether you are purchasing a piece of property in hopes of opening a hotel, or purchasing a functioning hotel, having a good business plan is of utmost importance. Before making an offer, it’s important to do significant research to determine to what the legitimate projected costs of running/ operating the business will be. Hotels are prime targets for “Fix & Flip” schemes where shady corporations will purchase a hotel making a reasonable profit and cut costs drastically in order to show a massive profit to buyers who will jump eagerly on the opportunity without genuinely doing their due diligence. Make sure you have a genuinely firm grasp of the actual costs and projected earnings of the business side of your investment before entering into any agreements.
Carefully Vet and Screen Investors
Purchasing a hotel is much like a 3-card monte game. Sometimes, you want to look for investors first so you know what kind of a budget you have to work with before looking for the right property, but other times you won’t be able to get investors on board before having a specific property with a detailed business plan to show them. Regardless of when you start to bring investors on board, however, the most important thing you can do is carefully vet and screen them – even if they are your close friends and family. In the case of investors unknown to you, you will want to check their background and reputation very carefully and definitely have an attorney go over any legal contracts or agreements you make with them. In the case of family and friends, however, a different kind of vetting and screening is equally important.
All Investors Have Expectations. It if of Utmost Importance to Know Going in Exactly What They Are
In the case of investors with whom you do not have a personal relationship with, their expectations are generally very clear – they want to make a profit, period. It is, of course, important to know just how much profit they expect to make on their investment, but overall, their motives are very clear. In the case of family and friends, however, their motives may not always be so cut and dried. First, make sure you know whether they feel they are giving you a loan or making an investment. If it is a loan, make sure you know exactly when they expect to be paid back. If it is an investment, make sure you know what their expectations are. Sometimes, parents, friends and family members can “invest” with you as a way of controlling you and may even attempt to sabotage your efforts or may “invest” with you as a way of drawing closer to you and can become angry when their unspoken expectations are not met. When expectations are not met, things can get ugly. Make sure you have a clear understanding of what your investor’s expectations are before taking any money from them – no matter who they are.