Assessing the actual cash you have available – and the cash you will need – to purchase a hotel or other hospitality property can be a tricky enterprise. One of the most important aspects of understanding your available cash, however, is how much you can spend within safe limits! Here is a quick guide to help you determine what you need, what you have and what you can comfortably spend.
What you need:
It is common to finance roughly two-thirds of the total initial investment on a hospitality property, so you will need to come up with roughly one-third of the total selling price. If you already have a property in mind, then you just need to figure out what you have and/or what you still need to meet that asking price. On the other hand, if you do not yet have a property in mind, then you can calculate your net worth, figure out what you are comfortable spending and then multiply that number by three. That will give you the total price of what you can afford to purchase.
What you have:
The first thing you will want to do is figure out your net worth, which is just the total value of your assets minus your liabilities. Your assets include everything from cold, hard cash to stocks, bonds, CD’s, IRA’s and 401k’s; land, real estate and even personal possessions such as cars, boats, art or even small items like golf clubs or the family silver.
Liabilities, on the other hand, are anything that you owe. This includes big things like mortgages and other loans, credit cards and taxes, but also includes things like your cable bill and subscription to Sports Illustrated. If you take all the things that you own (your assets) and subtract all the debt that you have (your liabilities) you are left with your net worth. For instance, if your sole asset were a home valued at $500,000 and you only owe $100,000 on the mortgage on that home, then your net worth would be $400,000. If you own nothing but make $100,000 a year and spend $5,000 a month, then your net worth would be $40,000. Multiply that number times 3 and that is what you have to spend.
What you can comfortably spend:
Finding your net worth will tell you what you have available to spend, but it doesn’t mean that’s what you should spend. Every business venture is going to involve some risk and there are never any guarantees that a business venture is going to be successful. That means you want to make sure you only risk what you can afford to lose. If you have a second home or vacation property, there is nothing wrong with putting that up as collateral or taking out a mortgage on it. If you lose it, you don’t lose your primary residence or put yourself out on the street. If you have a vintage Shelby Cobra you restored with your dad, you may want to put it up as collateral instead of selling it. There is still a chance you might lose it, but you stand a better chance of keeping it than if you sell it outright and use the cash for a down payment.
When you have determined what you can comfortably spend and multiplied it by three and that amount does not cover what you wish to buy, then you can go back and see if maybe you might be willing to sell your collection of 1970’s Star Wars memorabilia after all. If you reach the end of what you have to spend or leverage and are still not at the price you need, then you may need to bite the bullet and take on some partners or call Great Aunt Martha to see if she’s interested in a killer investment opportunity.