Photo credit: Valeriia Bugaiova
Hotels and Motels come in many different configurations from the large properties of Marriott, Sheraton, Hilton or Accor through a scale of boutique properties to the smaller regional properties that are self-owned and are uniquely banded. Owning your own hotel is a popular way to start a new business. Every year thousands of people, ranging from the retired couple to the lifelong hospitality professional, buy guest houses, hotels or bed-and-breakfasts, with the businesses as varied as the buyers. While investing a large amount of money in a hospitality business may seem daunting, it's a straightforward process with the right planning and professional assistance.
PART 1 - Raising Money
Photo credit: Unsplash
Pull together as much money as you can. In order to buy a hotel, you'll need to put together as much money as you can for a down payment. In addition, you'll need money to close the sale and run the hotel until it begins returning profits to you. How much you'll need for each of these expenses will depend on the value of the property and your business model. Start by compiling money from your savings and investment accounts. Don't worry if you don't have a lot of money saved in those accounts; there are plenty of other sources of financing you can use.
Take money out of a retirement account. You may also be able to get investment money out of your retirement account. However, this will incur penalties depending on your age and the type of account. For example, any money you take out of an RRSP will be taxed as income (at your regular income tax rate). You should also take into consideration that if your hotel fails, you will have little or no money left in your retirement account to use later in life.
Find other partners. You will be able to increase your investment amount if you can find other partners to go in with you. Ask friends and family if they are willing to make a more sizable investment in your business in exchange for equity (a share of the business's ownership and profits). You may also be able to find partners in local investment clubs or online.
PART 2 - Determining Your Budget
Photo credit: Jon Tyson
Set money aside for other costs. A good rule of thumb is to set aside 25 percent of your investment money to pay for other costs such as working capital. These costs include closing costs with the seller, legal costs (for the purchase contract), and working capital used to begin running the hotel. Subtract this money from your investment amount and use the remainder to make a down payment.
Calculate your price range. Your price range will depend on how much of a down payment the seller of the property requires. At this point, you'll likely be unsure of how much this will be. Set several different price ranges that are dependent on the seller requiring different down payment percentages, from 5 percent to 20 percent. For example, using the above example of $150,000 available for a down payment, you could afford:
20 percent down payments are the norm if you use a bank loan to purchase your hotel. However, with seller financing (borrowing from the seller of the property), you may be able to get the down payment percentage down to 5 percent. Additionally you will have the ability to leverage the value of the real-estate, and your broker advisor can help with this part.
Project future earnings from the hotel. You need to make sure that any hotel you want to buy will be able to provide you with enough returns to cover both your expenses and your cost of borrowing (debt service). To do this, project the cost of your loan payments over the next three to five years. This may require the assistance of your loan broker. Then, project the cost of the hotel's expenses, like costs of operating, property taxes, insurance, and utilities. Compare the sum of these expenses and your loan costs to the hotel's projected earnings over the same three to five year period. Make sure that these earnings cover or exceed your costs.
PART 3 - Finding the Right Property
Photo credit: runnyrem
Decide whether to buy an existing hotel or start your own. In looking for hotels to purchase, you have the option of either buying existing hotel properties or looking for another property to convert into a hotel (or bed and breakfast). In the latter case, you will need to set aside more money for renovations, but are free to choose a larger variety of properties. Make this decision before moving forward with the property selection process.
Choose a general area. You'll be spending a lot of time at your hotel, so make sure it is close by to where you live or easy to get to. You may even have to move into the area full time to make sure the hotel is run properly.
In addition, having a familiarity with the local area and hotel market can be a serious advantage.
Analyze the market. Once you've chosen an area, try to get a sense of the hotel market in that area. Ask local real estate brokers about hotel sales in the area, specifically if they generally sell for less or more than the asking price. Lower prices may reflect a depressed market and allow you to come in at a lower price and possibly work out seller financing with the seller. However, unless you're expecting an economic turnaround, this also means that cash flows from the hotel will also be low.
Work with specialized business brokers who also handle real-estate. Let Business Brokers in your chosen area know that you are seeking to purchase a hotel and what your price range is. They will be able to show you properties currently on the market or let you know if new ones become for sale. They also may be able to show you properties that can be converted into a hotel.
Investigate several options. After searching for properties, you may start to receive offers to sell through your real estate broker or from a property owner you've contacted. These offers will include information about the hotel's amenities, financial performance, market information, competition, and information about seller financing. If the offer is missing any of these items let your broker contact the seller and request them.
PART 4 - Hiring Help to Investigate the Hotel
Photo credit: Nik Lanús
Hire an appraiser to value the hotel. Locate and acquire the services of an appraiser who has experience with hotels or similar properties. It's best to use one who also has experience in the area where your hotel is located. Work with the appraiser to determine whether or not the hotel is actually worth the asking price. If it isn't, let them identify areas where you could point out problems or damage that you can use to urge the seller to back down on their price.
Work with an accountant to review the hotel's books. A qualified accountant can help you examine the hotel's financial records. This gives you reputable information on the hotel's cash flows, assets, and other financial positions. More importantly, the accountant will be able to assess whether or not any of this information was mishandled or misreported, and may be able to give you a more accurate picture of the hotel's current financial health.
Consider hiring a financial consultant. A market or financial consultant can be useful when projecting future earnings from the hotel. They will be able to combine an analysis of local markets, the hotel market overall, and other trends to identify your hotel's growth and earnings potential over a number of years. They will also be able to help you identify marketing goals, find ways to increase profits, and assist in writing a business plan.
Have an engineer and an architect examine the hotel. These two professionals will examine the building to make sure it complies with local building codes and is structurally sound. In addition, the engineer will determine the condition of utilities, machines, plumbing, and electric work in the hotel. This will help you locate any areas that are in immediate need of renovation or repair. It may also help you figure out how you will renovate an existing structure to meet your hotel's needs and get an estimate on how much those renovations would cost.
Work with a lawyer to meet regulatory guidelines. The only surefire way to make sure that your hotel business meets all local, provincial, and federal regulations is to hire an experienced real estate or hotel attorney.
The lawyer will examine everything from environmental and zoning regulations to taxes and trademarks, making sure that your business doesn't face any sort of legal liability down the road. The same lawyer can also help you out later in making sure that your purchase of the property goes through as planned and that the purchase contract is written in accordance with the law.
PART 5 - Finalizing the Purchase
Photo credit: Sylvie Tittel
Determine a fair price for the property. Subtract your down payment from the asking price of the property. The down payment percentage will vary based on whether or not you secure seller financing for the property or use a bank loan. Next, you'll have to adjust your offer based on the hotel market. If the market is not very active (and you don't have much competition for the property), you may be able to reduce the price in your initial offer. However, in a busier market, come in at the asking price (minus your down payment) or above the asking price if you want to make sure you get the property.
Make your offer. Once you've determined a fair price for the property, write the seller or work through your business broker to submit your offer. Make sure to include proposals for seller financing if the seller offered it in the original offer to sell. Your offer will also specify the amount of your down payment. Your offer should be a short letter that clearly sets forth your terms.
Negotiate with the seller. Chances are, the seller will respond to your offer with a counteroffer. Negotiate with the seller and try to stick as close to your original offer as possible. You may also be able to negotiate benefits like having the seller pay for certain improvements, repairs, or renovations. In addition, be sure to work out details like keeping key suppliers and employees, as well as how long, if at all, the seller will work with you to transition the hotel's management. This negotiation process may be long, but in the end it will be worth it if you and the seller can work out a mutually beneficial deal.
Work with a lawyer to complete the purchase agreement. The buyer attourney will likely write the purchase agreement, and you should hire a real estate attorney to create the agreement for you. A lawyer will ensure that the agreement is in your best interest and complies with your agreed-upon terms. Make sure you use an experienced, local lawyer who specializes in real estate law.
Take advantage of the time before closing. You will have some time after your purchase agreement is agreed upon but before your closing date. Use this time to work with the seller to learn the hotel's business model and make tweaks to your own business strategy. Check and double check your expected revenues and expenses during this period so that you won't have any surprises when you take control of the hotel.
Warnings and References
Once you've bought it, there's no going back. Make sure you understand what you're getting yourself into.
1. http://www.hotel-online.com/Trends/Payne/Articles/SoYouWanttoBuyaHotel.html 2. http://www.hotel-online.com/Trends/Payne/Articles/SoYouWanttoBuyaHotel.html 3. http://www.hotel-online.com/Trends/Payne/Articles/SoYouWanttoBuyaHotel.html 4. http://www.hotel-online.com/Trends/Payne/Articles/SoYouWanttoBuyaHotel.html 5. http://www.hotel-online.com/Trends/Payne/Articles/SoYouWanttoBuyaHotel.html 6. http://www.hotel-online.com/Trends/Payne/Articles/SoYouWanttoBuyaHotel.html 7. http://www.bizjournals.com/bizjournals/how-to/buy-a-business/bizbuysell/2012/12/buying-a-hotel-3-tips.html? page=all 8. http://www.hotel-online.com/Trends/Payne/Articles/SoYouWanttoBuyaHotel.html 9. http://www.hotel-online.com/Trends/Payne/Articles/SoYouWanttoBuyaHotel.html 10. http://www.hotel-online.com/Trends/Payne/Articles/SoYouWanttoBuyaHotel.html 11. http://www.hotellawyer.com/files/books/how-to-buy-a-hotel/#5 12. http://www.hotellawyer.com/files/books/how-to-buy-a-hotel/#5 13. http://www.hotellawyer.com/files/books/how-to-buy-a-hotel/#5 14. http://www.hotellawyer.com/files/books/how-to-buy-a-hotel/#5 15. http://www.hotellawyer.com/files/books/how-to-buy-a-hotel/#5 16. http://www.bizjournals.com/bizjournals/how-to/buy-a-business/bizbuysell/2012/12/buying-a-hotel-3-tips.html? page=all 17. http://www.hotel-online.com/Trends/Payne/Articles/SoYouWanttoBuyaHotel.html 18. http://www.hotel-online.com/Trends/Payne/Articles/SoYouWanttoBuyaHotel.html 19. http://www.hotel-online.com/Trends/Payne/Articles/SoYouWanttoBuyaHotel.html 20. http://www.hotel-online.com/Trends/Payne/Articles/SoYouWanttoBuyaHotel.html 21. http://www.hotel-online.com/Trends/Payne/Articles/SoYouWanttoBuyaHotel.html
© 2019 Sunbelt - All Rights Reserved
Canadian Hotel Brokers Hotel, Motel, Bed & Breakfast, Long Term Care Properties 2821 Riverside Drive, Ottawa, Ontario, Canada, (613) 731-9140 https://canadianhotelbrokers.com