Buying a hotel or motel can become a lucrative business. Before you take the big step, you need to weigh what you can afford and see the pricing in your target area. Read on to learn everything you need to know about buying a hotel or motel.
There are few ideas you want to think about before you begin the process of acquiring a hotel or motel.
In the hospitality industry, location is everything. It is important to see what kind of market exists in the are you want to buy your property. Also, research the average cost of a hotel and motel in the area you want to buy your property and collect that information to use for your business plan. Depending on the location of choice, the price will be high or low. For example, areas with low prices and less competition might not have much business.
High Upfront Costs
If you are considering building a new hotel or motel, it is going to be more expensive than buying existing property. Expenses you will need to pay for are cost of labor, materials, permits and more.
Buying a franchise hotel will cost at least $200,000 but then the rest of the expenses start to add up. Therefore, research is important so you know that your hotel will be able to cover the costs.
It Is A Lot of Work
You need to be able to put in a lot of effort to make your property a success. Some important questions to ask yourself is Are you prepared to manage maintenance and housekeeping? Will you be the general manager, or will you have to hire someone to fill that spot?
The most important factor in having a successful hotel or motel is the guest experience. A couple ways you can improve your guest experience is by ensuring that the staff is friendly and helpful to guests.
How to Finance a Hotel or Motel?
It can be an overwhelming decision to find out which type of financing is best for you. The following are loans you can get for hotels and motels.
These loans can be received from a bank or another financial institution. To qualify for this type of loan you need to have strong borrowing credentials and have an existing relationship with the financial institution. Conventional loans have no limit on loan sizes, interest rates of 5%-7%, and a repayment term up to 25 years.
The SBA 7(a) loan program is made to assist small businesses. You can get up to $5 million, however you may need collateral for the loan. SBA interest rates are between 7.25% to 9.75%, and a repayment term of up to 25 years. These loans are best for small-scale commercial real estate projects.
The SBA 504 loan is designed to provide financing toward the purchase of fixed assets and helps businesses purchase or refinance commercial property. With this loan, you only contribute 10% of the project costs. The SBA provides funds for 40% of the project and a participating lender called a Certified Development Company (CDC) provides up to 50% of the funds.
The USDA works if you are buying a hotel or motel in a rural area. This program works for those businesses that operate outside a city or town with a population of 50,000 people or less. You can borrow up to $25 million through this program, but the USDA guarantees a smaller percentage of the loan the more you borrow.
The Bottom Line
Before you buy a hotel or motel, be sure to do your homework. By having a solid business plan will help you determine where and how you will operate your business before looking at financing options. It is extremely important to consider your business plan, size, location, and target market before making any finalized decisions.