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Buying your First Inn/B&B - The Need-to-Know Nutshell Version
For aspiring innkeepers
, the initial step once you’ve made the decision to purchase an inn or B&B can often beoverwhelming. At any given time there can be a number of properties of all price ranges and size on the market. Sowhat’s your first step? It should be gaining a complete understanding of what your money will buy you. And this goes farbeyond understanding what cash you will need for a down payment at settlement.You think you might have a sense of what type of inn or B&B is ideal for you. However, from experience dealing withbuyers, I can tell you that if you keep an open mind, your options will be much greater and the chance of finding theright fit much more successful. If the ideal property exists, it might be rare to find. But don't let that concern you. Whatyou need to focus on are the various aspects of innkeeping and each one’s importance to you and their affect on thebusiness.During your search there are several things to keep in mind:
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Be truthful with yourself about the aspects of innkeeping that are most important to you
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What are your Owners Quarters requirements/personal space?
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Is there an option for other revenue streams (restaurant, retail, catering, yoga, massage, etc.)
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Location affects business – is the property located in a destination or in pass-through town? Does it get weekendonly traffic, does it get any business travelers?
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Season – 6 months or year round (seasonal may offer substantial time off but sometimes finding seasonalemployees is more difficult than year round help). I associate a seasonal 6 month business in a busy destinationlocation as
a light
switch without a dimmer – it’s either on or off
. You work hard for 6 months and relax for theother 6, providing the business is strong enough
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Village or rural setting; coastal or inland; lot size affects use
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Do the current rates allow room for increase?
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Is this your hobby, primary source of income or lifestyle choice?
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And very importantly, ENJOYMENT. Ask yourself “will I enjoy being here?”Now to the issue of what you can afford. As a rule of thumb, you'll need to come up with a 20% -25% down payment(sometimes less; SBA offers programs allowing very little down if the business fits the criteria-talk to your lender aboutthis option). If a property is performing, the banks might be willing to lend more and risk more since the revenue is therefrom the start.So here are two scenarios:
Property A
is priced at $1,000,000 and makes $170,000 in gross revenue and the resulting GRM is 5.88; Let’s presumethere’s very little room for additional revenue growth. This property has 8 rooms, affords a housekeeper, supports theinnkeeper's living expenses (though not extravagant).
Property B
, is priced at $695,000 makes $70,000 in gross revenue and the resulting GRM is 9.93; Let’s presume there’s60% room for future revenue growth.(GRM is a gross multiple of the room revenue used to help assess a business’ value)The difference in initial cash output (down payment) is $61,000. However, there is a great difference between the twoproperties. Many banks look at this number when reviewing a loan. If the business value isn't there, they may weigh theresidential value more heavily, or a combination of both. Often this is the case with smaller properties. But if you havethe additional $61,000 initial output, right away you might be able to walk into a turnkey property and make moneyfrom day one. Property B might take much longer to get to the desired level of income, in which case, you still have anoutput of cash to support the business while growing it. In either scenario, the under-performing property will requirethe cash, just not at settlement.
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