The idea of buying a hotel is an exciting one for many people. If you have a background in business or the hospitality industry, you might like the thought of purchasing and running a hotel. You have the chance to make some money running a successful property. You can also potentially put a smile on the faces of a lot of your guests who have had a memorable experience there.
In this article, we’ll discuss buying a hotel in detail. We’ll run through all the most crucial steps you should know about, and we’ll even give you a useful hotel value calculator tool to use if you’ve found a hotel you’re considering buying.
The first thing it makes sense to think about if you’re drawn to this type of purchase is what kind of hotel you would like to own. Would you like a small bed-and-breakfast, or would a boutique hotel appeal to you more? Are you the sort of person who would like to become part of a large, established hotel chain as a franchisee?
Once you have determined what kind of hotel you want, the next thing you should do is figure out what part of the country it makes sense to target as your base of operations. It probably is best to pick a state, city, or town with which you’re at least somewhat familiar. If you know nothing about the area where you plan to open your hotel, you are going to be starting at a significant disadvantage.
Just like any niche or industry, you’re not going to get very far in purchasing and running a business unless you have your finances in order. Do you have a chunk of cash ready to immediately put into buying the hotel, or will you need to approach a lending entity for a business loan?
Many would-be hotel owners combine some existing capital to which they already have access with the necessary financing to cover the rest. If you need financing, that probably means creating a business plan and presenting it to a credit union, a bank, or some other credible lending entity. It’s also possible you could approach a family member or friend with money to invest if you know such a person. They might be interested in going in on such a venture with you.
Once you've set up your financing, that will help you figure out what type of property you can comfortably afford. You may have a dream hotel concept in mind, but if you can’t get the proper financial backing, your idea will remain aspirational and will never become a reality.
Next, you’ll want to do as much research as possible to determine the approximate cost of developing and opening a hotel. A limited-service hotel might cost as much to open as $150,000 per room. However, a luxury hotel will presumably cost much more than that to get off the ground.
When trying to determine how much your dream hotel is going to cost to open, you must look at factors like location, the size of the property, and much more. It’s also helpful at this stage to use a hotel value calculator. Such a tool lets you calculate your hotel’s value once it’s fully operational. Having the data available from this tool will let you know whether your business model is realistic or whether you need to make some adjustments in order to make your hotel profitable.
When you’re considering the costs associated with running your hotel, you must also think about the caliber of experience you’re providing to your guests. A relatively simple, low-key experience will cost less. If you intend to provide your guests with more luxurious lodgings, that’s naturally going to cost more.
The purchase price is the most obvious expenditure, but also think about whether you plan to renovate or upgrade the property at all. If it’s an older building, that might be necessary. You must factor in all the supplies and labor costs before and after your proposed takeover of the property.
You should also think about the cost of insurance policies for the hotel, registration fees, permit costs, and closing fees. Don’t forget about the costs of fixtures, furniture, and various other needed equipment as well.
Buying a hotel is something you almost never do all by yourself. Even if you’re very well-versed in business and you’ve bought property before, you need a whole team of skilled and knowledgeable individuals helping you to make sure you don’t forget any crucial details.
In general, if you’re interested in buying a hotel, you’ll need the following individuals as part of your buying team. You will need a hotel valuation and appraisal firm. They can tell you about the feasibility of purchasing the hotel you’ve targeted based on the seller’s asking price and what kind of financing you’ve managed to secure.
You might require a real estate broker as well. However, keep in mind that not all brokers will know anything about hotels. You want to find one with specific knowledge about this industry and the market in which you are trying to buy. They should know all about the procedures you’ll need to follow and any local regulations with which you must comply.
Next, you will need a property inspector. It’s a mistake to purchase a hotel or any other property without having it carefully inspected first.
You will also need an asset manager. This is an individual you can meet with who will tell you all about the status of the hotel you’re thinking about buying. They can break down the asset’s status, what it needs to get it operational, and any potential risks associated with buying it. They will also want to talk to you about your goals associated with the property in both the long and short term to determine whether they are realistic.
You’re now at the stage where you can do a thorough analysis of the property’s potential at which you are looking. This is sometimes called a feasibility study. It will determine whether you might be able to make money off of the hotel. Ideally, this study should tell you whether you can use this property as a sustainable investment going forward.
Your market analysis should include many factors, such as regulations in the hotel market, the current economic landscape, and the hotel’s location and local market conditions. This is where putting together a team that’s familiar with local commerce and the real estate market should really come in handy.
The due diligence stage should come next. At this point, you will look at the hotel’s profit and loss statements for the past several years, assuming it has been operational for some time. You will also look at any legal encumbrances associated with the property. You will look at the hotel’s existing contracts, debts, liabilities and assets, accounts, cash flow, etc.
If there are any long-term contracts to which the hotel is connected, you’ll need to review those and make sure you understand their implications. If the property is under a franchise agreement already, you need to have a lawyer look at that to determine what effect it will have on the sale, if any.
You will also need to look at things like any existing zoning requirements that apply to the hotel. Are there any hidden or less-than-obvious requirements pertaining to the hotel of which you might not be aware until you do a deep dive?
Sometimes, an owner might try to sell you a hotel while concealing a lien someone has on it. It’s up to you to research the property and uncover that information before you go any further in the buying process.
You will also need to address any issues your inspection turned up. If there’s damage to the property, you might demand that the seller fix it satisfactorily before you buy. If they don’t want to do that, you might be justified in lowering your offer.
Next, you will need to make financial projections. At this point, you’ll want to enlist a financial expert who knows all about the local market and the hotel industry in general. This person can look at things like potential profitability in your first months and years of operation. They will also look at expenses, renovations, project revenue, etc.
Pre-opening and post-opening operating costs will come into play. So will utilities, property taxes, insurance, interest rates, loan payment costs, and food and beverage costs.
The financial expert will also look at daily rates and the property’s RevPAR. RevPAR refers to revenue per available room, and it’s a metric that the hospitality industry uses to measure a hotel’s performance.
You’ve now reached the offer stage, which is an exciting time for any potential hotel owner. Assuming all the experts you’ve spoken to have said you have a viable path forward and the hotel you’re looking at is a likely prospect, you can put in a bid on it.
You may want to underbid if you think you have a motivated seller and can get the property at a discount. You might want to put in a bid at exactly what you think the property is worth. You may even bid a bit more than you’re comfortable with as an opener if you feel sure there are multiple other entities potentially looking to buy.
Your realtor can help you with your bidding strategy. This is where their knowledge of the local real estate market will be beneficial to you. They presumably know a lot more than you do, and they can tell you what’s a suitable bid and where to draw the line if the seller isn’t being reasonable and operating in good faith.
A little back and forth might be required before you can agree on a selling price for the property. Hopefully, you can come up with a number that the seller will agree on that also doesn’t extend you beyond where you wanted to go financially.
If the seller decides your bid is acceptable, you can move on to the closing and all the paperwork that goes with it. As anyone who has ever bought a home or business can tell you, there’s a lengthy process of signing many important pieces of paper.
The process can be a little dizzying, and it’s sometimes tedious, but you have to get through all of it before you can possess the property free and clear. Trust your lawyer and realtor to guide you through it, and it’s fine to ask questions or to request clarification during this stage if you’re not sure about anything.
All of the conditions you and the seller agreed to must be met by the closing date. Ideally, that will happen with no issues.
If there are any glitches or crossed wires before the closing, your realtor and lawyer can help you with those. They have a legal obligation to make sure you are not taken advantage of, which is why getting an experienced lawyer and realtor whom you trust makes such a huge difference during the hotel-buying process.
When the closing date comes, assuming everything has moved forward to this point without a hitch, you will get access to your new hotel. This is what you have been waiting for and building toward, often for months or even years.
This might be the start of a fruitful and fulfilling time in your life as a hotel owner. You can now focus on making your hotel as attractive to potential customers as possible. With positive feedback and a well-developed sales strategy, perhaps your hotel can become a beloved staple of the local community.
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