So you have always wanted to own a hotel or a motel, in your part of the country. Maybe the area you want to own a place in is in a resort area or a downtown location of a portion of town that is being rehabilitated. How do you go about finding properties that you could purchase and run profitably?
A first step is to consider how much capital you will have for a down payment and for working capital. Then figure that this will represents from 5% to 20% of the total paid for the property. The second part of this exercise is the property must be assumable or the current owner will consider carry the balance above the down payment. You may also look into what a bank would demand to make a deal. Assuming you have good credit and several years of experience in the hotel or motel business you would probably make an excellent prospect to purchase the right place.
Finding properties that meet your qualifications
The first step that you should take is to let brokers that are specialists in hotel properties know that you are in the market and the price range you are looking for. This could begin the search for potential hotels or motels that meet your requirements. You could also check out properties listed on the Net by various brokers There are many listings to look at and the search engine can be made more selective by limiting the sections of the country you are interested in looking at for a hotel or motel. Both of these steps will generate information that can be used to consider what the current market looks like and what type of units are for sale. You could limit searches to properties that are for sale by owner and are in a certain state. The limitation could be further refined to only certain states or cities. If you are interested in a specific resort area you could limit the search to what is available in that particular resort area. The top price you are willing to pay could be put into the search engine, as further limiting criteria.
You can also easily find brokers in the area that you are looking at that limit their listings to hotels and motels. They are experts in moving this type of property. These property experts are excellent sources to get information from and obtain a feel for what the market will bare in the area you are interested in pursuing.
Financing the hotel or motel
There are sources listed on the Internet that specialize in these kind of business loans. The current owner may be willing to take back a mortgage for that portion of the purchase price that you do not have in cash. If the property is a high dollar investment, you may be able to form an LLC with partners and buy the property as an investment. There are many ways to make the purchase work if you have enough of a down payment to make it a worthwhile venture. It will help a great deal if you have a successful history running a business like this. Your personal credit rating will also be a factor. Getting the money needed is always the challenge when buying any business and a solid broker may be able to come up with financing sources. These brokers are invaluable in the deal making if they have the experience under their belt. They also can be used to help in the price negotiating and the terms of the deal. There is always a way for a motivated buyer and seller to come to an understanding that will work for both parties.
If the deal is just out of your reach then you must make that choice. Stretching to make a deal can be part of many purchases, but the stretch still has to be within reason. If the financial stretch is to far and could over time jeopardize the chances of success it may be time to pass on the purchase. You will need money to run the business and you will need more money than you realize to market your facility. In a resort area this is absolutely the case, as most people will make their room reservations before they come to town. The obvious way to get your message out is to use Internet advertising. All of these expenses need to be considered in order to make solid financial decisions. These have to be part of the financing plan when purchasing a hotel or motel.
Other considerations about the hotel business
There are two businesses that a person can own that take care 24 hours a day and someone always needs to be minding the store. The dairy business is one; because cows need to be milked daily and the hotel business as the desk needs to be covered 24/7. An owner of a hotel or motel must come to the realization early in the game how tied down to the desk they want to be on a weekly basis. If they want any freedom at all they will need to hire desk personnel and maids to keep the rooms in order. This is another fixed expense that there is little leeway in managing. You cannot go on the cheap with either employee because both can have a serious affect on your business if not the right person. A poor desk person can lose business for you by the way they handle incoming calls from people looking for a room. This person is your business as far as the person on the other end of the line is concerned. Poor phone technique can cost a lot of money in a year. This area of your business must be properly run or it will cost you more than you will ever realize. Room service is a given to anyone renting a room in your establishment. They fully expect that it will be done right and on time. Remember once you own the hotel you may need to do all of these jobs in order to run the business.
Conclusions
This hotel/motel business category has a very large price range for a buyer to contemplate. Most people will not build one from the ground up. The purchase of a hotel usually requires some financing to complete the deal. Many times the current owner is the source of the financing. Outside sources are also available to the buyer to raise the money to make the sale. This type of loan is based on several factors such as hotel experience, down payment, credit rating and cash flow prospects for the business.
A good broker may be brought in to find a suitable property and help with the price negotiating and maybe even help in finding the financing. The least they can do is bring to your attention a hotel they have a listing on and the asking terms. They will probably have an idea of how quickly the current owner wants to sell the hotel. It is sometimes easier to get a better deal from an impatient owner of a hotel or motel. Ask lots of questions of the broker when you find one that buys and sells properties as a special niche market. They can be of great help.
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Henthorn is president of Spiral Marketers, a marketing firm which includes a number of partnerships that range from cutting-edge software development, business and personal improvement coaching, online e-commerce businesses, and more.
He was formerly was president and principal broker of a resort / commercial real estate brokerage in Honolulu which specialized in representing sellers in transactions up to $50MM.
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By Bill Henthorn
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