Raising Money
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. You can also take out a home equity line of credit (HELOC), take out a second mortgage, use a personal credit card, or ask for loans from friends and family to get more startup money. For example, imagine that you have saved up $47,500 in various accounts. In addition, you are able to take out a second mortgage for $100,000. Finally, you secure a $20,000 loan from a friend. This would give you $167,500 total to invest in your hotel.
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 IRA will be taxed as income (at your regular income tax rate) and, if you are under 59.5 years of age, will also suffer a 10 percent penalty. 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. Imagine that you are 35 years and decide to take some money out an IRA to add to your hotel investment amount. You decide to take out $50,000. This withdrawal would be penalized for 10 percent of its value, or $5,000, and taxed at your income tax rate. Assuming an income tax rate of 25 percent, you would be left with $32,500 ($50,000*(1-(0.10 + 0.25)))after the penalty and taxes. This would give you a total investable amount of $200,000 ($167,500 from earlier plus the $32,500 from the IRA).
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.
Determining Your Budget
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. 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. For the previous example, this means that you would set aside $50,000 (0.25*$200,000). This leaves you with $150,000 for 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: A 5 percent down payment for a hotel costing $3 million. A 10 percent down payment for a hotel costing $1.5 million. A 20 percent down payment for a hotel costing $750,000. 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.
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. 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. Hotel expense and cost information can be estimated from examining hotel similar to those in your price range.
Finding the Right Property
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 there 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. You can also look at the national state of the hotel industry by searching for relevant news articles online.
Work with specialized real estate brokers. Let real estate 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. It may also be advantageous to drive around the local area and look for properties, particularly if you are planning to significantly update or restore your hotel. If you find one, you can access real estate records at the county seat to find out who owns the property and go from there.
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 contact the seller and request them. Once you have an offer to sell, check that the hotel meets your requirements in price, location, repairs or renovations needed, and style. If it doesn't, call the seller and tell them you aren't interested. If you have several offers, make a table comparing the benefits and drawbacks of each one, for example in cost, renovations needed, and amenities.
Hiring Help to Investigate the Hotel
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, state, 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.
Finalizing the Purchase
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 subtract another 10 or 20 percent from 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 real estate 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. Include in your offer that you require a set amount of time to inspect the property (for damages or necessary repairs), that you need to look through the hotel's books (to confirm their financial information), and that your offer relies on the two of you reaching a purchase agreement and signing a purchase contract.
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. Make sure you get any promises for additional payments or aid from the seller in writing and that they are later included in the purchase contract.
Work with a lawyer to complete the purchase agreement. The seller will likely write the purchase agreement, but you should hire a real estate attorney to review 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. In addition to reviewing the document, your lawyer can lengthen the approval process, giving you more time to secure your financing or seek out additional financing if you need it. Make sure the agreement stipulates that you can get out of the purchase up until the closing date without penalty.
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.
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