In an earlier blog post “Should you consider buying an existing bed and breakfast?” I wrote the reasons it makes financial sense to do so. In this post we discuss what groundwork needs to be done in order to apply for financing.
If you are approaching potential lenders, it requires the cooperation of both the buyer and seller.
From the current B&B owners’ perspective:
- Many B&B owners do not run their B&B as a business – therefore there is no business plan and proof of their return on investment to date
- A lot of B&B owners choose not to claim all the revenue they generate from their B&B; therefore they cannot expect to get full value from the business portion – only the income that is reported on their income tax
- In order to sell the chattels (i.e. the contents of the property – which can include any – or all – furniture, linens, kitchenware, etc.) they need a formal appraisal of the current value of the items, not just depreciation or the emotional value an item has for the owner.
- Owners need to be willing to break the sale into three parts – the business, the chattels and the property
- Owners need to consider whether they are in a position to take back the mortgage on their property to assist buyers in securing the sale
From a buyer’s perspective:
- Know how much revenue you need to generate in order to have the lifestyle you envision
- Have a clear vision of the type of B&B you wish to purchase and the type of guests you would like to have
- Know how much money you have available to invest yourself, and research other potential sources of investment
- Do your research and understand the locale and target audiences available so that you can identify potential ways to generate additional revenue
- Check out the on-line reviews of guests and look for problems with property and/or business from a guest’s point of view
- Be prepared to invest in the B&B yourself. Banks will look favourably on those who can purchase the business and chattels outright and only need assistance with the mortgage portion of the property – this will decrease their risk. Depending on the size and use of the property, it might be possible to secure a residential mortgage
- Be prepared to develop and present a strong business plan to the bank on each property you seriously consider
- Consider this a long-term investment – it generally takes 3 to 5 years to maximize the revenue generation of a B&B property.
A knowledgeable real estate broker can help you analyze a property for sale and make recommendations on increasing the revenue. However, as a potential buyer, you need to educate yourself as much as possible before even approaching a real estate broker on:
- How much money you need to generate from your property
- The type of property and guests you want to attract and
- How much money you have available to invest
If you need help with determining these factors, I can help you do this with my 4-step system “Design Your Dream Bed and Breakfast” that will show you how much income you need to create the lifestyle you desire, the type of guests you want at your B&B and where you want to be located.