Financing on Motel/Hotel - First Time Buyer, % Down Needed
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[{"id": "hatsxrd", "text": "Not sure where you're located but in the market I am in the banks are asking for 25-35% down. Then again this is Canada with slightly stricter leverage regulations I believe.", "replies": [{"id": "hattvrz", "text": "Thanks - updated location. I can manage up to 15% which is my concern. Looks like an SBA would be my only hope (however, I don\u2019t have any motel experience).", "replies": [{"id": "hatu3om", "text": "Any idea on what the previous NOI of the motel was? What\u2019s your cap rate going to be looking like cause that would probably play into how the bank assessed the risk of the loan", "replies": [{"id": "hatv91u", "text": "I\u2019m in the process of requesting the documents, waiting for the NDA. Just trying to manage my expectations to see if this \u201cidea\u201d is feasible. I\u2019ll provide additional details as they become available!", "replies": [{"id": "hav0we5", "text": "Don't get too far ahead of yourself.  Sign the NDA, request the due diligence documents, then see if it's worth proceeding.\n\nAcquiring a property with an active business means you are acquiring a business and the property.  Each has to be evaluated separately.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hatzd3v", "text": "I would say you don\u2019t have the funds or experience to do this. An 11 cap tells me it\u2019s some kind of rural and/or no flag motel?", "replies": [{"id": "hau072v", "text": "Buildings are actually separate cottages built in the last decade. Watching the information I give for NDA reasons.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hau9lsb", "text": " Check out StackSource which has a great lending network. You\u2019ll likely need a hard money lender to finance this.", "replies": [], "depth": 1}, {"id": "haubtl3", "text": "I'm going to say that this is not a CRE deal per se, but a \"buying a business\" deal. Your first focus should be more on whether you are capable of running a motel business while holding down a full time job? The hotel/motel space is pretty specific and needs those specific skills. Do you have the skills and experience to jump into this space? Does part of the deal structure encompass existing owner involvment to get you up to speed? \n\nIt's not so much a matter of \"can I structure financing to afford this space\" as it is \"can I actually operate this business and be successful\".", "replies": [{"id": "haucc5r", "text": "Solid point- having the owner help with the transition is crucial to the deal going through. My s/o is available full-time for business operations. I\u2019m focusing on financing right now because this is just an idea and the idea can\u2019t go anywhere if the initial capital is insufficient (my thought process at least - will contact lenders/agents next week).", "replies": [{"id": "haugz8p", "text": "Yeah, not knowing where you are coming from, or what your goals are, I see a certain type of mindset in the self storage space where small investors treat it as a pure CRE play, when in actuality, it's merely investing in a job. I see the hotel/motel space as the same, but even more so.\n\nThere is a big difference also, depending on the type of hotel/motel business model model. Is it in an area that is primarily \"tourist\"? In which case you can operate more in an AirBnB model. Is it more of a business client model? Then you are more dependant on corporate awareness and amenities. Is it more of just a general place to stay? This is more difficult as it is dependant on population density, location, and general visibility (and also very price sensitive).\n\nAgain, this is a situation where you are investing your way into a job, which is not necessarily a bad thing, just be aware of that as part of your consideration and due diligence.", "replies": [{"id": "hauiads", "text": "Yes, I realize if I go this route (although s/o would run) I\u2019d have to be willing to (at least in the short term) potentially leave a very lucrative salary to ensure the businesses success - I\u2019m optimistic due to the small size I\u2019d be fine to continue pursuing my job. I\u2019m young and my family previously owned restaurants\u2026these are not ever, when they are smaller scale, passive income if you want the place to be successful. The experience you give is hard to be matched by a low income worker (not always). \n\nThe model would be more of an Airbnb experience with self check out and limited guest interaction due to the seclusion of the experience. I\u2019d like to improve and implement my model year one based on current Infrastructure (interior design updates, social platforms, better experience etc.) and expand in following years if my model works. If it doesn\u2019t\u2026kinda just gonna let it ride and then it could be a headache for maybe 30k a year profit with a manager running (pay them 40k with free place to live). I\u2019m hoping it works, I expand, and then bring a manager in with 90k or so income after all expenses - this is hypothetical of course, still need to calculate everything out \u2026then I don\u2019t mind the calls coming in lol. \n\nI like the appeal of my worst case scenario still leaving me with a place to live and some decent income. Just curious if anyone has experience with first time financing (I.e. SBA 504)\n\n*note: 40k manager salary is a tad optimistic, but I\u2019m using this rate from a similar owner who has a great team member looking after the place for this amount. Also, by no means do I want to come off set in stone, I enjoy hearing conflicting arguments. I can\u2019t just run this from another state and think I\u2019m getting a check every month!", "replies": [{"id": "haupryg", "text": "While I don't have anything to add in the SBA direction, on a deal &lt;1MM, you will  have a more difficult time with national banks. I would reach out and talk with some of the local banks, and particularly credit unions with a strong commercial department. They will be much more interested in a smaller deal like this, although this will be dependant on how well the PO did with the books. If he had a solid financial grasp and didn't do a lot of \"under the table\" stuff and has a good firewall between personal and business expenses things will be a lot easier.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "haujg87", "text": "Standard is 30% from what I'm told for commercial. You are a high risk buyer with this being a first purchase, so I wouldn't expect much leniency from a bank.", "replies": [], "depth": 1}, {"id": "hav1eys", "text": "Hotels / motels are service intensive industries, where you need quality employees, systems and a very solid manager to oversee it, otherwise you are buying a job, not an investment. \n\nYou lack experience and funds, and are placing the investment to succeed on your SO. What if the business fails, or your SO and you don\u2019t work out? Would complicate things further. \n\nThe cap rate being so high indicates the seller is cooking the books, you are evaluating it wrong, or it\u2019s rural or in a tertiary market.\n\nHotels are very market and brand dependent. Some people only stay in certain chains or \u201ccertain star\u201d hotels. Furthermore, if the market isn\u2019t touristy or has long-term future, you are buying a business that will not sustain itself and be one of those dead motels on the side of the road. \n\nThis all seems like red flags to me. I would not do this. \n\nIf you are so into the idea of having guests or \u201cshort time rentals\u201d, try a house in a secondary market that functions as an air bnb. Much smaller scale, can be scaled as a business and less risk but good returns.", "replies": [{"id": "hav4lkt", "text": "I should provide some more context (valid points). This is a piece of land with 6 cottages in a rural area. The attraction is to get away from our busy lives and enjoy hiking, sight seeing etc. the land has room to add more. I guess the issue I am having is buying one cottage residentially with good up keep is going to run me 175k/210k or I can buy 6 separate cottages for low 600\u2019s in excellent condition and room to grow and scale later. Granted the cottage I would buy would be twice the size, but I\u2019ve learned sq ft/ rent price isn\u2019t huge on vacations as opposed to styling and experience. So I believe I might be biting off more than I can chew, but this isn\u2019t a Budget Inn with 15/ 20 rooms that\u2019s run down.", "replies": [{"id": "havaaoo", "text": "Rural cottage doesn\u2019t sound to me like an investment I would want to keep long term. \n\nIs there easy, realistic ways you can improve the value of this investment or business?\n\nIf not, keep in mind they are selling it at a very high cap rate - why? Because it couldn\u2019t sell otherwise. Desirable and safer assets trade at lower cap rates.\n\nYou don\u2019t provide me with a strategy on why your lack of experience can be circumvented. \n\nIn my opinion this is not a good idea based on the info you\u2019ve presented.\n\nI would re-evaluate why you are choosing this, what your priorities in real estate are, and where you fit in all of this.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hav5qng", "text": "I have worked in banking for 10 years and now actually broker loans for Commercial purchases and other lending needs. Here\u2019s what I think:\n\nConventional lenders are strapping a lot of lending right now which has pushed solid deals to private equity funds, so now they are pretty flush with good deals which means there isn\u2019t a need for them to take risks like they used to have to do. \n\nNot having a history in Hotel/hospitality outside of the AirBnB is tough. I would say it isn\u2019t impossible but we would have to really sell the lender both of your work histories as being beneficial to the deal.\n\nDown payment is a bit on the low side, I would want you to have something more around 30% but if we could get the purchase price down below 550k that would be a good start. Or increase your down by pulling equity out of your home or other sources, maybe 50-100k (and implement a cushion).\n\nOverall, I would say your close but either need a partner in the hospitality business or additional injection to make it a deal that could get done within reason.", "replies": [], "depth": 1}, {"id": "havuvzi", "text": "Hospitality is a tough sector right now.  If it didn't do well in COVID the question is will it recover.  If it did do well (maybe why you have an 11 cap... some 2020 fluffy numbers?) can it sustain if the world goes back to pre-covid?\n\nSBA is an option but they (generally) don't make loans directly so you have to find a bank to shepherd you through the process and be willing to hold the risk on 25%.", "replies": [], "depth": 1}, {"id": "haw0nkd", "text": "Contact an SBA lender as you may be able to buy with 10-15% down depending upon cash flows.", "replies": [], "depth": 1}, {"id": "hawcxil", "text": "Is seller financing an option? If the owner is supposed to help with the transition, putting your cash down for a 12-36 term on seller financing may ensure that the seller keeps some skin in the game to make sure you succeed. At the same time, it'll give you / SO some hands on training experience while building more equity. Whenever you're ready for permanent debt the seller could get paid off", "replies": [], "depth": 1}]