You’re looking online at Inns for sale and your focus is only on the asking price. The price you THINK you can afford. Does this sound familiar? Price vs affordability…did you know that there is a very real possibility that the lower priced inns “may” cost you “more” than the higher priced ones? Sometimes the less expensive properties could be harder to finance because of limited business value.
Here is a simple scenario.
There are two inns. One is $500,000 and the other is $1,000,000. Both have 9 rooms, similar size and location. The $500,000 inn generates revenues of $75,000. Because of the low cash flow the banks will most likely want a high down payment percentage. Let’s say 50% which would make it $250,000 down.
The $1,000,000 inn generates revenues of $200,000. Banks like this! Solid business with good cash flow. A bank will most likely require a 20 to 25% down payment of $ 250,000. So the same $250,000 down buys you substantially more revenues and substantially more profits and all in all a better use of your monies with a greater return.
For the same amount of down payment buyers can acquire the $1,000,000 solid financially viable property with a solid cash flow from day one. The under performing $500,000 inn may take up to a year or more to increase the business with a much larger up front and ongoing investment of cash.
There are some details that a buyer must also look at in the under-performing properties.
- Owner’s quarters. Is it a one room apartment in the basement?
- Website. Is it a 10 year old site with bad photos?
- Marketing. Is the inn virtually invisible?
- Décor. Is it dated and tired?
- Deferred maintenance. This will be discovered in a building inspection. But if you see a lot of visible “issues” it most likely means there may be more hidden ones!
All the five points are things that will have to be addressed by new owners and they all add up to a big price tag. Conclusion: that $500,000 price tag doesn’t seem quite so affordable does it? It may still be a good investment long term, but you may not be able to afford that investment now.
The B&B Team helps buyers discover what they can afford. We pride ourselves in the fact we work with our clients to help them make informed decisions. Their hard earned money that they are investing is best if it goes to work for them the day after closing. No one wants to be over-leveraged or face a year or more long expensive makeover with little cash flow coming in.
So next time you are cruising the internet for “inns for sale”, THINK about what you may have just learned here. The property price tag with the extra coma may just be your future affordable inn.
Thanks for Listening,
Janet & Rick Wolf