A popular dream of many, opening a Bed and Breakfast is (supposedly) the greatest lifestyle business you can choose. But is it really? And how much can you even make owning a B&B or Motel?
Last summer I almost succumbed to the romantic notion of of owning a Bed and Breakfast and started exploring the possibility of ownership. At first glance - what a great business, you buy a beautiful mansion, maybe by the ocean, you rent out rooms, maybe have a swanky restaurant as well, and its an all cash business. Here is how buyers think: I buy a B&B with 8 rooms, I rent those rooms for $200 a night, at peak capacity that is $1600 a day, $11,200 a week over $44,000 a month! Over half a million dollars just for smiling and welcoming people. And here is where most buyers stop researching because they dont want their dream shattered. So spoiler alert, if you dont want your dream shattered click away now.
For you red-pill people - let's say we invested about one million dollars for this bed and breakfast and are grossing $500k annually. We won't get into ways of valuating a B&B but we'll use this fairly conservative number. So in most cases buyers will need to finance a portion of the investment which brings us to the first barrier to entry with your hotel or B&B. Financing.
So the loan on your house was pretty easy right? Signed some papers and here is $800,000. Not so easy with a B&B. First, keep in mind if you get a commercial loan they'll typically need at least 25% down so you'll need $250K liquid available to invest. Now you can possibly get a residential mortgage in situations where your residential use is higher than commercial, but it can be risky. Also loans on commercial property are not secured by Fannie or Freddie so the banks are not wanting to part with their money quite as easily. Interest rates are higher than residential, and they can ask for a balloon payment, which means in a few years you are on the hook to pay off the entire amount, be aware of that. The banks will also want to see a complete business plan, so if you are buying a failing or struggling Bed and Breakfast chances are you will find it very difficult to find financing. There are a couple of SBA options in the US that can make things a bit easier but it will still be a challenge. We won't get much deeper on this topic but just be prepared to jump through a lot of hoops, and end up paying a lot more in fees and interest than you envisioned. But let's say you have money and will be buying your B&B or Motel cash. How much can you make with a Bed and Breakfast?
Let's explore listings in my area. These listings are current and are not far off most listings I looked at across the country. So first we have a 12-14 room motel, asking $675K, revenue of $185 and cash flow of $100K, Next is a Motel and cottages, asking $650 cash flow of $50-$100k. The Castle Inn, asking just under a million, 13 rooms and 49 seat restaurant, cash flow between $50-$100k. Here is a hotel, asking 3 million, cash flow is $250K to $500k. Another one here 3.3 million asking with cash flow $250k to $500k. So most people never take the time to compare this industry with others, so they run their motel or B&B for years, never knowing if they made a good investment decision. So let's take a look. Here is another listing in that same directory for a QSR franchise restaurant. $175k investment, with cash flow pretty much the same as the $700,000 motels we looked at. Here is an Asian food franchise $225 asking with cash flow of $182,000. So an investment one third the price with cash flow almost double the amount over the motels. Here is an online business asking $265k cash flow of $87K. And these are just random examples that are on this directory today. I can tell you there are franchises available with a $100,000 investment that average 1.5 million annually gross. Now there are some nuances here as your expenses can tie back to building equity in your asset, but from a purely cash flow perspective, and you can check listings in your own area, this industry is just not a the top of the list. Now beyond brick and mortar businesses we also have online businesses, let's look at some current listings.
So this is a listing right now on Empire Flippers - asking 1.4 million with a net monthly profit of almost $60,000. That's a 720,000 net profit a year. Remember our hotel for over 3 million dollars was cash flowing under $500k! Heres a technology app asking $500k with a net profit of almost a quarter of a million a year. And you will see most online businesses selling for between 20-40 times multiple of their monthly net earnings. So within 20-40 months you would have made your money back. There are hundreds of online businesses for sale at any given moment.
So strictly from a revenue perspective, B&B's are often not the best bet. (Continued in video)
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7 июл 2024
