How to Buy a Hotel: Funding Options & Mistakes to Avoid

  • December 22, 2021

Some entrepreneurs envision building their own hotel from the ground up. Others decide to invest in a pre-existing hotel and make it their own. Whichever route you choose, you have the opportunity to bring your hotel management dreams to life. 

If you’re interested in learning how to buy a hotel, you’ve come to the right place. Read on to learn more about buying a hotel and how to find the right funding source for this investment. 

How to Buy a Hotel

The first step in buying a hotel is knowing where to begin. Keep reading to learn the step-by-step process of how to buy a hotel. 

1. Search for Property

Start by identifying the type of hotel you would like to own. Will it be a large convention center or resort? A mid-size business hotel? Maybe a smaller boutique hotel is your top choice. During this step, you’ll also want to consider factors such as location, cost, cash flow yield, and earnings stability. 

2. Locate a Hotel

Once you’ve determined the type of property you’re interested in, your next task is to enter the market. This may mean contacting potential hotels directly or putting out word to sellers that you are ready to invest. Screen any offerings with an acquisitions team to determine the best opportunities. Your acquisitions team will likely consist of a broker, appraiser, accountant, market consultant, financial consultant, legal consultant, architect, and engineer. 

3. Evaluate Financing Options

If you need financing, you should already have a lender in your pipeline before putting an offer on the table. If you don’t have a committed financing partner, the seller will most likely move on to another buyer who can close quickly. Working with a lending partner such as AVANA Capital can help you get the financing you need to acquire your dream hotel. 

4. Negotiate Final Terms

Your offer may be contingent on due diligence, which is an inspection process that determines how much capital you need to complete your acquisition and return your expected profit. You will also negotiate how much is due at closing, what expenses are associated with the sale, and whether you can walk away if the deal doesn’t meet agreed terms.

5. Close on Financing

Depending on how quickly you want to take ownership of the property after the purchase is finalized, you may need to complete your due diligence and financing during the same time frame.

6. Sign Contracts

The final step is to sign the contracts and take over ownership of your hotel. This is where the finalized terms will be covered and ownership will be transferred over. Any payment required at this stage will need to be made, so you’ll want to ensure you have your funding in place. 

Cost to Buy a Hotel

So, how much does it cost to buy a hotel? The total cost of buying a hotel is based on a number of factors. These include location, property type, size, asset value, and more. Determine with your lending partner how much you can truly afford as you search for properties and evaluate offers. 

The acquisition price of a hotel is often the biggest factor when determining how much you can afford to pay. Before beginning your search, know how much capital you have available and what return on investment (ROI) you are targeting for this property. 

Be sure to seek advice from professionals who understand the industry as well. Speak with an accountant, business attorney, and lending professional before committing any capital; they can help you avoid any costly mistakes. 

What to Know Before Buying a Hotel

As you learn how to buy a hotel, there are a few factors you should consider. These include: 

Determine Return on Investment

Financing can increase your project’s ROI. The ROI (return on investment) is the number that tells how much money you will make when you sell your hotel. ROI takes into account both your initial investment, monthly operating expenses, and the hotel’s net operating income.

Consider Profitability

The purchase price of the property does not always determine whether it will be profitable. You should consider other aspects of the hotel, such as the management agreement you will have with the seller. Be sure to look at other incentives-such as state and local tax credits-that can lower your net operating income.

Save for Operating Expenses

Part of knowing how to buy a hotel is knowing what to expect in additional costs. Set aside enough capital for operating expenses and the unexpected. The purchase of a hotel is not just about purchasing the property; you must also pay for renovations, utilities, insurance, management fees, and other operational costs. 

Understand Long-Term Investment

Consider whether you can afford to hold onto the property long-term. When buying a hotel, your ROI projections should include not only how much money this investment will generate today but also how profitable it will be in the future. 

Decide Ownership

Determine whether you should purchase the property yourself or with a partner. The majority of hotel transactions involve an outside partner who brings capital, management expertise, and other resources to the table. 

Mistakes to Avoid When Buying a Hotel

With any major investment, there are mistakes that can greatly impact your deal. Keep these common mistakes in mind as you begin the process of buying a hotel. 

Underestimating Closing Costs

Closing costs may be more than you’re expecting. That’s why it’s essential to work with a lending partner who can help you receive the funds you need in a timely manner. Attending a closing meeting without adequate funding can lose your business deal and, ultimately, your potential hotel. 

Failure to Plan

Failing to plan and prepare for the acquisition in advance can be detrimental to your purchase. You will need to work with an accounting firm, legal representative, and other professionals who can guide you through this process. 

Early Renovation

It’s understandable that you’ll want to get started making the hotel your own. However, don’t start renovation projects without all of the required permits and approvals. Hire a qualified architect who understands the city’s building codes and can help you navigate through zoning, permitting, and other municipal regulations. 

Partner with AVANA Capital

Don’t miss out on the opportunity of a lifetime — work with AVANA Capital to get the funding you need for your hotel. At AVANA Capital, we understand the importance of entrepreneurship. That’s why we offer 504 SBA loans that can help you acquire your dream hotel. Our flexible borrowing solutions can be used for acquisition funding, building improvements, and more. 

Contact the lending professionals at AVANA Capital today to learn how we can help you bring your hotel purchasing dreams to life!