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

  • August 10, 2022

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. 

According to a report by CBRE, the U.S. is expected to see a rise in hotel demand in 2022 as border restrictions ease up post-pandemic. Vaccinated travelers, in particular, will likely account for one-sixth of the forecast 23% growth in the hotel sector for the year. This only means that if you’re a hotel owner or new investor looking for opportunities in this industry, the present is a good time.

If you’re interested in learning how to buy a hotel or a hotel franchise, 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 hospitality niche

How To Buy a Hotel

The first step in buying a hotel or hotel franchise is knowing where to begin. Keep reading to learn the step-by-step process of buying 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. Buying a hotel is a complex investment, so it’s important to have experts in your corner.

3. Conduct Due Diligence

After you’ve found a property that meets your criteria, it’s time to do your due diligence. This is when you’ll verify that the hotel is a sound investment by looking at the financial records and physical condition of the property. Once you’re confident in your decision, you can move on to the next steps.

4. Evaluate Financing Options

If you need financing to buy a hotel, you should already have a lender at your side 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. 

5. Negotiate Final Terms

Your offer may be contingent on due diligence, which we mentioned earlier. This essential inspection process will determine 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.

6. Close on Financing and Purchase

You’ve done your due diligence, found the right property, and negotiated final terms. Now it’s time to close on your loan and purchase the hotel. Once everything is finalized, you can begin making changes and improvements to tailor the property to your unique vision.

7. 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.

Independent Hotel vs. Hotel Franchise: What’s the Difference?

Buying a hotel franchise is a bit different from buying an independent hotel. First, you’ll need to find the right brand that fits your vision and goals. Once you’ve determined which brand is the best fit, you can begin the process of franchising.

The biggest difference between buying a hotel and a hotel franchise is that with a franchise, you’ll be working with an established brand. This comes with a number of benefits, such as access to pre-existing marketing materials, training programs, and support from the franchisor. However, it’s important to remember that you will also be beholden to the franchisor’s rules and regulations.

If you’re considering buying a hotel franchise, here are a few tips to keep in mind:

  • Make sure you understand the franchisor’s rules and regulations.
  • Choose a brand that fits your vision and goals.
  • Familiarize yourself with the franchisor’s marketing materials, training programs, and support options.
  • Have realistic expectations for your return on investment.

How Much To Buy a Hotel?

So, how much should you pay for a hotel? And how much is a hotel worth? The total cost of buying a hotel or hotel franchise 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. 

It can cost around $750,000 to $1,000,000 to start a small motel and the price goes up from there. Luxury properties and larger hotels with more rooms will be exponentially more expensive.

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: 

Determining Return on Investment

An accountant or skilled lending professional can help you understand a hotel’s potential ROI (return on investment). Understanding the ROI of a hotel upfront will help determine if a particular property is worth the investment.

Considering 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 if there is room to increase the daily rates and/or occupancy of the property. Be sure to look at other incentives such as state and local tax credits that can lower your net operating income.

Saving 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, staff, and other operational costs. 

Understanding Long-Term Investment

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. 

Deciding 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. 

When deciding how to buy a hotel, remember that the process is different from buying other types of properties. You can make this dream a reality with careful planning and attention to detail.

Mistakes To Avoid When Buying a Hotel

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

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.  

Checking the Books

If you are buying an existing property as opposed to building a new one, make sure you review the hotel’s financial statements for the past few years. This will give you a better understanding of its overall profitability and allow you to make informed decisions about your purchase. Lenders will require the seller to provide financials as a part of their underwriting and due diligence. Seeking a lender’s insight can prove to be invaluable. 

Not Getting Professional Advice

This may be one of the most important tips when learning how to buy a hotel. It’s crucial that you work with a qualified team of professionals, including an experienced hotel broker, who can help you through every step of the process.

When done correctly, buying a hotel can be a profitable endeavor. By following these tips and avoiding common mistakes, you’ll be on your way to owning a successful business.

Buying a Hotel? 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 several types of loan options, including 504 SBA loans that can help you acquire your dream hotel. Our flexible borrowing solutions can be used for acquisition funding, building improvements, service enhancements, expanding manpower, and more. 

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