I have found my dream property and investment. It's a small B&B, that has positive cash flow and has opened their books to us, everything looks great and we would live on the property and run the business. But, I have only every worked in residential mortgages. My business owns 4 other properties, but these are passive income rentals.
This business would be purchased Turnkey style, they are fully operatiional and net approximately 60,000$ a year. The property costs 700K. I have 20% to put down, but I don't know how to secure the rest of the financing thru a lender. The owner is also willing to help with some of the financing, but since I will be buying the property, don't i have to finance 100% of the property thru a lender or can I do some thru a bank and some privately thru the current owner.
Can someone point me in the right direction? Help me ask the right questions, etc.
Does the net income of $60,000 a year include your own living space?
You should start speaking to some local and national lenders to see if they are interested in helping you buy this property.
Yes, this includes my own living space. It's a 5 bedroom 5 bath house. One wing has a main room and small office, that is the living space for my wife and I. the other rooms in the other wing is the B&B. I have started looking for lenders, but they all require me to fill out applicatiions with business info, but I don't own the business now, the seller does. Is there a particular type of lender I should look for? Is it better to finance thru the seller or a bank?
"This business would be purchased Turnkey style, they are fully operatiional and net approximately 60,000$ a year."
I would want to know if this is with the owner working in the business actively or not. In other words if 60k net is with the owner putting in 30 to 40 hrs a week you have a hobby not a business. To be absentee owner where you have time for your other investments you would have to put a manager in place at 40k to 50k a year. Any minor tweak in expenses and you are now breaking even.
A B & B takes up a ton of time. I don't buy anything that requires me to be there. Has to make great money with management in place as an absentee owner. Owner / operator is a non-starter for me.
At a distance everything sounds wonderful! However you don't want your dream property & investment turning into a nightmare. That wouldn't make retirement very fun (& could deplete your retirement funds as well).
@Joel Owens pointed out some questions worth answering especially around the 60k net & how the current owner/operator/manager is being paid. Also how about debt service?
I would also dive into the property financials. How are they driving sales? What channels? Online? Travel Agencies? The hated OTA's (online travel agencies) who take a large cut? How's the F&B (food & beverage) component ran? Are they currently owner/operator managed? Any deferred maintenance or large upcoming renovations needed?
A local bank is the best bet for a property like this, however they will probably require at least 25% down unless you have an existing solid relationship. If you can get the seller to take back a 2nd mortgage let's say 15% (at a low interest rate) then maybe (MAYBE) you can be in the deal for around 10% (with a solid banking relationship). However you will need additional reserves, I would say 12 months operating & debt service (including the 2nd). Plus any deferred maintenance or capital projects needed.
I also wouldn't count on the 60k (if that's accurate) & plan for the best & worst case scenario (break even) for the 1st year. B&B's are extremely operator driven especially if you have an F&B component. Numbers can quickly go in the wrong direction for a variety of reasons.
What are the sales for last three years?
Thank you very much Chris for your response, that gives me a ton of information. Joel, my question was framed around us running our dream job, not whether YOU would buy an owner managed property. In our case, this is what we enjoy doing. I simply need help with the financing part of it. I have run multiple businesses in multiple countries and enjoy owner operated businesses as startups, because the work is all done and only relies on one person to come in and put systems in place. This place has a solid reputation, steady revenue and the only issue with the business seems to be the families health and ability of the current owner to operate it in her elderly years. There records are not great and the info Chris you gave me about checking out future expenses is a great option.
They are willing to hold some of the loan, but I'm not sure how that would be structured. Do I do that outside of the loan, or do all three of us work with a bank to do that?
The numbers run much lower at worse case, but fortunately because they took nearly 4 months vacation last year, there is a much higher potential revenue stream by simply staying open year round.
If anyone has any other suggestions, regarding our situation, I would love the advice and comments. Thank you!
Look into SBA financing...
i'm in the midst of it now, thank you frank
It sounds like you have an open relationship with the owners. Ask them if they would take a 20% (it might end up being 10-15%) seller second at a low interest rate (140k). Push for a 5, 7, or 10+ year fully amortized loan (if they agree). A lawyer can draw up the paperwork and the closing can be handled by a title company (or lawyer). Have you negotiated down the asking price? You might want to submit two offers (if able), one for no seller second (lower price) & one with a seller second. You will need to talk to as many local banks as possible. Here's how it will go, call 10 banks, 5 have interest, 3 have interest with the terms you like, & 1 actually approves the loan with the stated terms discussed. It might be more like 15 banks etc but you get the idea. Not every local bank will have the appetite for this type of business with a new borrower. Getting them comfortable with the seller second will be important. Since you don't have a prior relationship these types of deals are more difficult. They will probably want at least 10% into the deal. SBA is also an option but will take 90+ days to close. If you are able to get an SBA loan that is the best option. Owner occ/operator helps with the loan. They will generally want 10-15% into the deal and I don't think they allow seller seconds (but I could be wrong).
Recap with bank financing & seller second:
Bank financing at 75% LTV, loan amount 525k
Seller 2nd mortgage of 15% PP, loan amount 105k
Buyer comes to the table with 10% or 70k plus closing costs etc.
This is probably your best case scenario with a bank. The bank will also have to verify your DSCR including the seller second. Good luck!
That's a fantastic response and exactly what I was looking for. I didn't realize you had to combine a 504 loan with a standard loan. Nice suggestions, I will certainly be in touch with my banks. Thank you!!
I wanted to update my message with some information about the SBA 504 program. I actually had to look into this program recently for a hotel project we are looking at developing.
SBA 504 program is administered by CDC's or Certified Development Companies. There are around 240 of these non-profit companies around the US. They work with local, regional, and national banks to administer the 504 program. The basic run down for a hotel/B&B would be this...
50% - 1st mortgage provided by bank
30% - provided by SBA (SBA will go up to 40% but because it's a new business they add 5% & ding you for another 5% because it's a single purpose asset (hotel)).
20% - down from borrower
Full Recourse for any borrower with 20%+ in equity stake
The 50% bank piece term & rate are somewhat up to the bank with a few exceptions. The 30% CDC/SBA piece is 20 year fully amortized fixed rate loan that sits around 4.5% right now + fees). It's the same rate around the country. It has a prepayment penalty that scales down for 10 years.
If this interests you I would recommend contacting the top producing CDC in your area/region. You can find this information on the SBA's website or by searching online. Ask them who are the active hotel lenders in your local area. Talk to these banks and get the full scoop about appetite.
This is the exact conversation I had a with a lender yesterday. Thank you for your response, I can confirm the information Chris added, via a local lender here in CO.
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