Potential Bed and Breakfast | Ways to evaluate the deal!

[Siddharth Patel]

First Post! Avid listener, and finally found a good opportunity to buy a Bed and Breakfast in my city of New Orleans. It has the potential space to serve as a event venue, STR, and bed and breakfast. I am looking for guidance and tips on what metrics to evaluate when offering and negotiating a purchase.

New Orleans is very saturated with hotels, and STRs. Summer is also tough to rent out. So I am going with a 75% occupancy to accommodate. 

[Andrew Syrios]

If it's a bed and breakfast, you'll need someone to run it, not just your typical AirBNB. Do you plan to manage it yourself or look for an operator?

[Andrew Steffens]

Andrew above makes a good point - is it being sold as a managed property or owner operator?

Otherwise it works a lot like any other business, it is being sold on EBITDA

[Garrett Brown]

Hey @Siddharth Patel, welcome! 

I run a small nature hotel (luxury glamping) that offers similar services to bed and breakfasts. My operations team is top-notch, and I would not have achieved this without them. You will need to get as much of a P&L as you can from the business for the last two years and also run numbers on projections based on your competition's enemy method. You can get the STR data from something like AirDNA and then check out what your competitors offer on sites like Airbnb/VRBO.

Negotiations will also depend on their cash flow and how much of the business you buy. Is it just the property, or are you buying the company as a whole? Running a business like that takes marketing efforts, networking, direct booking functionality, and so much more. Don't just take their word on the P&L as well. Use that as a basis to do your own due diligence. Let us know what you find out!

[Siddharth Patel]

Quote from @Andrew Syrios:

If it's a bed and breakfast, you'll need someone to run it, not just your typical AirBNB. Do you plan to manage it yourself or look for an operator?

 I have a property manager onsite. They have been with the property for 3 years. I am looking to keep them on, so long as they are open to changing processes, and marketing. The property has under produced based on the P/L of the last three years

[Siddharth Patel]

Quote from @Andrew Steffens:

Andrew above makes a good point - is it being sold as a managed property or owner operator?

Otherwise it works a lot like any other business, it is being sold on EBITDA

 It is being sold as a property along with the business. EBITDA is poor. They have lost money every year. Their occupancy is low. 

[Siddharth Patel]

Quote from @Garrett Brown:

Hey @Siddharth Patel, welcome! 

I run a small nature hotel (luxury glamping) that offers similar services to bed and breakfasts. My operations team is top-notch, and I would not have achieved this without them. You will need to get as much of a P&L as you can from the business for the last two years and also run numbers on projections based on your competition's enemy method. You can get the STR data from something like AirDNA and then check out what your competitors offer on sites like Airbnb/VRBO.

Negotiations will also depend on their cash flow and how much of the business you buy. Is it just the property, or are you buying the company as a whole? Running a business like that takes marketing efforts, networking, direct booking functionality, and so much more. Don't just take their word on the P&L as well. Use that as a basis to do your own due diligence. Let us know what you find out!

Awesome! This reinforces my current strategy, this what I have done so far. I requested the last 3 years of their Tax returns, P/Ls, and balance sheets. In review, I found that they have basically made zero dollars after paying out all expenses AND debit expenses. 

The true value is in the property itself. I valued it by looking at comps for similar sized properties sold in the last 3 years, and the assessor's website. My cost to operate using their current expenditures (which I have intentions to reduce) would be at $400,000 conservatively. 

I have now developed a Revenue Stream Strategy that will cover this cost. But I have not confirmed if my pricing will work. Great idea to compare with AirDNA! I intend on providing whole home rental deals for the Top 10 weekends in New Orleans. This will relate well. 

My other Revenue Stream is by selling the property as a venue for weddings, inclusive of all the rooms. 

If I can sell 12 weddings a year, and sell out on the Top 10 weekends I will be able to get a 25% cash on cash return for the year. 

[Andrew Syrios]

Quote from @Siddharth Patel:

Quote from @Andrew Syrios:

If it's a bed and breakfast, you'll need someone to run it, not just your typical AirBNB. Do you plan to manage it yourself or look for an operator?

 I have a property manager onsite. They have been with the property for 3 years. I am looking to keep them on, so long as they are open to changing processes, and marketing. The property has under produced based on the P/L of the last three years

That definitely changes the arithmetic. You definitely want to make sure they want to stay on and even if they do, I would still be wary as it will likely be difficult to find another operator if they ever do move on. But if you have an operator in place, then it's an investment that's at least worth considering. 

[Zachary Jensen]

Quote from @Siddharth Patel:

First Post! Avid listener, and finally found a good opportunity to buy a Bed and Breakfast in my city of New Orleans. It has the potential space to serve as a event venue, STR, and bed and breakfast. I am looking for guidance and tips on what metrics to evaluate when offering and negotiating a purchase.

New Orleans is very saturated with hotels, and STRs. Summer is also tough to rent out. So I am going with a 75% occupancy to accommodate. 

 This is great from a tax perspective as well. You can usually use bonus depreciation against the asset assuming it will follow the short term rental loophole rules of 7 days or less average stays. 

[Andrew Steffens]

Quote from @Siddharth Patel:

Quote from @Andrew Steffens:

Andrew above makes a good point - is it being sold as a managed property or owner operator?

Otherwise it works a lot like any other business, it is being sold on EBITDA

 It is being sold as a property along with the business. EBITDA is poor. They have lost money every year. Their occupancy is low. 

Sounds like a good value add play but you would have to consider the costs in cash and effort

[Alecia Loveless]

@Siddharth Patel I owned 2 bed and breakfasts for 25 years.

In most markets owning a B&B is a lifestyle choice. When you start paying out money for management and staff you start hemorrhaging dollars.

I live in a 4 season mountain town and we were only able to generate about 30% occupancy. I would think you could get a higher occupancy in a destination town like New Orleans but look at past years evidence from the property and look at industry standards. You might even call some of your competitors and strike up conversations about how you generically want to open a bed and breakfast elsewhere and see if you can get them to disclose their occupancy percentage or any other valuable data.

My Ex and I opened a restaurant on an “estimated table turn” per night that seemed reasonable based on what we thought we could get. We didn’t even get close to where we needed to be to be profitable and closed down after a large financial loss just 2 years later.

When you just estimate a percentage based upon your perceived thoughts you’re risking a huge disaster.

[Siddharth Patel]

@Alecia Loveless

Thank you for that insight. I have contacted a few local properties to see their occupancy, and am using the due diligence period to see what their current occupancy and ADR. The current GM does a lot of the leg work, I think I have opportunity to capture the marketing and booking dollars spent by doing that work on my own. 

I built a spreadsheet so i can input the numbers I find during the due diligence period. I am looking to buy this property on a 50% total occupancy outlook. This is due to the fact that summers are VERY slow in New Orleans. If the numbers dont work at 50%, the deal doesnt work for me. Too much risk!

[Drago Stanimirovic]

Hey there, and congrats on finding that opportunity in New Orleans!

Buying a Bed and Breakfast with potential for events and short-term rentals (STRs) can be a fantastic investment, but as you mentioned, with the market saturation and seasonal challenges, it's important to run the numbers carefully. Here are a few key metrics and factors to evaluate when making your offer and negotiating the purchase:

1. Occupancy Rate:

You're smart to estimate 75% occupancy→that’s a conservative yet realistic approach, especially with the competition in New Orleans. Make sure to break it down by season to account for lower occupancy during the slower summer months and higher rates during peak tourist seasons (Mardi Gras, Jazz Fest, etc.).

2. Average Daily Rate (ADR):

Look at the average daily rate for comparable STRs and bed and breakfasts in your area. This will help you estimate revenue more accurately. Sites like AirDNA can give you insights into market rates, or you can compare similar properties on platforms like Airbnb or VRBO.

3. Revenue Per Available Room (RevPAR):

RevPAR helps you combine occupancy and ADR into one figure to evaluate overall profitability. If your occupancy rate is 75% and your ADR is $200, your RevPAR would be $150 ($200 x 0.75). Use this to compare potential earnings against your operating expenses.

4. Operating Expenses:

Consider all the costs of running a B&B and event venue—staffing, cleaning, maintenance, utilities, insurance, marketing, and supplies. Since summer is slow, factor in fixed costs during those months when revenue will dip.

5. Seasonal Flexibility:

Since you know summer is a tough rental season, think about how you can use that downtime for events. Weddings, corporate retreats, and special events might help fill those slow months and boost your revenue during off-peak seasons.

6. Cap Rate:

To assess the overall profitability of the property, calculate the cap rate. This is your annual net operating income (NOI) divided by the purchase price. Cap rates for hospitality properties are typically higher than traditional rentals because of the additional operational work, but they can still give you a solid benchmark for comparison.

7. Regulations:

Given that New Orleans has strict rules for short-term rentals, make sure to fully understand the local zoning laws, STR permits, and licensing requirements for B&Bs. Compliance issues could impact your ability to operate and your bottom line.

8. Financing Options:

Look into financing options that fit hospitality properties. You may want to consider a commercial loan or SBA loan that caters to businesses like B&Bs or hotels. Be prepared with solid financial projections to present to lenders.

9. Event Venue Potential:

Evaluate how much space and infrastructure you'll need to convert part of the property into an event venue (e.g., outdoor areas, parking, kitchen facilities). Events can be lucrative but may require additional investment upfront.

By focusing on these metrics and carefully analyzing cash flow potential, you’ll be able to make a more informed offer and have a strong foundation for negotiation.

If you need help with financing options or further advice, feel free to reach out!

Best of luck,
Drago