How to Buy a Motel with an SBA Loan
Due diligence and financing a motel or small hotel with an SBA 7(a) small business loan.
Buying a motel, or small hotel, can be a great investment but finding the right location, deciding on a flag (branded) or independent (no brand) and obtaining successful financing can be complicated. Here’s a quick how-to guide.
Motel financing options. First, determine the price range you can afford so you can narrow your search. If you are planning to use an SBA loan to buy a motel, please use our popular Total Funding Calculator to determine how much you can afford using cash, retirement funds (401k or ROBS), home equity line of credit (HELOC), gifts and other down payment sources. That calculator is available here.
For a complete lending scenario including possible down payment requirements and “seller participation” scenarios, use our Complete SBA Loan Calculator for an incredibly useful overall lending projection. This calculator is available here.
Plan to contribute no less than 10% of the total purchase price as a down payment.
You can add some working capital into your project for inventory, improvements, personnel, and addition of ancillary services such as convenience stores, car washes, repair centers.
Advantages
- Real estate more likely included
- Franchise more easily financed
- Annual events and conventions
- Regular guests and groups
If you are using a loan to buy a motel, as with any business acquisition, make sure the cash flow of the motel can pay the loan payments and a salary for you as owner.
Conventional loans to buy a motel are also an option but can be harder to qualify for, have higher down payment requirements and shorter loan terms, and do not allow for working capital.
You should get pre-qualified ahead of time to begin discussions, estimate your borrowing limit and loan terms, and get a pre-qualification letter to help with your negotiations.
Disadvantages
- Seasonality
- Changes in local roads, attractions
- Airbnb may have impact
- 24-hour / 365 days responsibilities
You can get pre-qualified within 36 hours, with no credit check required here.
Have an Overnight Stay. Although you can learn a lot by reading online reviews, you should also visit the motel yourself and see what it is like to stay overnight. While you are there, you should note the staff and management in place, friendliness, service, comfort, cleanliness, and quality of furnishings. A lack of quality in certain areas can argue for a lower purchase price and can also provide you with areas for growth and improvement.
Location, Location, Location. The location of a gas station can have a huge impact on the future performance. Be sure to keep these ideas in mind:
- Visibility: Is the motel easily visible from the street or highway? Is it easy to get to?
- Nearby attractions: How close is the motel to airports, amusement parks, tourist attractions, concert venues, conference centers, entertainment, dining, malls, and corporate headquarters?
- Market conditions: Is the population growing? Are new attractions such as sports stadiums, conference centers or corporate offices under development?
- Competition: How many other motels are nearby? Do research on these motels. Try to get an idea of their room rate, occupancy, and reputation. Having nearly motels and hotels can be as much of a “plus” as it is a “minus.” For example, one of our clients owns a motel with a great “extended stay” lodging package that nearly competition cannot provide.
- Barriers to entry: Is there anything stopping future competition? Some barriers to entry can include lack of reasonably priced land and lack of hospitality-zoned land.
A pre-qualification is a great way to get a headstart on your application and will help in your negotiations. There is no credit check required and you’ll receive your pre-qualification letter and borrowing estimate within 24 hours.
Consider the brand of the motel. Are you looking at buying a “flag” or non-”flag” motel? Flag motels are brands with names more commonly recognized such as Holiday Inn or Best Western. A strong brand provides marketing and advertising, name recognition, training, reservation systems, loyalty programs, amenities, and construction and renovation guidance. However, an independent motel can be less expensive and will not require franchise fees paid to the franchisor. In general, a national flag motel will have a better chance of obtaining financing.
Review the documents. There are a number of documents to review when buying a hotel or motel:
- Tax returns: last 3-5 years
- Interim income statement: year-to-date and comparison to previous year
- Interim balance sheet: year-to-date and comparison to previous year
- Occupancy and average daily room rate (ADR): last 3-5 years
- Revenue per available room (RevPAR) – calculated by multiplying a motel’s average daily room rate (ADR) by its occupancy rate
- Capital expenditures: last 3-5 years with projections
- List of inventory and furniture, fixtures, and equipment
- List of employees with name, position, start date, salary, and benefits
- Details of litigation threatened, pending, or taken against the motel
- STR reports: Tracks supply and demand data for the motel industry. STR provides market share analysis for major motel chains and brands.Quality service reports. May be referred to a “STaR” report.
- Inspection reports such as elevator, building, health, and fire inspection reports.
- Lease agreement: How long is the lease? Does the tenant or the landlord maintain the exterior and interior?
- Business valuation or appraisal
- Environmental studies
- Warranties
- Service contracts
- Other licenses, permits, and contracts: i.e. liquor license, lottery license, vendor contracts, relationship agreements, supplier agreements, etc. What is the process of getting these transferred to you and how long will it take?
HOW DO I GET STARTED?
The best online SBA loan platform is YourEdge™ by YourSBA.com:
- Get prequalified to buy a business within 24 hours
- Start here with YourEdge™
- Find out how much you may qualify for using our SBA Loan Calculator tools here.
- Business acquisition loans from $350,000 to over $5 million.
- 5x success rate of your bank
- No fees
- No credit check / No hard credit pull
- No bank runaround
- Online, streamlined application accepted by all of the most aggressive SBA lenders for competitive interest rates and a 95% success rate.