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tim123

Relocation - Buying A Hotel - How Do The Finances Work?

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On last night's RR the couple wanted to buy a hotel on a budget of 850K.

But how do they get to this budget?

As they will have no income other than that from the business it can't be based upon a loan of multiple of current earnings.

So it must be either:

a) They have 850K in cash available (or an alternative house to borrow against).

or

B) They borrow the money based upon the profitability of the business, in which case their budget would be completely unrestricted. So where does the 850K figure come from.

During the prog they assessed some businesses and one of them cost about 600K showing a "profit" (i.e. personal income) of 30K with zero staff costs. If I had 600K invested in a business and then put 2 times 24/7 effort in, I would think that 30K was a derisory return, so why would anybody do it?

OTHO if that 30K profit was after having paid the interest on 600K of borrowed capital then I'm back to (B) above. As long as the business shows a profit after borrowing costs surely anybody (who can show the bank the appropriate business skills) can borrow 2 million, or 5 million, or whatever for such a purchase.

Though Kirstie said that if the bought the 600K prop they would still have 200K of their budget to spend on improvements. But if this budget is based upon borrowed money the bank aren't going to lend this with no business behind it, so it doesn't really exist?

I'm confused. Does anybody know how this normally works?

TIA

tim

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On last night's RR the couple wanted to buy a hotel on a budget of 850K.

But how do they get to this budget?

As they will have no income other than that from the business it can't be based upon a loan of multiple of current earnings.

So it must be either:

a) They have 850K in cash available (or an alternative house to borrow against).

or

B) They borrow the money based upon the profitability of the business, in which case their budget would be completely unrestricted. So where does the 850K figure come from.

During the prog they assessed some businesses and one of them cost about 600K showing a "profit" (i.e. personal income) of 30K with zero staff costs. If I had 600K invested in a business and then put 2 times 24/7 effort in, I would think that 30K was a derisory return, so why would anybody do it?

OTHO if that 30K profit was after having paid the interest on 600K of borrowed capital then I'm back to (B) above. As long as the business shows a profit after borrowing costs surely anybody (who can show the bank the appropriate business skills) can borrow 2 million, or 5 million, or whatever for such a purchase.

Though Kirstie said that if the bought the 600K prop they would still have 200K of their budget to spend on improvements. But if this budget is based upon borrowed money the bank aren't going to lend this with no business behind it, so it doesn't really exist?

I'm confused. Does anybody know how this normally works?

TIA

tim

I was wondering the same thing when the missus was watching it last night - I have to say that I assumed they had cash (especially given they managed to buy a repossion from the bank in the end) but as always the details of the financing were very unclear.

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On last night's RR the couple wanted to buy a hotel on a budget of 850K.

But how do they get to this budget?

As they will have no income other than that from the business it can't be based upon a loan of multiple of current earnings.

So it must be either:

a) They have 850K in cash available (or an alternative house to borrow against).

or

B) They borrow the money based upon the profitability of the business, in which case their budget would be completely unrestricted. So where does the 850K figure come from.

During the prog they assessed some businesses and one of them cost about 600K showing a "profit" (i.e. personal income) of 30K with zero staff costs. If I had 600K invested in a business and then put 2 times 24/7 effort in, I would think that 30K was a derisory return, so why would anybody do it?

OTHO if that 30K profit was after having paid the interest on 600K of borrowed capital then I'm back to (B) above. As long as the business shows a profit after borrowing costs surely anybody (who can show the bank the appropriate business skills) can borrow 2 million, or 5 million, or whatever for such a purchase.

Though Kirstie said that if the bought the 600K prop they would still have 200K of their budget to spend on improvements. But if this budget is based upon borrowed money the bank aren't going to lend this with no business behind it, so it doesn't really exist?

I'm confused. Does anybody know how this normally works?

TIA

tim

I didn't see it, but just recently I was looking at the books of a small, 12 room hotel. Its a very difficult business to make money on, and is very hard work. The value of the plot the hotel was on was probably circa £1m, but this was for redevelopment value and is in no way underpinned by the earnings from the hotel, which were pretty minimal.

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On last night's RR the couple wanted to buy a hotel on a budget of 850K.

But how do they get to this budget?

As they will have no income other than that from the business it can't be based upon a loan of multiple of current earnings.

So it must be either:

a) They have 850K in cash available (or an alternative house to borrow against).

or

B) They borrow the money based upon the profitability of the business, in which case their budget would be completely unrestricted. So where does the 850K figure come from.

During the prog they assessed some businesses and one of them cost about 600K showing a "profit" (i.e. personal income) of 30K with zero staff costs. If I had 600K invested in a business and then put 2 times 24/7 effort in, I would think that 30K was a derisory return, so why would anybody do it?

OTHO if that 30K profit was after having paid the interest on 600K of borrowed capital then I'm back to (B) above. As long as the business shows a profit after borrowing costs surely anybody (who can show the bank the appropriate business skills) can borrow 2 million, or 5 million, or whatever for such a purchase.

Though Kirstie said that if the bought the 600K prop they would still have 200K of their budget to spend on improvements. But if this budget is based upon borrowed money the bank aren't going to lend this with no business behind it, so it doesn't really exist?

I'm confused. Does anybody know how this normally works?

TIA

tim

Normal requirements are that the purchasers should have deposit, nowadays moving from 20% towards 35% and beyond. The lenders would require the business to be able to "comfortably" service the remainder of the loan. The margins they look for are wider for those with no previous experience in the hospitality industry but means that the business previously would have to be sufficiently profitable.

There are vested interests in that lenders often specialise in this sector adn have tie ups with the two main specialist agents, namely Christies and Colliers Robert Barry.

You do get a lot more for your money in Scotland but trading is restricted to only part of the year often.

I havent seen the episode yet but my manageress was talking about it this morning. I understood they found their own property after the show.

I wish them luck. The sector is very difficult at the moment.

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Friends of mine run a 20-room hotel, and they struggle to make any profit from it.

The hotel is in Scotland, not far from Edinburgh, and a house of equivalent size would probably cost about 4-5 times what they paid for the hotel, but I understand getting permission for change of use to residential property is very difficult.

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Friends of mine run a 20-room hotel, and they struggle to make any profit from it.

The hotel is in Scotland, not far from Edinburgh, and a house of equivalent size would probably cost about 4-5 times what they paid for the hotel, but I understand getting permission for change of use to residential property is very difficult.

Edinburgh is not exactly short of hotels !!

They do ok at New Year/Summer though ? Any business guests ?

Just being nosey.

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During the prog they assessed some businesses and one of them cost about 600K showing a "profit" (i.e. personal income) of 30K with zero staff costs. If I had 600K invested in a business and then put 2 times 24/7 effort in, I would think that 30K was a derisory return, so why would anybody do it?

Checkout Daltons Business or BusinessesForSale and you'll see lots of hotels/guest houses/kennels etc. with returns that are about the same.

I agree with you, but times are hard !

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Checkout Daltons Business or BusinessesForSale and you'll see lots of hotels/guest houses/kennels etc. with returns that are about the same.

I agree with you, but times are hard !

I know.

But what I don't know is, is that return based upon a purchase for cash, or after the costs of borrowing have been deducted?

tim

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Only saw 5 mins of it, but was amazed at the break down of income (if memory correct)

50% of income from bar drinks !

35% from food

only 15% from rooms !

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I loved the way Phil the expect said that he would have to go through the books of any potential purchase to make sure the figures added up

http://www.dailymail.co.uk/news/article-1147582/Location-Location-host-Phil-Spencers-property-firm-goes-bust.html

Property expert Phil Spencer's homefinding business has finally gone bust.

"Yes, it all looks fine to me"

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I loved the way Phil the expect said that he would have to go through the books of any potential purchase to make sure the figures added up

http://www.dailymail.co.uk/news/article-1147582/Location-Location-host-Phil-Spencers-property-firm-goes-bust.html

"Yes, it all looks fine to me"

:)

and the OP stated "or.. They borrow the money based upon the profitability of the business, in which case their budget would be completely unrestricted. So where does the 850K figure come from."

Don't they just borrow 125% of the £850k purchase price, and then pay it all back in 2 years from the HPI-inflated new price?

(sorry, just flew in from 2005... :) )

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Looked to me like they had inherited a house and were cashing in? The guy was a driving instructor and she had been working in hotels for years (which I had total respect for, actually learning the business is rare in these shows).

Every time Phil pontificated on what they would make money on and what was good business I just snorted. What the stuff did he know about food, drink, or hotels?

Edited by Tonkers

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They bought the wrong hotel, they should have bought the hotel on loch Ness as its one of the biggest tourist attractions in the UK.

They bought the wrong hotel,but it should have been the one by the ferry.Guaranteed trade and a 17% return on the investment takes some beating.I too wondered about the financing,I have been in business 34 years and,talking to my business manager he said I could borrow as much as I wanted as long as I matched the bank's loan with my own money.So on that basis they needed £425k.

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They bought the wrong hotel, they should have bought the hotel on loch Ness as its one of the biggest tourist attractions in the UK.

I thought that would have been the dumbest purchase.

It has the shortest season and probably zero possibility of increasing trade by opening a resturant/bar serving food/drink to non residents. (I say probably because I couldn't work out exactly where it was).

I think that either the one in Pitlochary or the one in Kincraig (was it?) was best. Because being just off the A9 they are precisely the opposite. I.e capable of attracting trade 12 months of the year and of attracting non residents to a resturant/bar.

tim

Edited by tim123

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They bought the wrong hotel,but it should have been the one by the ferry.Guaranteed trade and a 17% return on the investment takes some beating.I too wondered about the financing,I have been in business 34 years and,talking to my business manager he said I could borrow as much as I wanted as long as I matched the bank's loan with my own money.So on that basis they needed £425k.

But you have to live there too.

Everywhere that you ever want to go to is across that ferry. And everything that gets delivered to you is going to have to add on the cost of coming across on the ferry.

And being just 100 yards from the dock, in the summer the queue for the ferry is going to be snaking past right outside your door.

tim

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Only saw 5 mins of it, but was amazed at the break down of income (if memory correct)

50% of income from bar drinks !

35% from food

only 15% from rooms !

That was the hotel with three bars!

Phil to his credit was trying to steer them away from that on, and back onto their original strategy of being hoteliers and not pub landlords!

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  • 284 Brexit, House prices and Summer 2020

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