We hear constant misinformation about the availability of financing a purchase of a Bed & Breakfast Inn. In fact, I believe it has never been easier to find excellent financing packages. It is just a question of looking in the right place. I can assure you that the large, interstate banks (Bank of America, Chase) will never finance our small owner-operated businesses. However, for smaller local and regional banks, quite the opposite is true. For those smaller banks we provide a relatively safe, real estate heavy customer with a very good return for them. Over the past several months, three banks have approached me to solicit Bed & Breakfast financing business, even offering a fee for a successful completion of a transaction.
Most small bank lending is done with the support of the Small Business Administration, particularly the SBA 504 Debenture Program. In the 504 program, a bank lends 50% of the sale or appraisal price, whichever is less. The SBA, through a Certified Development Corporation (they are everywhere), will issue debentures for an additional 30% of the cost, leaving 20% as the normal down payment.
Interest Rates: How Quickly We Forget
In most of my 35 years of working with Inns, interest rates ranged from 6.5% – 12%. For the last three years, interest rates have been at historic lows. Currently, a typical Bed & Breakfast Inn will be financed at an interest rate of 4.5%, amortized on a 20-year term with a fixed rate for five years. This creates strong advantages for the purchase of an Inn at this point in time. For comparison, on $500,000.00 at 4.5% interest with a 20-year term, the payment is $3,163.00/month or $37,959.00/year. Of that $37,959.00, $15,782.00 is repayment of principal in year one, leaving the real cost of financing to be $37,959.00 minus $15,782.00. The real cost of financing is then $22,177.00.
Now let’s take a look at a 6.5% mortgage interest rate with the same terms. The monthly payment will be $3,728.00, for an annual payment of $44,736.00, of which $12,606.00 is principal repayment. The real cost of financing is then $32,130.00. Current financing makes it much more feasible to purchase an Inn, as prices have not escalated as the cost of financing decreases.
Unfortunately, rumbles from the FED indicate strongly the rise in interest rates beginning in 2015. The sum of all this is that there will probably never be a better time to purchase an Inn than now. All you have to do is leave behind your worries about another great recession and be an entrepreneur. We are here to help.
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