This article will eventually lead you to the perfect place to find a commercial loan on a bed and breakfast inn; but first a reality check.
In terms of cash-on-cash return on your money, however, the single worst real estate investment on earth is the bed and breakfast inn ("B&B"). In addition to earning an almost zero percent return on your life savings, the buyer also gets to enjoy rising early every single day of the week to cook breakfast. Is this a great country or what?
Don't get me wrong. Bed and breakfast inns are usually gorgeous properties. The big winner here is the previous seller (phew) and the guests, who get to enjoy a relaxing getaway with their favorite someone. But the inn keeper? He is totally and completely screwed.
What seems to the problem? Bed and breakfast inns are so gorgeous that the buyers fall in love with them... and then they grossly overpay for them. In many cases, the buyers will put down a whopping $500,000 and take out a commercial loan of $800,000 or more. Then the buyers try to service the debt on this massive commercial loan by renting out fewer than ten (just four?) guest rooms.
These commercial loans simply don't pencil. Sure, the B&B might generate enough dough to make the mortgage payments, but there is seldom any money left over on which the retired couple can live. Therefore the buyers have to go deeper and deeper into credit card debt in order to survive. Eventually they have to sell, and the Old Maid is passed on to the next sucker. Phew.
You will recall that a cap rate is the return on your money if you bought an income property for all cash. For example, suppose you buy a 36-unit apartment building. You start with your Gross Scheduled Rents, and you lose some potential rent when you have some vacancies and credit losses (5%). Then you have your operating expenses and some replacement reserves that you have to set aside for the roof and AC units.
When you are all done, you are left with your net operating income ("NOI"), which is your dollar return on your investment. (Important note: Do NOT deduct the payments on your commercial loan when computing your NOI.) Your cap rate is simply your NOI divided by what you paid for the building.*
You can buy decent apartment buildings for a 5% to 7% cap rate. In other words, if you buy the apartment building for all cash, you will enjoy an income of around 6% on your money. You can buy good office buildings and retail properties for 6% to 8% cap rates. But bed and breakfast inns? B&B's sell at 2% to 4% cap rates!
"But George, the owners also get to live in the beautiful property rent free."
True. It's an appealing lifestyle, until the cost of the repairs and replacements eats up your cash reserves. Now if you have a huge, outside retirement income on which you can survive, and you don't need the B&B's income to buy groceries, then the B&B lifestyle may be for you. But as an investment to generate a cash-on-cash return on your retirement savings, bed and breakfast inns are stinkers.
What about making commercial loans on bed and breakfast inns? From a lender's perspective, they are not the best kind of collateral. (But they are not the worst.) B&B's seldom generate enough dough to pay for professional management. As a result, in the event of a foreclosure, the bank has to immediately close the inn.
A foreclosure destroys years and years worth of marketing effort. "Oh, honey, let's sneak off and stay at that little B&B where (giggle) little Johnny was conceived. Oh, no... it's closed down!"
Now let's talk about personal property. If a buyer pays $1.5 million for a bed and breakfast inn, at least $300,000 of that price will be for the gorgeous, antique furnishings. Guess what happens when a lender forecloses? Poof. They are all gone. Empty building.
That being said, B&B's are not the absolute worst collateral for a commercial real estate loan because they are usually gorgeous and the setting is heavenly. They are far-far better collateral than, say, an apartment building in the ghetto.
Okay, suppose you are looking for financing on a bed and breakfast inn. Where should you go? Banks don't like to finance B&B's because they are money-losers. The borrowers almost never have large enough cash reserves to attract a bank.
I don't think the SBA will finance bed and breakfast inns; but I could be wrong. I just wrote to my SBA loan buddies and asked them, and I'll post the results here. This just in: Riley Risto, an SBA loan officer for Gulf Bank, just replied, "Yes, those are tougher deals to get done, but there’s no SBA restriction. The zoning has to be correct."
If I needed and SBA loan, I think I would apply to a local credit union. The key is the word, "local". You can find scores of suitable credit unions for your B&B deal on CommercialMortgage.com.
By the way, guys, when you use CommercialMortgage.com to place a commercial loan, be sure to scroll down past the Recommended Lenders section to the Hungry Lenders section, where you will find your thirty DIRECT LENDERS (banks and credit unions). You may not be scrolling down far enough.
My own hard money shop, Blackburne & Sons will make small commercial loans on bed and breakfast inns. Our biggest limitation is that our maximum loan size is $800,000 for such properties.
Be sure to check out our updated Blackburne and Sons web site. Purdy. :-)
* Multiplied by 100% to put the number into a percentage format.