If your mission is to become the owner of a hospitality property, it’s important to know how B&B real estate (commercial hospitality real estate) and residential real estate differ. Understanding the difference will help you clarify your goals and get you closer to achieving them. Here are five major differences:
1. B&B real estate is a commercial investment while owner-occupied residential real estate is a personal investment.
The decision to buy a B&B, boutique hotel or other lodging property is primarily based on an investor’s expected return on their investment. The decision to buy a home is also a financial decision, but the emphasis is on personal, emotional and family needs. For many innkeepers, their business property is also their home. Eliot Dalton has years of experience helping inn buyers find the commercial real estate listings that balance their investment and personal needs.
2. B&B real estate and residential real estate are valued differently.
Residential properties are nearly always valued by comparing them to physically similar residential properties, while commercial real estate is valued on income. Independent lodging properties are famously unique in size, style and operation, but can be compared financially. Commercial investors and lenders look at different industry measures such as Capitalization Rate, Net Operating Income, and Return on Investment. These are terms that lodging property buyers should become familiar with. We know what investors look for and can help buyers understand the “numbers”.
3. The Utility of lodging real estate and residential real estate are quite different.
“Utility” refers to a property’s ability to provide for its intended purpose. The purpose of residential real estate, for the most part, is to provide reasonable living conditions as a family home. The purpose of a commercial lodging property is to produce cash flow, now and in the future. There are cases where residential properties have undergone a creative adapted reuse (conversion) to become a business enterprise. They are then considered commercial property.
4. The time it takes to sell residential real estate is much shorter than it is for hospitality real estate.
Generally, in the residential market, properties are listed, marketed, and sold in a matter of months, weeks, or sometimes days. Commercial property often takes many months, and sometimes years to find new owners or investors. The number of conditions that need to be met in order to match a potential inn buyer with a property is much greater than that of a home buyer. Home buyers look at the number of bedrooms and baths, the kitchen layout, school district, condition, size of the lot, etc. With B&B real estate, those same factors may play a part, but there is a long list of other considerations. These include zoning and expansion possibilities; the value of the furniture, fixtures, and equipment; location and market exposure; satisfactory financial records; the quality of the facility, etc. The time-on-market of B&B real estate is also affected by a relatively small pool of buyers and the requirements of commercial lenders. If you are contemplating selling your inn or hospitality property in the future, now is the time to explore the selling process with us.
5. Commercial financing and residential financing are distinctively different.
The old saying is true – residential lenders focus on qualifying the borrower and commercial lenders focus on qualifying the real estate. When financing the purchase of a residential property, a buyer qualifies based on their income, credit score, debt ratio and down payment. Commercial lenders qualify borrowers as well, but their underwriting teams spend a significant amount of time evaluating the property’s ability to generate revenue. In order to reduce their risk, commercial lenders look for collateral beyond the real estate value, typically requiring a larger down payment, capital reserves and (sometimes) participation by the SBA and/or an Economic Development Corporation.
Do you have questions about buying or selling B&B real estate, a full-service inn, boutique hotel, or other lodging property? White Stone Brokers can help you find the right property or get your property sold. Contact us for a free consultation.