How to Finance a Hotel Purchase: The Simplest Way to Buy

how to finance a hotel purchase
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Investing in bricks and mortar is a major undertaking, and when it comes to purchasing a hotel you will need to put in a sizeable amount of time, effort, and of course, money. Get it right, however, and owning your own hotel can prove to be incredibly lucrative financially.

How to finance a hotel purchase?

If you want to finance a hotel purchase, then a short-term bridging loan can be used to secure the sale. In addition to funding commercial property purchases, bridging finance is used to raise capital for hotel development projects and refurbishments.

The hospitality industry is competitive and so being in a position to obtain hotel development financing quickly can often give you an added advantage; and bridging loans are one of the best forms of capital to obtain.

At Bridging Options, we specialise in raising finance for the development and renovation of hotels. Our advisers have years of experience brokering bridge loans for prospective hotel owners and have access to a wide range of lenders. Here we’ll explain the process for taking a bridge loan and why it could be a smart business move when setting up and financing your own hotel purchase.

The benefits of a hotel bridge loan

When looking to raise money for purchasing property, the obvious choice is to visit a high street bank or advisor to arrange a mortgage. Bridge loans, however, are often a more viable option for purchasing a hotel, especially in circumstances where timing is critical or where commercial mortgage lenders cannot offer enough flexibility.

This is often the case when the property is inhabitable at purchase, bought at auction or needs considerable renovation.

The benefits of taking a bridge loan over a traditional mortgage is that the finance is available for a shorter period of time, with terms generally available from 1 month to 3 years. This means you are not tied in for the long haul and once improvements have been made and the business is viable, you can pay off the bridge loan or look to re-mortgage.

The amount you can borrow depends on the value of the hotel itself and will be secured against other existing assets. As a responsible buyer, you need to make sure that you can not only acquire enough money to buy your hotel but that you are confident in your cash flow projections and forecasted occupancy rates. This will ensure that you will be able to cover the bridge loan payments at the end of the term.

Financing a hotel with a bridging loan

There are many reasons why a hotelier or property developer with an interest in the hospitality sector might consider taking out a bridging loan. These are the most common ones: –

  1. To expand or renovate a hotel they already own
    A bridge loan can help hotel owners, as it can provide an injection of much needed money when they need it the most.
    Even if you already have a hotel (or chain of hotels) that are operating at a profit, expanding or refurbishing property of this size can require serious capital. And, in the hotel industry, timing is everything, and the need to increase capacity to keep up with growing demands should be carried out before peak season begins.
    The good thing about using a bridge loan to finance hotel refurbishments or expansions is that once the busy period is over, there is often enough profit to cover the repayments. Or, if it is a larger investment, then once the work is complete a commercial re-mortgage can be arranged based on the increase value of the property.
  2. Adding hotels to the investment portfolio
    If you are an experienced hotel operator, then you may wish to expand your business enterprise. Bridging loans can be arranged quicker than commercial mortgages, so if you have your eye on a property, it could just give you the edge over the competition.
  3. Inhabitable hotels
    Along with accessibility, another reason to choose bridging finance for your hotel purchase is the flexibility it allows. This is particularly important if you are looking to buy a hotel that needs significant work such as installing utilities or putting in a working kitchen, as most mortgage lenders would not offer money on an inhabitable hotel.
    By taking out a bridging loan, you can receive the capital you need to convert the building into a fully functioning hotel in order to re-mortgage or sell on.
  4. Securing the hotel “chain”
    Big investments often have lengthy buying chains. A bridging loan can help you to raise finance on your existing property and ensure the smooth purchase of your property. Afterall, the last thing you need is for the chain to become broken.
    The great thing about a bridging loan is that it can be arranged in a matter of days, enabling you to complete on your purchase even if the sale of your other asset has yet to be achieved.
  5. Hotel management buyouts
    Bridging finance can also be used for management buyouts. As negotiations can be time sensitive, having available funds in place to buy out your business partner or current owner can be critical to a smooth sale. Likewise, having the available finance in place can also put you in a stronger position to secure the deal quickly.

How much can you borrow with a hotel bridge loan?

There is no set amount that you can or can’t borrow when taking out a bridging loan. Most lenders will evaluate the risks, assets and plans and consider the loan terms and length on a case by case basis.

In general, however, the Loan to Value (LTV) on most bridging loans is around 70-75% of the properties value. For a commercial bridge loan, the same percentage may apply to low risk hotel investments, however, if it is considered high risk by the lender then this may drop to around 50-60% LTV.

If you are an experienced hotel operator with a proven track record and impressive property portfolio, then you may be able to take out even more, providing you can secure the loan against your other assets. You do need to be mindful, however, that should your new business venture fail, and you are unable to repay the loan, that you could be putting your other hotel properties at risk of repossession.

Regulated vs Unregulated bridging loan

Bridging finance lenders and brokers can be broadly divided into two categories: regulated bridge loans which are homes that are owned and lived in by the property owner and unregulated which are generally commercial buildings or investment properties.

Unfortunately, if you are taking a bridge loan to finance a hotel then this is not something you can choose, and it will automatically be considered unregulated.

This is nothing to be alarmed about, as around 50% of all bridge loans are unregulated. It is, however, important that you do your due diligence to ensure you find a reputable lender that can clarify the terms and conditions in advance. Unregulated bridging providers specialise in commercial bridge loans and are often best placed to offer you the better rates.

How to get a hotel bridge loan

In order to finance your hotel using a bridge loan your lender will want to make sure that you meet certain criteria and those who are deemed less risk will often receive more choice when it comes to rates and fees. This includes: –

  • Exit strategy. Clear evidence of how the loan is to be repaid will need to be demonstrated at the outset. This could include the sale of the hotel at a profit once work has been completed, capital raised through selling other property or a long term commercial re-mortgage.
  • Credit Scoring. Whilst it is not essential to have impeccable spending habits, it will be harder for those with bad credit to get the best rates and your choice of bridge loan providers is likely to be greatly reduced.
  • Property Experience. We all have to start somewhere, so if it is your first step on the property investment ladder don’t despair. As long as you have a well thought out business plan most lenders will still back you. Those with previous experience in the hotel industry and a proven track record are more likely to be viewed as low risk and have access to better rates.
  • Deposit. As with any financial commitment, the larger the deposit the lower the risks for the lender. A minimum deposit of 30% is usually required, but anything above and beyond this is considered to be a major bonus.

 Bridging Options, the hotel bridge loan experts

Although buying a hotel could eventually provide you with a profitable business, your bank balance at the outset might not reflect your passion or ideas. This is where Bridging Options can help turn your dreams into reality.

If you have questions about bridging loans for hotels or how to finance buying a hotel, then our bridging brokers are available to chat and can find you the best rates.

For a free, no obligation telephone consultation, call us today or complete our online enquiry form.

Bridging Options
Bridging Options

At Bridging Options we specialise in providing short-term loans to help purchase commercial or residential developments and property. If you would like advice or to speak to a finance expert please contact us.

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