Last reviewed on 3rd November 2023 by Martin Alexander (Mortgage Advisor)
Running a successful hotel starts with getting the numbers right. Whether you want a mortgage for a hotel or need capital to renovate an existing building, getting the right deal is crucial.
This guide will explore how to get a mortgage for a hotel and how to prepare your proposal.
How can I get a mortgage for a hotel business?
You’ll need a commercial mortgage to buy a hotel, but there are other alternatives, which we’ll cover further in this guide.
Each lender that works in the commercial sector will vary in what they’ll require for a mortgage. Your choice of lenders will also depend on whether you purchase an existing hotel business or build a hotel from scratch.
You’ll require the following to get a mortgage for a hotel business:
- Business plan
- Experience in running a hotel business
- Hotel KPI (when buying an existing hotel)
- Income projection and trading accounts where possible
- Minimum 30% deposit
- Good credit score
- Ability to offer security
Every lender will want to see solid proof that your proposition is viable. To do this, you must demonstrate the viability of your business, which will ultimately come from the documents you provide.
In addition, you’ll also need a good credit score and a 30% minimum deposit. Any less than this, and you’ll struggle to find a lender. Being able to offer security will also help your application.
Having a good business plan
You’ll need an in-depth business plan before applying for hotel finance. This is because lenders must assess whether your plan is realistic and if projections meet the loan requirements.
Although lenders can assess past revenues with existing businesses, they’ll still need an indication of future plans. Lenders may also adjust their LTV ratios depending on the solidarity of your business plan.
Experience in the hospitality sector
Experience running a hotel would be preferred, but experience in the hospitality sector is a must. The greater the experience you have, the stronger your application becomes.
Lenders carry out their assessments to establish the amount of risk involved with your loan. You can significantly minimise a lender’s concerns by having a great deal of experience with hotel businesses. In contrast, having little experience will make it very difficult for you to get approved.
Having qualifications such as degrees in hospitality or hotel management can also help your application.
Hotel key performance indicators
If you’re buying an existing hotel, lenders will want to see the hotel’s key performance indicators (KPI). As with any business, a KPI will indicate the hotel’s performance.
Lenders will require details of the occupancy rates and revenues. They’ll then calculate the revenues per available room (RevPAR) and the average daily rates (ADR) to establish how well the hotel performs.
If your figures are below average, lenders will want to see how you plan on raising revenue to an at least average level.
Income projection and trading accounts
Lenders prefer to see at least two years of accounts if you’re buying an existing business. If you don’t yet have two years of accounts, some specialist lenders may still consider you.
The key here is demonstrating that your hotel will generate enough profit to repay the loan. Improving the profitability of a business should also be part of your business plan, especially if your figures fall short.
The location of your hotel will be a key factor in how successful your business can be. Buying a hotel close to city centres, retail parks, entertainment centres, office buildings and other commercial buildings will give your application a huge boost. Furthermore, having transport and access links will also support your proposal.
Lenders will question your application if you’re buying in a derelict area. Unless the hotel has a brilliant track record, you could struggle to be approved. Selling a hotel also becomes much easier when located in a prime location than somewhere less desirable. This is another reason why lenders may become hesitant.
What can I do to prepare my mortgage proposal?
Commercial lenders will approve your application based on its credibility. So, you should spend most of your time building a strong business plan. Lenders need to be confident that you’re purchasing a profitable hotel and have a proposal to go with it.
These are some of the questions you’ll need to be prepared for:
- Is the hotel already a running business?
- Does the hotel need extensive refurbishment?
- The number of years the hotel has been trading
- Amount of employed staff
- Is your lender suitable for this project?
- Does the loan meet your requirements, or is there a shortfall?
You’ll need to ensure your lender understands your plans once you become a hotelier. For instance, will you be taking over the building or spending part of the loan on improvements?
Your business goals will dictate the direction of your application and the most suitable lenders. Applying with a lender that isn’t suitable can cause problems, so you’ll need to plan ahead.
How can I get the best mortgage rates for my hotel?
The rates you’re offered will be based on the strength of your application. For instance, having experience in this sector and having a credible business plan should give you access to the best rates possible.
Lenders base assessments on risk. For instance, applicants with vast experience will be considered lower risk than those buying their first hotel. Furthermore, business plans with stronger income evidence will also help unlock better mortgage rates.
Our advisors can assess your application and give you areas to improve. Doing so can ensure your proposal is at its best, which can unlock better rates than you otherwise wouldn’t have access to.
Alternatives to a hotel mortgage
A commercial mortgage is one of many ways to buy a hotel. There are several alternatives to using a mortgage:
- Asset finance
- Development finance
- Refurbishment finance
- Business loan
- Bridging loan
Asset finance can also be a suitable option to purchase a hotel. This is especially true if your hotel requires additional furniture rather than a refurbishment. Using asset finance is also ideal for buying equipment such as computers and other office equipment.
If your hotel doesn’t require much equipment but would benefit from a renovation, then refurbishment or development finance could be better suited.
A business loan may be more suitable if you only require a small amount of capital. This is quite common for purchasing existing hotel businesses.
If you’re building a hotel business from scratch, you may benefit from development finance. This would include funds for the build and internal refurbishment of the project. Funds are released in stages, which can be advantageous. This is because you’re only charged interest on each part of the loan as it’s released. Furthermore, lenders will assess whether each development stage passes its criteria.
If you already have a building you want to renovate, a refurbishment mortgage could be a better option.
Bridging loans can also be suitable for purchasing a hotel, especially if you need to meet tight deadlines, such as buying at an auction. Nonetheless, you’d need an exit strategy for a sustainable loan, such as a commercial mortgage.
A bridging loan is a type of short-term finance, with terms rarely exceeding three years. The good news is that bridging can be approved very fast compared to other borrowing methods.
Specialist advice for buying a hotel
Buying a hotel is entirely different from purchasing any other building. The process can be overwhelming for many as the assessment is highly intricate. As discussed, lenders will delve into your business plan as well as the current or projected revenue of the business.
While you may think one type of finance is suitable, we may be able to find a more suitable product. This is because a hotel business can be purchased using more than one type of finance. Our experts will then liaise with lenders to ensure they’re satisfied with what you’ve provided. If lenders have any concerns, we can provide the documents required to get the loan approved.
Trying to purchase a hotel by directly going to a lender can take a lot of work. If you are refused for any given reason, it can have a negative impact on applying for a mortgage in the future. This is why speaking to an expert beforehand can be so crucial.
You can make an enquiry to get a more in-depth idea of what’s required for your situation. Our experts will then guide you further on whether or not your proposition is viable before approaching lenders.
About the author
Martin is a senior mortgage advisor and has held a CeMAP qualification for over 15 years while also completing an MBA in Global Banking & Finance.