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How to finance a B&B

ninja learning Jan 20, 2021

THE QUESTION

Who would be a good lender for existing B&B properties, with an estimated value of £400k?

THE ANSWER

There are specific commercial lenders that lend on B&Bs.  

With very few exceptions, B&B owners will have run their B&B in a certain way.  Show me a B&B owner and I can give you a very accurate description of them and their business mind-set, a B&B owner avatar, if you like.     

With numerous B&B and guest house finance arrangements under our belt, we know there are, invariably, very big issues getting mortgage on them.  On the face of it, it looks like difficult to almost impossible to finance these properties. But, if you know the workaround to it, it means you can pick them up very cheaply.   

The first thing you need to get from any B&B owner is their last 3 years accounts, because any commercial lender wants to see how much cash the business is generating to support a mortgage payment.  It is these accounts where your mortgage application usually hits the buffers because of how the current owners have run their business. 

In a nutshell they structure it so they pay little or no tax: 

    1. By taking as much in cash as they can and pocketing it and 

    2. What they do put through the books their accountant writes off the max possible in expenses. 

So in this case, where you are looking for a 75% mortgage of £300k, the books only support lending of significantly less, if anything at all.     

B&Bs rarely have any commercial value because the books are so poor and get valued at vacant possession value, which is commercial speak for bricks and mortar i.e. the business has no value, only the building has value.  

Hence these B&Bs sit unsold for year after year, in part because of the owner’s unrealistically high view of the value of their business and also the inability of any would be buyer to get a decent sized mortgage.  Invariably they eventually get bought by a cash buyer at a knockdown price.

If you think not having that much cash to buy it outright takes you out of the game you would be wrong.  We help investors buy B&Bs using short term bridging finance, give you a year to ramp up the business maximising profits, then take you to a commercial lender with a robust set of accounts to get a mortgage and pay off the bridge.  

 

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