Not a bad way to live, and in some cases entirely delightful. But is a B&B a good business or retirement option?
At first buying a B&B might seem like a real estate transaction, but it's more. You're not only buying ground and "improvements" (that quaint house), you're also buying a business which needs customers. To get customers you must market. To keep customers you must maintain facilities and provide something better than can be found at home. You'll likely need to hire a few folks, say groundskeepers, housekeepers and cooks. And since your "in" the inn business, you'll need to worry about changing sheets, canceled reservations and all the other joys of hotel ownership.
Imagine that you have a household income of $120,000, $20,000 stashed away in cash, and $50,000 in real estate equity once your current residence is sold. Can you buy a B&B? Here are 10 basic issues to consider:
1. Is it a B&B?
Some properties work as a bed and breakfast and some don't. You need bedrooms and bathing facilities, a place -- at least -- for breakfast. But you also need more -- privacy, quiet, good furnishings, etc. Does the property have such facilities or can they be built? How much cash is required to bring the physical plant up to your standards?
2. Is it a business?
There's a difference between a hobby and a business. For one thing, a business means there are deductible expenses. It also means that profits and their pursuit are a measure of whether or not an activity is a "business" by the standards of the IRS. For background information, take a look at Publication 535.
If you were buying a local bakery or hardware store the first thing you would want to see are tax returns for the past two or three years -- same with a B&B. If it's a business, if it has cashflow, the tax forms will show it.
But what if some income is off-the-books? In such situations you have to wonder what, if anything, can be believed. There is no practical way to trace unreported income, no assurance that it exists, no way to use it to secure financing and no guarantee that it will continue.
3. How will you market?
If you buy an existing business one of the most important assets to acquire is the list of past visitors. This list can be the basis of an extensive marketing campaign (meet the new owners, 20 percent off on the second night, etc.). Alternatively, you need dollars for websites, ads and brochures.
4. Should you acquire or create?
There are arguments on both sides of this question. If you purchase an established B&B you are paying for a going business with all the assets and advantages of an enterprise which has been in place for some time -- past clients, experience, supplier lists, etc.
If you start from scratch you may have a lower initial cash cost -- but mistakes and a lack of experience can be expensive.
5. What about cashflow?
Go back to our wage earners and look at their $120,000 a year -- can any of that income be continued from a B&B? With cell phones and home offices that's not an unreasonable idea in many cases. But what if some or all of today's income is lost by moving -- can the B&B support the business and the new owners? How long will it take before the dollars roll in?
6. How will the transaction be financed?
You may need one or more loans to acquire a B&B. As a place to start, consider the SBA 504 program. For a case history, look at the Foley House in New Orleans.
7. What are the terms?
If you need financing be sure to ask tough questions. How long is the loan? Shorter terms, say 10 or 20 years, mean higher monthly payments than with a 30-year mortgage. What is the interest rate? Can it change? How much down? Also, beware of fees. You could be looking at three percent or more.
Create a spreadsheet and compare financing costs with existing or projected revenue. Be conservative. You will have vacancies. Towels will be swiped. Furniture will be broken. Checks will bounce.
8. What are the rules?
We live in a regulated society -- sometimes with good reason. For a B&B, you have to ask what zoning, fire, health, building, and lodging rules apply. What about licenses? For a good discussion, see Home-Based Business and Government Regulation by Henry B. R. Beale.
9. Can you practice?
If possible, pick a B&B you like and ask the owners if you can "shadow" them for a few days -- see the hours they put in, the practical problems they have, etc. If you're negotiating for a specific property, make the transaction contingent on a study period of given length, on-the-job training to better understand daily needs.
10. Who can help?
You need an experienced real estate broker -- and an accountant, structural inspector, lawyer, etc. -- to help with the transaction, whether you're buying an existing facility or hope to convert a property for use as a B&B.
Can it be done? There are thousands of B&Bs throughout the country, so the answer is "yes." But like any business, a B&B is work. If it's the kind of work you would find interesting, then now's the time to start looking at properties.
