A great investment opportunity: will the bank go along?
Backpacker accommodation such as hostels and guest houses are a popular commercial property type but successful investment comes down to the property location and good management.
Banks take a similar approach to assessing backpacker accommodation commercial loans as they do with pubs and hotels.
Put the best case forward to get approved for a loan.
How much can I borrow?
- Freehold purchase: Borrow up to 60% of the property value or 70% in strong cases or up to 100% using a guarantor if the property can be used for other commercial uses.
- Leasehold purchase: Borrow up to 50% of the business value (going concern).
- Maximum loan term for principal and interest repayment: 5 years (debt to reduce to 40%).
- Maximum loan term for interest only: 3 years.
- The bank may ask for a business forecast before approving the backpacker accommodation commercial loan.
- Low doc options not typically available.
- Interest rate discounts vary depending on the strength of your application.
Call us on 1300 889 743 or fill in our free assessment form to get an indicative funding approval for a backpacker accommodation commercial loan.
What do the banks assess?
A backpacker accommodation commercial loan can be a little difficult to get approved because hostels are considered specialised properties.
Like hotels and pubs, they can quickly be affected by poor management because running costs can be high.
The reason is that the permits and licences required to run the hostel can be huge.
Fire regulations, for example, can be quite strict because there is a high risk to guests and staff.
Another reason is that they operate on a seasonal basis.
Long-term tenants are highly unlikely and the inn will only be bustling during certain times of the year, typically spring and summer.
Whether you’re leasing the property or you’re running the hostel yourself, you’re generally required to have 1.5 to 2 times the amount of income to proposed interest expenses.
This is known as the banks ‘serviceability ratio’ or DSCR (Debt Service Coverage Ratio).
Basically, this gives the bank assurance that you can keep the investment afloat should either you or your tenant hit financial hardship.
Apart from your financial situation and credit history, banks prefer if you have industry experience in a managerial role.
How do banks value a hostel?
If you’re simply buying the freehold and continuing the business “as is” with the current tenants, banks will value both the premises and the business.
Like any other property security, the valuation will be based on land value, including location, and the nature and condition of the hostel.
To value the business, a bank will usually use a capitalisation rate (cap rate) to work out the potential return on investment (ROI).
The cap rate is based on the average net operating income (NOI) of the hostel over the past two years as well as comparable sales in the area. To be clear, you can get NOI after deducting operating expenses while including the cost of the mortgage.
For example, if the backpacker hostel generated an average profit of $90,000 annually and comparable sales in the area are at the $1,000,000 mark, the cap rate for the property would be 9.00%.
The bank will cross-check this with a few other comparable sales to get an average sold cap rate.
Let’s say the cap rate is 9.00%, the NOI for the business is $75,000 and the property is being sold for $1,000,000.
Using the cap rate, the bank may value the property at $833,333, more than $150,000 below the asking price. The property has been way overpriced and you would need around $500,000 as a deposit to complete the purchase.
The cap rate technique is a useful method you can use when buying or selling a commercial property.
Of course, this is just an example and only intended to give you an estimate.
Do I need security for the loan?
Yes, you’ll need to secure the mortgage but it doesn’t have to be a mortgage/residential property.
The hostel commercial loan can also be secured by the following if you’re purchasing an existing strong business (not a start-up):
- Registered fixed or floating charge or Bill of Sale over the hostel’s business assets.
- Directors’ guarantee.
- A deed of consent between lessor/lessee and the bank.
Why speak to us?
There are many benefits to speaking with an experienced mortgage broker rather than going to a bank directly.
Firstly, the bank will only offer you the products they have. A mortgage broker has a number of different major banks and lenders to choose from so you can get the right commercial loan for your needs.
Because of the strong relationships we have, our mortgage brokers can often get significantly discounted interest rates on your behalf.
The commercial property loans section can provide more information about how the commercial loan process works and the other types of commercial properties that our lending panel can finance.
Please call us on 1300 889 743 or fill in our online enquiry form to find if you qualify for a backpacker accommodation commercial loan.
Tips for buying a hostel
Do you know what a backpacker hostel is and what’s involved with running one?
Apart from managing the business, there a few tips and tricks that will help you buy a hostel at a price that works for your overall investment goals.
How do you know if a hostel is worth buying?
Like other types of commercial properties, location is key: it will give you the level of business you need to stay profitable with the clientele you want to service.
Metro areas are highly sought after because they have good infrastructure, entertainment outlets, sights and attractions.
Distance to public transport is a definite plus and will have a big impact on the property price.
What about rural properties?
Guest houses and tourist inns located in rural locations can be attractive if you’re after a sea change by running the hostel yourself.
They can even be lucrative if the town is home to some kind of novelty or attraction like an historical site.
The problem is that you’d likely only attract short-term stay guests and be more harshly affected by seasonal dips.
More importantly, the bank may flat out decline your application due to postcode restrictions.
Yes, these restrictions affect commercial properties as well.
Despite of this “case by case” nature of commercial loan, we may still be able to get you approved.
Presenting a solid business plan and showing evidence that you have strong industry experience and strong financials will help your case.
Call us on 1300 889 743 or complete our free assessment form to speak with one of our mortgage brokers today.
What is the level of tourism like?
You can get this kind of information from the local council’s chamber of commerce.
They can provide you annual tourism and hospitality figures so you can make an informed decision on the area you’re looking to buy in.
Generally speaking, the more popular an area, the more restrictions there are and the higher the property price is.
Who are your clients?
Some tourists are simply happy having somewhere to eat, sleep and shower while others are after a hotel-style experience.
Choosing the wrong property in the wrong location simply burns away the investment potential.
Don’t forget too that locations can change and become more appealing to the middle class.
Around 30 years ago, investing in simple, flat-style hostel in the Gold Coast would have produced a great return on investment.
These days, tourists and backpackers on the Sunshine Coast want more from their stay than just a guest house.
Having a games area, a bar, decent food and comfortable beds may appeal to perhaps the boutique hotel market which has been growing over the past few years.
Also, consider whether the market you’re targeting are long stay guests or simply passing through, like a bed and breakfast or motel.
These questions and answers come down to understanding the location and the type of business you want to run.
How do I present a good business plan?
If you have plenty of experience working in or running a hostel, you’re already in with a good chance of getting approved for a backpacker accommodation commercial loan.
In saying that, you still need to provide a forecast of the potential return on investment (ROI) based on the property price, its guest capacity and the strength of the tourist market in the area.
Basically, you have to show the banks that you have the know-how and financial backing to run a successful venture.
If you’re leasing the premises out, the bank will want to see the last 2 years profit and loss statements for the business owners.
The great thing about hostels is that ROI is generally higher than a typical hotel because there are fewer running costs.
The communal nature of a hostel means there are very low cleaning costs: guests usually clean up after themselves.
Sheets are only really changed after the guest leaves since they would have only been staying for a couple of days or up to a week at most.
Your accountant can help you compile a detailed business plan and forecasting.
Will the bank undertake yearly reviews?
Because of the turbulent nature of the hospitality and accommodation industry, banks will usually require yearly reviews of the business.
There may be exceptions to this rule if you have a solid business plan and a lot of experience.
Should I get insurance?
It’s worthwhile looking into comprehensive insurance for the travellers in if you’re running it yourself.
The reason is that you’ll be housing quite a lot of guests and chances are they’re not all going to be on their best behaviour.
The intentional or unintentional destruction of property by guests is simply the reality of owning an backpackers inn.
Apart from insuring the actual premises and the contents/assets, Tourism Victoria suggests getting:
- Public liability of around $10 million to cover paying guests and visitors.
- Product liability to cover prepared food or other products offered to guests.
- Motor vehicle insurance if your vehicle is used for business purposes.
- Personal injury and/or income protection.
Are fire regulations strict?
Yes. The threat of fire-related injuries and fatalities in the hostel industry is higher than other types of commercial properties.
With hundreds of guests, it’s a state and federal requirement that there is an effective fire prevention plan in place.
This plan must be in accordance with the Australian Standard, AS 3745 – 2010 Planning for Emergencies in Facilities.
Fire threat is one of the main reasons that banks are conservative with LVR.
Are there other regulations I need to know about?
Some other regulations to consider and permits you may need to include:
- Registration of Food Premises: Required in Victoria and other states. An Environmental Health Officer from the council health department can take you through the registration process.
- General liquor licence: If the hostel serves or sells alcohol.
- Music licence: This varies from state to state but in most cases you’ll need music licences from the Australian Performing Rights Association and Phonographic Performance Company of Australia if you’re playing recorded music.
- Noise restrictions: For example, exhaust fans and air-conditioners aren’t typically permitted near residential premises if they can be heard within a neighbour’s living areas. For a hostel, trying to keeping noise to an acceptable level in suburban areas can be much more challenging than if the property were located in a metro area.
For a complete list of permits and codes of practice, search the Australian Business Licence Information System (ABLIS).
What’s the benefit of buying the freehold going concern?
In most cases, business owners tend to enjoy a much higher ROI than owning the freehold alone.
The problem is that if the business fails, you can lose all of the money you outlaid to get the venture started.
Deciding on which ownership to choose comes down to your circumstances and your lifestyle.
With freehold going concern, the land itself retains value even if the hostel fails.
You get the best of both worlds albeit at a higher level of risk.
You should get independent financial advice before choosing which ownership is right for you.
Do you need a backpacker accommodation commercial loan?
We’re experts in getting low cost commercial finance for backpacker accommodation and hostels.
Don’t wait to buy your commercial investment!
Call us on 1300 889 743 or complete our free assessment form to find out if we can get you approved for a backpacker accommodation commercial loan.