Bed & Breakfast Loan
Swapping office or city life to run a bed and breakfast (B&B) is a great way to change pace and enjoy an idyllic lifestyle in your autumn years after the kids have left home.
However, getting finance to purchase this type of property can be difficult because some lenders consider them to be commercial properties.
Luckily, we know lenders that can help you finance your dream!
How much can I borrow?
- Standard homes: If the property can be used as a standard residential home and you’re currently employed then you may be able to borrow 90% of the purchase price.
- Income from the B&B: If you’ll be relying on the B&B income to pay the loan then you can borrow up to 80% of the purchase price.
- Commercial property: If the property can only be used as a B&B, not a home, then your borrowing power will vary depending on whether the property is a:
- Freehold purchase: You may be able to borrow up to 70% of the property value.
- Leasehold purchase: You may be able to borrow up to 50% of the business or going concern value.
- Interest rate discounts: Available on a case by case basis through one of our lenders.
- Low doc: Low doc loans are typically not available.
Bed and breakfast properties, along with your current financial situation, are assessed on a case by case.
To find out if you qualify for a loan and how much you can borrow, please call us on 1300 889 743 or complete our free online assessment form.
How can we help?
Thanks to the commercial credit relationships that we have, we may be able to negotiate the following, depending on your situation:
- Borrow up to the maximum Loan to Value Ratio (LVR) for your commercial purchase. This is because our brokers will always endeavour to process your application as a residential property if we can see the B&B can be used for more than just a commercial purpose.
- Qualify for significantly reduced interest rates (on a case by case basis).
By choosing the right lender, you can get even more out of the loan than just low fees and a strong interest rate and take advantage of the commercial loan features that work best for you.
Our commercial property loans page can provide more information about how the commercial loan process works and the other types of commercial properties that the lenders on our panel can finance.
What do the banks assess?
Debt Service Coverage Ratio (DSCR): Most lenders will be guided by the business’ DSCR in order to determine your borrowing power.
This ratio should be over 1 which means that the property is generating enough income to pay its debt obligations.
Land size: If the property is for residential purposes, lenders will generally accept properties that are no more than 50ha. Larger land sizes will require a commercial loan.
Hiring professional staff or DIY: If you’re purchasing the property for commercial purposes, banks will want to see the business plan including income projections for the business you plan to run.
That means you can hire professional staff such as cleaners or cooks despite the fact that a traditional B&B is operated entirely by the owners.
The bigger your deposit, the more likely you are to get your home loan approved.
Location/Zoning: Bed and breakfast properties tend to be found outside of central business district (CBD) areas and located more so in rural areas.
For residential purposes, lenders generally want to see a property that’s zoned as a Category 1 or 2 property. Category 3 and regional properties may be financed if you have a larger deposit.
Business plan: Ultimately, the lender is looking at the viability of your new business and the saleability of the property, so this is all on a case by case basis.
Speak to one of our B&B loan specialists by calling 1300 889 743 or complete our free online assessment form.
Why are banks so conservative?
Why most banks and lenders consider bed and breakfast properties a high risk is because they want to know they can easily sell your property in the event that you default on your mortgage.
The success of the B&B comes down to you as the borrowers so if the B&B is for income-producing purposes, banks will be concerned that you may be planning to leave your job to run the business full-time.
The chances of you defaulting increases so the banks want to reduce their risk by asking for a larger deposit!
Will you run the B&B?
Buying a B&B can be a grey area because, technically speaking, it’s not a residential property.
If you’re borrowing more than 80% of the property value, Lenders Mortgage Insurance (LMI) is required and you’d be declined by most lenders.
This is because the LMI provider might consider you reliant on income from the purchase of a business. In addition to this, fewer people than ever are interested in buying a B&B so it’s harder to sell.
If you’re going to run the B&B yourself and will be relying on this income to make the repayments then we’ll need to seek a commercial loan which means that you’ll need a larger deposit.
Whereas if you’re currently employed then we can get you a lower interest rate with a smaller deposit because we can show the lender that you’re not reliant on your new business.
What if I don't have a deposit?
If you purchase the B&B as a residential property, you’ll need a 10% to 20% deposit and 5% of the purchase price to cover costs such as stamp duty.
However, we can help you secure your loan with no deposit if you have a guarantor.
In this way, you can borrow up to 105% of the purchase price with some of our lenders.
Call us on 1300 889 743 or fill in our free online assessment form so one of our specialist brokers can help find a loan that suits your needs.
What is a bed & breakfast?
In most cases, a B&B business is a principal place of residence (PPR) with fewer than 10 rooms that offers overnight accommodation and breakfast.
Rooms may be allotted for guests to use or the B&B itself may be an established building separate to the main residence.
Usually the owner of the property prepares all the meals and cleans the guest rooms or they may hire staff to complete such duties.
In most circumstances though, hiring professional staff will mean the property is considered to be specialised and the maximum loan size will be reduced.
What do I need to know about running a B&B?
A B&B differs a little from owning a hotel at least from a business perspective, with the service provided usually little more than a bed to sleep in and a full breakfast before check out.
What really sets a B&B apart is that the hotel is your property so you’re effectively opening up your home to strangers. Having a hospitable attitude and being a committed housekeeper are a given if you’re thinking about buying this type of commercial property.
Since the business is owner-occupied, you have to be content with having your work life creep into your home life. These so-called “lifestyle” businesses are the reason they’re mostly sought after by people in relationships (married) and people in their autumn years.
Like other commercial properties, the earning potential of the business comes down to such factors as your location, how much you charge for goods and services, how many staff you employ and how much you put into marketing.
Does location matter?
Although it’s easy to picture a B&B in an idyllic country setting, there are properties located in more urban settings, with each location offering its own benefits and requiring different approaches to marketing.
City or suburban businesses, for instance, can be quite lucrative because they tend to attract international travelers, business people, and people attending an event in the area.
B&B’s in more remote, scenic areas are popular for weekend getaways and special occasions. Farm stays generally attract even longer stays.
The location of the property will often dictate the services you provide, from a luxury retreat experience or simply a place to sleep and eat breakfast.
What are the basic things I need to have in the B&B?
Hosted Accommodation Australia, the peak body for Australia’s bed and breakfast, farmstay, guesthouse and self-catering accommodation industry, sets out certain essential criteria the property and its location should meet.
This includes having:
- A clearly-stated smoking policy.
- Sufficient lighting at entrances, steps and stairs.
- A smoke detector.
- Out buildings, paths, gardens and lawns all well maintained.
Other requirements are more desirable than essential such as:
- Low noise levels from passing traffic
- A barbecue for guests to use.
- Bath robes for guests.
- Extra personal toiletries such as shampoo and razors.
For the success of the leasehold, it’s important to seek out as much advice from industry associations as possible as well as people already operating in the space.
Are there licensing requirements?
B&B operators need to comply with a number of different laws and licensing requirements including planning, food safety, liquor licensing, insurance, safety, employing staff and anti-discrimination.
Businesses that don’t comply with these laws can incur fines and breaches may also jeopardise any insurance claim.
According to Hosted Accommodation Australia, you should carry insurance suitable to the conduct of your business, and consider other professional insurances such as loss of income. B&B insurance is a specialised field and not all insurance underwriters will provide it.
Apply for bed & breakfast loan
Our mortgage brokers are specialists in financing B&Bs so please call us on 1300 889 743 or complete our free online assessment form today!
We know which lenders will view your new business in a favourable way and which will give competitive interest rate discounts!