Monday, May 4, 2009

The Truth About Innkeeping...


With regard to my previous post about the ideal day in the life of an innkeeper, I thought I would take a minute to address aspiring innkeepers, potential buyers and innkeepers in general.

I read a comment that it's the "hardest job you will ever love" and this is probably true. I am not denying that. What I fully believe is that it's easy on the mind, harder on the body. It's a physically demanding job in a non-demanding, easy going atmosphere. The fact is, for the most part, innkeepers are dealing with happy people every day, who are on vacation and enjoying what you've provided for them. Innkeepers aren't dealing with typical job problems and a desk full of unresolved issues. Each day is a completed to-do list and that, for me, was key to my lifestyle change. What kind of problems do we deal with? Spots on towels, spots on sheets, wine spills on the carpet, trails of cookie crumbs, an occasional double booking (the kind where you have pay for them stay elsewhere), a malfunctioning washing machine, a clogged toilet from a bar of soap someone dropped in, a torn duvet cover from the luggage wheels, the strawberries at the store look awful...essentially the issues are all easily resolved. You chalk it up to business that you will have to buy new towels or new sheets and call someone to come fix the appliance (unless your partner is handy, which is very important).

Your financial ability to handle these situations and how you handle them depends on several factors:
  • your occupancy rate
  • the number of rooms at your inn
  • your ADR (average daily rate)
  • are you in a busy destination location?
  • are you seasonal or do you operate year round?
  • are you running this as a hobby or as an income producing job? Or a combination of both?
  • do you have another source of income?
  • are you working alone or do you have a partner sharing responsibilities?
  • do you market adequately or is it feasible to do so? Keep in mind it takes money to make money.
This is why it is imperative when you begin to look for a property to buy, that you hire an agent who has innkeeping experience. It will make the difference of reality vs. disillusion. Quite often you can use this rule of thumb:

Higher priced properties:
  • higher income
  • higher potential income
  • possibly 6 month seasonal thus extending the season provides for much greater potential
  • more than 6-8 rooms
  • affords housekeeping
  • location, location, location
  • amenities such as water views or spa tubs
  • can support owner's living expenses (not extravagant)
Lower priced properties:
  • lower income
  • often priced based on residential value if business value is not there
  • fewer than 6 rooms
  • often there is room for potential, but it might be limited because the property is already year round
  • lower advertising budget, though it takes advertising to grow the business
  • until the income grows, innkeepers are the housekeepers
Something very important to keep in mind: you'll need to come up with 20% down payment (sometimes more, on occasion less) regardless of the performance of the property. So here are two scenarios:

Property A, priced at $1,000,000 makes $170,000 in gross room revenue - GRM of 5.88; affords a housekeeper, supports the innkeeper's living expenses (not extravagant).

Property B, priced at $695,000 makes $70,000 - GRM of 9.93

The difference in initial cash output (down payment) is $61,000. However, the GRM (which is a gross multiple of the room revenue used to help place value on a business) is much different between the two properties. Banks look at this number when reviewing a loan. If the business value isn't there, they may only consider the residential value, or a combination of both. Often this is the case with smaller properties. But if the buyer has the additional $61,000 initial output, right away they might be able to walk into a turnkey property and make money from day one. Property B might take much longer to get to the desired level of income, in which case, there is still an output of cash by the owner, to support the business while growing it. Either way, the under-performing property will need the cash, just not at settlement. Just keep this in mind when you're looking at properties and pricing.

When my husband and I left the corporate world of comfortable salaries, we didn't do it without risk, but we did make sure we bought a property that would support our lifestyle. And for us that meant working very hard for 6 months (with a near 100% occupancy) and having housekeeping on payroll. You have to decide for yourself, what will work for you.

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