Sunday, November 15, 2015

Lifestyle vs Feasible vs Financially Viable...Which is Right For You?



In this industry we talk a lot about the lifestyle of being an innkeeper. But we also refer to the various types of businesses (inns/B&Bs, etc) as lifestyle, feasible or financially viable. Each of these are still a lifestyle, but there are various categories that generalize the level of revenue an inn might produce.

“Financially Viable” means inns and B&B’s that generate sufficient income to cover operating expenses, debt service (mortgage), and owner’s compensation.

“Feasible” means properties with a size and location that have the realistic potential to become financially viable. They may include unique hospitality properties that are under-performing (for health, personal or a variety of other reasons), closed, distressed, or currently used for other purposes. Often times we see inns in this category that are under-performing by the owner's choice. This might be because the owners may have additional source(s) of income (retirement or working from home or aside from the inn) and are able to operate the business leisurely for enjoyment. They might also stay open seasonally to go spend time with grandchildren in the off season (we see this a lot) when the area offers year round tourism. Staying open 10-12 months could move the inn from the feasible category to the financially viable category. We also see owner's who've kept up the physical property but not with the marketing and current technology centric times we are in. Considerable marketing, better website, social media presence, etc. might be all it takes to move an inn from feasible to financially viable.

“Lifestyle” means inns and B&B’s whose smaller size and revenues may not generate sufficient income to cover all operating expenses and debt service (mortgage). These inns are priced primarily on real estate value. These owners may have additional source(s) of income (retirement or working from home or aside from the inn) and are able to operate the business leisurely for enjoyment.

Let's face it, most of us work to make money, right? And we hope that we enjoy what we do along the way. But the bottom line paycheck that an inn or lodging property affords is different than what we may make in other, more traditional jobs. A lodging property is a hybrid business. There are numerous tax benefits from working in your home based business (inn/lodging property/B&B). Your paycheck from a more traditional job needs to cover mortgage, utilities, food, insurance, auto expense, leisurely expenses, etc. Many of these expenses are legitimate tax write-offs to the lodging business so your personal "paycheck" requirements seem to change - it's primarily for spending money, vacation, some food, some dining out (essentially what can't be legally written off).




An example of a feasible property situation:
A 5 room inn has 3 additional units that could be converted to nightly inn rooms and increase the occupancy and ADR (average daily rate) over the current discounted long term rental rate. The inn started out small, and with 5 rooms and the innkeepers thought it seems simple enough for them to not have to deal with hiring staff and just do the work themselves. So what ends up happening is that they are spending more time working IN the business and not ON improving it. When asked why they haven't converted the 3 other units which could produce a higher revenue stream, they said they were too busy to clean more rooms, check more people in, cook for more people, etc! Every now and then they would have a room or two open but be so tired that they put the "no vacancy" sign up! The financially smart solution? Convert your rooms to larger more luxury suites, bringing you a higher ADR, hire out housekeeping help, even check-in help a couple days a week, and work on being an innkeeper, your marketing, your social media presence, etc. which will in turn, help increase occupancy and revenue. 

This situation is not uncommon. So as you are browsing online or looking for inns, keep this in mind and ask your broker questions that will help you determine if you can afford a feasible inn with the goal of creating a financially viable business under your ownership!



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