The first step is to determine what you can afford to purchase. This is not the fun part, but it will make the rest of your search so much more productive. If you plan to finance your purchase of an existing bed & breakfast you will need a commercial mortgage, and the structure and terms of a commercial mortgage are very different from a residential mortgage.
First, you will need a minimum downpayment of 20% of the purchase price. Banks often have a portfolio loan product that is suitable for a B&B purchase. This means the mortgage is funded by the bank and kept in their "portfolio". The underwriting requirements can be very different from one lender to the next. Most B&B's are not generating enough income to satisfy the lender as the exclusive source of income. In reality, the B&B income can be sufficient for making the mortgage payments, but the lender may need to see additional income. Many B&B owners have an additional source of income, including retirement/pension income or from a job outside of the B&B.
Next, the typical residential mortgage is amortized over 30 years. A commercial mortgage is typically amortized over a shorter period of time with a balloon payment due after 5 or 7 years. If you have a principal balance on your mortgage when the balloon payment is due you will need to refinance the loan at that time.
Lastly, commercial interest rates are higher than those for a residential mortgage. They run approximately 1% to 2% higher than their residential counterparts. Commercial financing is higher risk for the lender so it is more expensive for the consumer.
The bottom line is when compared to a residential mortgage you will need more money down, you will have a higher interest rate and you will have a shorter amortization schedule.
For these reasons, it is best to explore your financing qualifications and costs prior to finding the "perfect inn". You will be able to evaluate prospective B&B's with greater confidence knowing your financing options up front.
Lisa Naples, Realtor
I'm enjoying my 17th year of selling residential real estate in Lancaster County. In my past career I was an innkeeper for a 9 room local B&B. Now I enjoy the best of both worlds - finding new owners for Lancaster County bed & breakfasts. Please leave comments, I'd love to have your feedback!