Financing a hotel or motel purchase can be challenging for many aspiring real estate investors, as the process of purchasing and renovating these commercial properties can be expensive and time-consuming.
Luckily, investors have several options when it comes to choosing the right hotel or motel property financing. This article discusses the most common methods to finance your hotel or motel purchase and why Hard Money Offers is the best way to fund your next commercial real estate deal.
Financing options for hotel and motel purchases
Buying a hotel or motel isn’t always a linear process, which is why it’s important to work with a professional lender to help guide you through the process and find the best financing option for your personal situation.
Below are the most common financing options investors have to choose from when financing their hotel or motel deals.
- Traditional bank financing
- Hard money lending
- SBA 504 Green loans
- C-PACE (Commercial Property Assessed Clean Energy) financing
- PIP (Property Improvement Plan)
- Private debt and equity financing
Hard money lending vs. traditional bank financing
Hard money lending and traditional bank financing are two different types of financing options available to investors. Here are some key differences between the two:
- Hard money lending is based on the value of the property being financed, while traditional bank financing typically assesses the borrower’s creditworthiness and the property’s rental income potential.
- Hard money loans usually have higher interest rates than traditional bank loans. This is because hard money lenders assume more risk by lending based on the value of the property instead of the borrower’s creditworthiness.
- Traditional bank loans have more stringent approval processes and may take longer than the process for hard money loans.
- Bank loans also have longer repayment terms than hard money loans and may be more affordable for many borrowers. On the flip side, hard money loans have short repayment terms that typically don’t exceed a few years.
There are pros and cons to both hard money loans and traditional bank financing. Borrowers with good credit scores and high monthly income may choose traditional bank financing while borrowers with less than stellar credit may be better suited for a hard money loan.
SBA 504 Green loans
The SBA 504 Green loan is a long-term financing option that is designed to help small businesses purchase or renovate fixed assets like commercial real estate properties.
The goal of the SBA 504 Green loan is to provide small businesses with the same access to funding as large companies. These loans typically have low down payment requirements of around 10% of the total project cost.
SBA 504 Green loans have fixed interest rates and repayment terms of up to 20 years, making them an affordable option for small businesses looking for long-term financing. These loans are also eligible for loan guarantees to help reduce the risk for lenders and make it easier for small businesses to obtain the funding they need.
These loans are often used to finance energy-efficient upgrades during hotel or motel renovations and provide special incentives for investors opting for environmentally-friendly appliances and fixtures.
Commercial Property Assessed Clean Energy (or “C-PACE”) is a loan option that allows commercial property owners to finance energy-efficient improvements to their investments.
C-PACE financing is designed to make it easy for commercial real estate investors to access the capital they need to make energy-efficient improvements to their properties for upgrades like energy-efficient lighting, windows, HVAC systems, and insulation.
The biggest advantage to C-PACE financing is that it’s typically easier to qualify for than traditional loans since it’s repaid through a special assessment on the investors’ property tax bill.
Property owners typically don’t need stellar credit or collateral to qualify for a C-PACE loan, making them an attractive option for hotel and motel investors.
PIP (Property Improvement Plan)
Property Improvement Plans (or PIPs) outline the renovations, repairs, and improvements that investors plan to make to a hotel, motel, or other commercial property.
A PIP is often required by lenders during the underwriting process to ensure that the investor properly maintains the commercial property.
Property Improvement Plans include the budget and timeline for completing the upgrades and renovations. Details about the materials and contractors used for the work are often included as well.
PIPs are most common among hotel franchise companies and are often an important tool for hotel and commercial property owners to ensure that their hotels are well-maintained and kept up to date to attract and retain new guests.
Private debt and equity financing
Private debt and equity financing can be used by hotel and motel owners to fund the acquisition, construction, or renovation of a commercial property.
Private debt financing refers to borrowing money from a private lender such as a bank or other financial institution. This type of financing is typically secured by the property being financed and may be structured as a mortgage or a loan.
Private debt financing is attractive to hotel and motel investors because it may offer lower interest rates and longer repayment terms than other types of financing mentioned above.
On the flip side, private equity financing involves the sale of ownership stakes in the property to private investors in exchange for a share of the profits generated by the property. Investors with average credit who can’t secure traditional financing will find that private equity financing can be a good option.
The bottom line
Investors looking to finance their hotel or motel purchase or renovation have several options in today’s banking world. Most investors explore traditional financing methods through banks while those with less than stellar credit may explore hard money loans or private equity financing.
It’s important to do plenty of research to determine the best way to finance your hotel or motel purchase for your situation. For more information on why a hard money loan may be right for you, visit HardMoneyOffers.com to get the process started today.