The bed and breakfast business offers investors the opportunity to make a living from the comfort of their own homes—literally. In addition, bed and breakfast owners enjoy the benefits of owning an independent or family-run business, having creative freedom and serving other people.
Owning a bed and breakfast can be personally and financially rewarding, but requires hard, skillful work. Innkeeping, like any other career, demands individuals who are sufficiently qualified for the job.
“It takes a special kind of person to run an inn,” Kit Cassingham, owner of TheBandBLady.com, said. Cassingham said she became interested in the bed and breakfast industry in 1985 out of her desire for a “people-oriented” career and has been consulting in the bed and breakfast industry for nearly 20 years.
“A lot of people get into the bed and breakfast business because they enjoy meeting people,” Michael Elmer, owner and president of InnSpired Management, said. In 1996, Elmer and his wife purchased a distraught property in Hendersonville, NC, which they transformed into their first bed and breakfast property. He and his wife sold their second of two properties in 2005 and are now focused on brokering and consulting in the bed and breakfast industry.
Generally, people who are skilled in the business of serving others—individuals specializing in the hospitality industry, or even education or medicine—make the best innkeepers. Many retirees are also attracted to innkeeping as a means of staying active without having to take on a full-time job, Elmer said.
While many are drawn to innkeeping as a lifestyle investment, owning an inn means owning a business. An inn needs to generate enough income to sustain itself and its owners.
“For an inn to be feasible, it must have enough gross income to pay all the operating expenses and mortgage, yet still leave enough income to live on,” Lyman Robbins, a commercial broker specializing in lodging and bed and breakfasts, said. Robbins has sold inns, small hotels, motels and resorts in Northern California for more than 17 years.
Financial returns are variable, depending on the success of the business and the real estate. Occasionally an inn might yield a return of 10 percent on gross room income, but it’s typically less than 5 percent, Cassingham said.
However, “Many innkeepers actually live at the bed and breakfast, so how do you factor that into [an investor’s] return?” Cassingham said. “If [they’re] doing it for the business and lifestyle, [residence at the inn] matters.”
Additionally, the income generated by renting out guest rooms provides a way for a nice property to pay for itself, Elmer said.
Property value is a major factor in the overall value of the inn and the potential profit that can be made in resale. The real estate market is especially critical for startup inns. Most bed and breakfasts are not originally built as inns; rather, they have been transformed from beautiful old homes into inns, Elmer said.
Location is critical for the purpose of the investment. Bed and breakfasts are most likely to be successful in the vicinity of a tourist or business area that will attract guests. Unfortunately, many attractive places to visit double as attractive places to live; high real estate prices in places such as California have made it harder for smaller inns to be economically feasible, Robbins said.
Deciding to buy
First-time buyers might perceive innkeeping as “a fun, easy way to make a living,” Cassingham said. In reality, an inn requires a great deal of work—work that many individuals may not be willing or able to perform—as well as substantial financial and personal resources.
“A lot of people are interested in [owning bed and breakfasts] but they have no idea what they’re getting into,” Robbins said.
Consequently, prospective owners should educate themselves about the bed and breakfast business before investing. Attending an innkeeper’s seminar and volunteering for an unpaid internship at an inn for two or three weeks are straightforward ways to gain exposure to innkeeping. It is also possible to receive training as an innsitter, a person who is hired to keep an inn running while the owner-operator is away, Robbins said.
In addition to learning the tools of the trade, there are a number of questions that prospective investors should ask themselves in assessing their readiness to become innkeepers, Cassingham said. Investors need to determine if owning an inn is realistic: Are they in good physical condition? Do they have sufficient financial resources to own an inn? In the case of married couples, is the investor’s spouse supportive of the decision to own an inn? What are the spouse’s respective commitments to owning the inn?
“I’ve seen the business tear too many couples apart, and it’s usually because one of them is not really interested in it,” Cassingham said.
In terms of financial readiness, a down payment must be large—at an amount that might be prohibitive for some. Conservatively, buyers need at least $200,000, which still may not be enough, Cassingham said. “$200,000 with 30 percent down can buy, with closing costs, an inn selling for $500,000, which is difficult to find,” Cassingham said.
A down payment of 30 percent is preferable to a bare minimum of 20 percent, Cassingham said. Ideally, a mortgage should be as small as possible. “Mortgage is the least flexible expense you have; [the owners must pay it] whether [they] have guests or not,” Cassingham said.
Investors should first consider local banks when looking for a lender. Local banks generally have a stronger history in financing bed and breakfasts than large banks, Elmer said. Additionally, the Small Business Administration (SBA) is a popular source for loans among buyers.
“I’ve worked with a couple clients that have gone the SBA route and have been very successful doing that,” Elmer said.
For buyers who are purchasing a home with plans to start up a bed and breakfast, a home loan may be more advantageous than a full commercial loan to begin with, Elmer said. As investors build their business, they can obtain an additional business loan, or switch over to a commercial loan, depending on what makes the most sense for the individual investor.
In addition to a substantial financial investment, the initial time commitment required to run an inn can be exhausting. Cassingham advises clients to set a strict work schedule for themselves.
“They need to decide if they can work 50 hours a week or 60 or if they have to stop at 40…and they really need to stick with it, because there is so much the inn wants and needs,” Cassingham said.
Time commitment can change as a business grows. Larger inns that generate enough revenue to support a reliable staff offer more flexibility, Elmer said. Owners should provide a solid framework for managing staff and delegating tasks effectively. “[My wife and I] are firm believers in operating systems,” Elmer said.
Additionally, hiring staff makes it possible for owners to operate multiple inns simultaneously. An innkeeper couple expecting a baby found that they could run three bed and breakfasts as easily as they could run one if they were able to hire competent employees and managers, Cassingham said.
Prospective owners should keep in mind that hiring a reliable staff is much easier said than done, and “harder now than ever before,” Cassingham said.
Buying an established business vs. building a startup
“Buying an existing business is the conventional wisdom—whether you’re buying a bed and breakfast or any other business—because there’s already a cash flow,” Cassingham said.
Additional benefits to buying an established business are that zoning issues are handled and the inn has already been advertised to the public. Even buying an inn with a bad reputation is better than starting from scratch, and such an inn can easily be marketed positively as “under new management,” Cassingham said.
Owners who choose to buy an established inn should continue running the business for at least six months before making any drastic changes, Elmer said. During that time getting feedback from guests, meeting regularly with staff and paying attention to numbers are all critical for making plans to improve the business.
While buying an established business may save owners hassle with logistics, building a startup bed and breakfast can be rewarding for risk-takers who are keen with this type of enterprise, Elmer said.
“I think in the long term [owners get] a much better return on [their] money and have more fun with [a startup] because [they] are establishing the type of experience that [they] want to give [their] guests,” Elmer said.
However, it takes several years before startups become profitable businesses, and the waiting period only seems to be getting longer. It is now four to five years, rather than two to three years, as it was a decade ago, Cassingham said. Since the recession of 2000 and 2001 and the catastrophic events of 9/11, investors and travelers are more cautious, Cassingham said. Travel patterns have changed, and room and occupancy rates are lower—factors that have negatively affected the cash flow for new properties. High purchase prices, construction costs and expensive mortgage money also eat into profits, Cassingham said.
The Bottom Line
Overall, prospective owners should understand that owning a bed and breakfast is no small undertaking; it relies heavily on the commitment and the skill and innovation of the individuals running it.
“A lot of properties are successful out there because of their innkeepers,” Elmer said.
Furthermore, owning a successful bed and breakfast seems to involve those who are able to find the right market for an inn and take a balanced, systematic approach to running the business. Owners who live on the premises, for example, should take account of their own needs.
“Good owner’s quarters are a must,” Cassingham said. “I’ve known innkeepers who have lived in closets, in kitchens, in a tent in the backyard—they’ll stay in whatever room’s not occupied.”
Renting out living quarters is not an uncomfortable arrangement just for innkeepers. “Guests don’t like staying in the owner’s bedroom,” Cassingham said.