Hypothetically, buy motel with loan 2.5 mil, interest rate is 8% is good or bad?
I think is bad cos annual net suplus can't cover loan repayment.
what do others think?
Answers:
go with a variable rate - low to start, higher later - that way, you have time to get the property going to make cash while not paying too much in the beginning
Bad, interest rate is too high. I would shoot for a 6%. If your credit isn't good enough find a partner who can help you out.
If the business doesn't have a history of producing good revenue, then it generally isn't a good buy. In other words, if you aren't making a profit AFTER paying the loan, it's a very, very risky business.
Now, if you can afford to lose the money, and see some overlooked potential in the business. Say, the hotel is in a growing area near the airport, but it's so badly managed that its the fleabag delux, then you may be able to turn the business around and make a killing. You should talk to a 'turn' specialist if possible. But I wouldn't go into this endeavor unless you had a crack team of financial and managerial experts on your staff.
I cannot tell you whether or not this is BAD or not since this is only the COST side of the equations for your investment decision.
Its true you may be able to get lower than 8% in today's market. But even a lower interest rate that won't necessarily make it a GOOD deal.
You stated the "annual net surplus" doesnt cover the loan repayment. In other words, the deal is cashflow NEGATIVE at the start. If you are only interested in a CASH FLOW POSITIVE deal at time ZERO, then this is a BAD deal. However, any deal can be cashflow nuetral or positive by putting down a bigger downpayment. So you have to look at 2 things. 1) How long does the deal take to break even in terms of cashflow and 2) What is the annual RETURN on CAPITAL? to determine if you have a good deal. If the return is not better than what you could get in the open market say (10% for stocks for example) don't bother!
For my real estate investements I look for 25% plus returns on invested capital (and refinance when the returns fall below 20%). To figure out your return in the first year divide the expected business value appreciation (real estate typcially appreciates 5% annually over the long run but it is VERY location dependant - look in your area of investment) by your cost (down payment + cash flow negative accumulation in the first year). Return = Annual Appreciation/ Cost x 100%
Or since this is a MOTEL - you can use publicly traded Motels as a Valuation basis. The smaller companies tend to trade at 1 - 1.5x Annual Revenues. Do you expect this Motel to bring in annual revenues of 1.75-2.5Mil??
The answers post by the user, for information only, BAnswer.com does not guarantee the right.
More Related Questions and Answers...