We started a 3 part series on Buying vs. Leasing a hostel because it is a question that consistently comes up on the Hostel Management forum, Facebook group, and in general conversation. To help our members better understand their options, we gathered a lot of useful information into one spot.
There are many factors to consider when making this decision, and our first two posts went through a lot of the nuts and bolts. The first part
was pros & cons of buying vs. leasing, as well as some specific factors to consider. The second part
was types of leases and change of use permits. If you haven’t read either yet, be sure to check them out for good background knowledge. This final posts consists of information to consider from the actual experiences of Hostel Management members. While this post could be never-ending, and every situation is different, we hope these bits of wisdom help you as you navigate the process.
General Points To Keep In Mind
Length of lease
A longer lease (10 years or more) may be good insurance against a property owner taking back the building and benefiting against all of the renovations, work, and investment that has gone into making it viable for a hostel. Having a long lease will at least give the business a chance to profit before this could happen, especially through any possible ups and downs in the future economic/business or tourism environments.
If you do have the money to buy but want less of a risk for the business, put the money in some type of other investment that you feel more comfortable with (anything from a savings account to high risk/high reward investments) and use the interest or profits to pay your monthly lease.
Terms & Conditions
If you decide to buy, make sure you read the fine print for any bank loan. Hostel Management member CAPhouse said while he was looking to buy a hostel he got approved for a loan that had a clause it could not be used for any transient lodging as part of the loan. Of course this doesn’t only go for buying. You should be reading the fine print of any contract you are going into, including a lease.
One member, Sunshine2015, with a background in finance suggested that a prospective hostel owner should get a mortgage even if you have enough money to buy the place outright. The reasoning being that normally you can deduct mortgage interest from your income and reduce your overall tax liability. You also don’t have to put up so much of your own money and can use it to improve the property, invest in something else, or buy another hostel. He did mention, however, that getting mortgage approval could also be challenging if you can not prove to the bank you have other sources of income.
“Hostel”- to use or not to use
One member, Drunk Traveler, pointed out something that many prospective or current hostel owners may have come across and that is an aversion by city officials to the word ‘hostel’. This unfortunately is especially true in North America where hosteling is not understood nearly as much as other parts of the world. Many cities also have no regulations for hostels, only for hotels, BnBs, etc. so this often presents a problem for officials who want the ability to clearly check a box or otherwise say no.
The suggestion from this member was to tilt your branding a bit in order to move forward with the bureaucratic process. You may physically design a hostel, and even call it a hostel on your website, but if you give it a name with BnB, Guesthouse, or something similar in the title you may get further with the zoning and other issues. This member noticed that once he stopped using the word hostel, many more doors were opened. We are obviously passionate about hosteling and promoting it, but as he pointed out, sometimes you have to change tactics or play the game to make things happen.
Slumlords- good or bad?
One of the biggest challenges with leasing is the fear that a landlord will take advantage of your time, money, and energy investment into your building. It makes sense right? If you aren’t renting a high dollar, turn key place that is not at risk of being taken back (because it’s already ready to go), there’s a chance you found something super cheap and in need of a lot of TLC.
So you take a crappy building, make it look fantastic and ready for business, and the landlord suddenly sees an ‘easy’ business opportunity to take it back and just rent it out themselves. There are many people, landlords included, who don’t see hostels as much more than a cheap bed to rent out. Those are the landlords you probably *don’t* want to rent from.
However, there are some slumlord unicorns out there who fall in the middle. They have kind of crappy buildings, and they are charging pretty cheap rent, but they are pretty apathetic. They just want to make sure someone is paying them a check each month, and other than that don’t really make an appearance. There’s little chance they will consider doing the business themselves. How do you find these? Well...you never really know for sure who will act in what way in the future, but a good chance is finding buildings for rent that are not listed online. Literally going around your city or town and looking for rent signs in windows kind of thing. Or asking around. The same attitude that makes these landlords apathetic towards taking over business often keeps them from trying very hard at finding a tenant. Approaching them may be far easier than a landlord who is getting multiple calls a week, and with little competition you may be able to work out a good deal.
What other information do you have about buying vs. leasing a hostel? What has worked for you, or what has presented major roadblocks? Sign in and comment below.
NOTE: These posts are in no way comprehensive, or should be taken as any type of legal advice. I have very little direct knowledge on the subject, but have gathered information from our members via the forum and shared their experiences and insights, along with my own research and lessons on the topic. Feel free to comment on anything that you feel is missing, or is not correct. This is how we collaboratively learn!
**I know many of you comment on these blogs on the site's FB page, which is great, but it would be even better to have the comments directly on here for everyone to read. Thanks for your input and helping to further our knowledge.**
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