Investing in backpacker accommodation, such as hostels and guest houses, presents a unique opportunity in the commercial property landscape. However, success hinges on factors like location and effective management. Understanding how banks evaluate backpacker accommodation commercial loans is pivotal in securing financing. Here’s a detailed guide to help you navigate this investment avenue:

Loan Parameters:

Freehold Purchase:

• Borrow up to 60% of the property value (70% in strong cases).
• Guarantor option for up to 100% if the property allows for other commercial uses.

Leasehold Purchase:

• Borrow up to 50% of the business value (going concern).

Loan Terms:

• Maximum term for principal and interest repayment: 5 years (debt to reduce to 40%).
• Maximum term for interest-only repayment: 3 years.

Loan Approval Considerations:

• Business forecast may be required.
• Low doc options are typically not available.

Assessment Criteria: Securing a backpacker accommodation commercial loan can be challenging due to the specialized nature of hostels. Key assessment factors include:

• High running costs due to strict permits and licenses.
• Seasonal operation, impacting long-term tenant viability.
• Serviceability ratio (Debt Service Coverage Ratio) of 1.5 to 2 times proposed interest expenses.
• Preference for industry experience, especially in managerial roles.

Valuation of Hostels:

• Banks value both premises and business.
• Property valuation based on land value, location, and hostel condition.
• Business valuation using Capitalization Rate (cap rate) considering the Net Operating Income (NOI) and comparable sales.
• Cap rate technique used for property price negotiation.

Security for the Loan:

• Mortgage security required.
• Can be secured by registered fixed or floating charge, director’s guarantee, or deed of consent between lessor/lessee and the bank.

Tips for Buying a Hostel:

• Location Matters:
• Metro areas are sought after for infrastructure and attractions.
• Rural properties may be attractive for a sea change but are susceptible to seasonal fluctuations.
• Understanding Tourism:
• Analyze local tourism figures for informed decision-making.
• Popular areas may have higher restrictions and property prices.
• Know Your Clientele:
• Tailor the property to the preferences of your target market.
• Consider whether the market prefers long-stay guests or transient visitors.

Presenting a Business Plan:

• Highlight industry experience.
• Provide ROI forecast based on property price, capacity, and tourist market strength.
• For lease arrangements, submit profit and loss statements for the last two years.

Yearly Reviews and Insurance:

• Banks may require yearly reviews due to industry volatility.
• Comprehensive insurance recommended for property, contents, public liability, product liability, and personal injury.

Regulations and Permits:

• Strict fire regulations due to higher fire-related risks.
• Other permits may include food premises registration, liquor license, music license, and adherence to noise restrictions.
• Research applicable permits on the Australian Business Licence Information System (ABLIS).

Choosing Freehold Going Concern:

• Business owners often enjoy higher ROI but with increased risk.
• Freehold retains value even if the business fails.
• Independent financial advice crucial for determining the right ownership structure.

Conclusion: Investing in backpacker accommodation requires careful consideration of location, clientele, and regulatory compliance. Successfully securing a commercial loan for hostels involves presenting a robust business plan, understanding valuation techniques, and navigating the complexities of the hospitality industry. Engaging with financial professionals and industry experts is recommended for a well-informed investment strategy.