Business loans for a backpackers hostel
If you're looking to capitalise on Australia's robust backpacking industry, you'll need finance. Find out how to increase your chances of finance approval.
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It may be cheap to spend a night in a backpackers' hostel, but the backpacking industry in Australia certainly isn't suffering from lack of funds. In fact, the 2015-2016 financial year saw more than $1.1 billion spent on backpackers' accommodation in Australia alone. Accommodation specifically aimed at those travelling on a shoestring budget can be lucrative, provided the accommodation is in a good location and adequately meets the needs of backpackers.
If you're interested in entering the backpackers' accommodation market, you'll need finance. Find out how to choose the best backpackers' hostel and maximise your chances of having your finance application approved.
Business loans suitable for use by a backpackers' hostel
Choosing the right backpackers' hostel to buy
The importance of location
When it comes to choosing a backpackers' hostel, location is key. Consider the following:
- Is the property located close to a major international drawcard, like a tourist attraction, popular beach or festival location?
- Alternatively, is the property located in or very close to one of Australia's major cities?
- Backpackers rely heavily on public transport. Is the property adequately serviced by a bus, tram or train network?
- Is the property located in a well-known tourist area?
- Is the area well-lit and safe, allowing tourists to travel at night?
Before you decide on a particular location, consider taking a backpacking holiday yourself and experience the area from a traveller's point of view.
Understanding your target market
A mistake that some owners of backpackers' hostels make is thinking that all backpackers are alike. Some backpackers are on an extremely limited budget and are looking for basic accommodation at the cheapest possible price. Other travellers have a bigger budget and expect more than basic facilities.
Before choosing a backpackers' hostel to purchase or fitting out your own hostel, understand the type of backpackers that typically visit that particular location. What other activities do they normally enjoy? What is the socio-economic standard of the area? Understanding the answers to these questions will give you valuable insights into the type of traveller that your accommodation needs to target.
What do backpackers want from a hostel?
It is a huge mistake to buy or create a backpackers' hostel without having a very clear idea of what backpackers want from a hostel.
For many backpackers, a hostel is so much more than a place to stay. While basic necessities like clean, safe sleeping areas and enough bathrooms so that there aren't too many people sharing each one are a must, it is the social aspects of backpackers' hostels that can make them particularly attractive to travellers.
Backpackers' hostels offer travellers the opportunity to meet other travellers, making facilities that allow for social interactions between guests vital. Consider indoor and outdoor common areas as well as facilities that tend to bring people together, such as a pool, a barbecue area, a shared kitchen or a games room. Screens tend to kill conversation, so aim to have a separate area for TV and computers away from the main common areas.
Freehold or leasehold?
When choosing the location of your backpackers' hostel, you'll need to decide whether you are looking for leasehold property, or whether you want to buy the freehold property as well. There are advantages and disadvantages for either course, and the biggest consideration will most likely be whether you can afford to purchase freehold property in addition to purchasing or starting the business.
A major advantage of purchasing the freehold associated with the business is that if the business were to fail, you would still have the freehold property to sell, lease out or re-purpose for another use. However, if your funds are limited, you may be better off running your hostel from a rental property.
Costs and profitability of a backpackers' hostel
Initial cost of purchasing a backpackers' hostel
The initial cost of purchasing a backpackers' hostel can vary greatly depending on whether you are also purchasing the freehold property in addition to the business, or whether you are simply purchasing the leasehold business. Other variations will occur due to the size and amenities included in the business and the physical location of the business.
As a guide, consider the following backpackers' hostels currently for sale or recently sold in Australia:
- Leasehold hostel in Victoria with 12 rooms offering 30 beds for $280,000.
- Leasehold hostel in Victoria with 14 rooms for $310,000.
- Leasehold hostel in Western Australia with 100 beds for under $400,000.
- Leasehold hostel in South Australia's wine region for $400,000.
- Leasehold hostel in Victoria with 12 rooms offering up to 60 beds for $660,000.
- Freehold hostel in Tasmania with 26 rooms of varying sizes for $850,000.
- Freehold hostel in Victoria with 13 rooms and an in-ground pool for $900,000.
- Freehold hostel in Queensland with 40 rooms of varying sizes for $1.2 million.
- Freehold hostel in New South Wales with 22 rooms for $1.25 million.
- Freehold hostel in New South Wales with 8 rooms offering up to 46 beds $1.4 million.
- Freehold hostel in Queensland with 21 rooms and a swimming pool for $3.7 million.
Ongoing costs of running a backpackers' hostel
The ongoing running costs of a backpackers' hostel are generally significantly lower than similar costs related to running a motel. For example, in a hotel, each room's sheets are changed every day, whereas at a backpackers' hostel, the sheets would only be changed once each guest has checked out or weekly for a longer stay. Fewer amenities within the individual rooms of a hostel tend to mean that the cleaning costs are also lower than that of a hotel.
On the other hand, backpackers can be rowdy and sometimes even destructive. Items in common areas will need to be hardy and able to sustain a reasonable amount of wear and tear, otherwise you'll be replacing furniture and equipment on a regular basis.
You will also need to budget for comprehensive insurance to cover the hostel, its contents and its guests at all times. This should include the following:
- Public liability insurance
- Product liability insurance to cover food preparation and any food items provided to guests
- Personal injury insurance for guests and staff.
In addition, other ongoing costs will include wages and other entitlements for staff, cleaning and maintenance fees, marketing, consumables, rent or mortgage payments as applicable and loan repayments.
How profitable is a backpackers' hostel?
As with all businesses, the profitability of a backpackers' hostel will depend on a number of factors, including its location, the amenities provided, the number of beds available, the hostel's average occupancy and all expenses incurred in running the business.
In general, backpackers' hostels tend to have high profit margins compared to hotels in a similar area. This is largely due to the relatively low ongoing costs of maintaining a backpackers' hostel compared to a hotel, along with the opportunity to make additional income by taking advantage of other related opportunities (see the next section).
To calculate the revenue that a backpackers' hostel could potentially bring in, simply multiply the rate per night by the number of beds available. This will give you the revenue when operating at full capacity, but keep in mind that you will rarely have all beds filled. Speak to hostel owners in neighbouring areas to inquire about their average occupancy during both peak season and low season. For example, you may be able to expect 70% occupancy in peak season and 30% occupancy in low season. As such, your average occupancy may work out to 50% for the year, so you would multiply your revenue at full capacity by 50% to calculate your average expected gross revenue.
Maximising your revenue through additional sources
Resourceful owners will maximise their revenue by providing additional services, such as the following:
- Meals. Many hostels offer a free simple breakfast as part of the nightly rate. Consider also offering hot lunches and dinners within the hostel, and inexpensive packed lunches for guests to take out with them for the day, particularly if they are going on a tour. Keep all meals inexpensive, healthy and hearty.
- Alcohol. Having a bar on site will require additional permits and insurance, but can be an excellent additional source of income.
- On-site shop. Consider selling local souvenirs, branded merchandise and essential travel items like travel adapters and toiletries.
- Sports equipment rental. Consider renting bicycles, surfboards, skateboards or other sporting or travel equipment as applicable to your location.
Finding finance to buy a backpackers' hostel
Standard loan terms for a backpackers' hostel
Finance terms will vary greatly depending on whether you are looking to purchase freehold property in addition to the hostel business, your personal financial situation, the valuation of the business and/or freehold property, and your relevant skills and qualifications.
As a guide, a loan to purchase a backpackers' hostel could include the following terms:
- If purchasing freehold property in addition to the business, you may be able to get a loan of up to 70% of the value of the property and business. If purchasing a leasehold business, you could get a loan of up to 50% of the value of the business.
- Loan amounts could increase if applying for a business loan with a guarantor.
- For loans over $1 million, the amount of the loan as a percentage of the value of the business or freehold property tends to be lower than for loan amounts under $1 million.
- A significant asset will need to be offered as security for the loan. Backpackers' accommodation is considered specialised commercial property and presents a higher risk to the lender. This is because specialised commercial properties cannot readily be converted to other uses. Also, its value can fluctuate and the property can be harder to sell than standard commercial properties or residential properties.
As always, it is a good idea to compare business loans to ensure that you are getting the best deal for your circumstances.
How to get approved for a loan
Your best chance of being approved for a loan is to be as prepared as possible before approaching a lender. This includes having full financial documentation on hand, both for yourself and for the business and/or freehold property. You will also need a strong business plan, including cash flow forecasting. For best results, have your accountant assist you in the preparation of the business plan.
Similarly, update your CV to include all relevant qualifications and experience, especially any related to owning or managing backpackers' hostels or any other hospitality experience. In this way, you will present a strong case to the lender and put yourself in the best position for finance approval.
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