From “Ask Kit!”:
Q: We are looking at several properties and trying to decide after looking at gross income (some records only show net income) how you decide what to offer?
A: To be on the same page, let me define *my* use of gross income and net income. When I talk about gross income it’s the amount of income guestrooms generated, not including tax, special events, gift shop, or rentals (or for that matter, anything outside of guestrooms).
Net income, in my usage, is gross room-income minus extra-ordinary expenses and management fees/wages. Again, sales tax shouldn’t be part of the formula at all.
That said, I’m guessing you are getting gross income because I don’t think the typical innkeeper thinks in net income terms. How far off am I with that guess?
Ok, now to your question. There are several rules-of-thumb to help guide you in making an offer. They have to be used carefully though because a rule-of-thumb is a guideline, not “gospel”. The national average for the GRM (gross room income multiplier) pricing method is 5.5 — take the stated gross room income and multiply it by 5.5 to get a “today” selling price. The multiplier will go up and down based on the condition of owner’s quarters, the property and business and what level of amenities are offered. And after you determine that price target, figure you need at least 30% of that for a down payment on your bank loan; you’ll need additional funds as well for other things, but start with at least 30% to help you understand if you can afford the property.