TIPS FOR BUYING MOTELS
Motel ownership:
The best of both worlds “The best of both worlds” is a phrase that is often used to describe the business of owning a motel. The benefits of a lucrative business alongside a flexible lifestyle is what keeps people coming back for more. And while the opportunities and reasons vary from one motel to the next, the overriding reasons include the quality and flexibility of lifestyle available, the high return on capital invested, the potential for substantial capital gain, on site accommodation or a combination of them all. Generally, motels are acquired on the back of a five-year plan to operate, then on sell. Many however, go on to look for another motel, perhaps a larger one, or one with a restaurant, or with a higher turnover and profit. There are a large number of motel owners within the industry who have owned and operated many different types of motels over the years, and they have been very successful whether it be on a full time or part time basis. A few of the benefits of owning and operating a motel include, but are not limited to the following:
Andrew Morgan,
Motel Broker, Qld Tourism & Hospitality Brokers
telephone etc. this feature can help to reduce their living costs substantially. Purchasers must however, be prepared that most motel residences are not built as stand-alone houses and therefore do not offer the space of today’s popular four-bedroom, twobathroom house in the suburbs. Operate under management – the motel industry is ever evolving and a large number of motels today are operated ‘under management’. This is completely opposite to how the industry was 24 years ago, where whoever owned the motel lived on site and operated it themselves. If one doesn’t want to be involved in the day-to-day operation then an ‘under management’ option may be a great way to get involved in the industry on a more passive basis, with the ability to stay involved as much or as little as one wants.
A high return on capital invested – for the capital invested in a motel a high return is achievable. Leasehold, freehold and passive investment tenures offer the investor a very high return on investment. When considering risk versus return, the statistics confirm motels are a solid and secure business to invest in. Onsite residence/home – motels almost always offer an onsite residence for the owner and if one takes into account electricity, council rates, insurance, © Copyright 2019 Resort Publishing • Phone 07 5440 5322
Quality lifestyle/flexibility – those planning to operate a motel need to know that the purchase is not only a business decision but a lifestyle choice as well. Motels offer a good working lifestyle for the operators, with the whole family able to live and work together on site, with the addition of being able to meet new and interesting people each day. The flexibility available to the motel owner is part of the attraction for investors. Active market – in the motel market there is generally a ready market when you wish to sell. Other types of businesses may require more specialised skills or may not be as attractive to business investors, but good quality motels are always in strong demand. Stock on hand – unlike other accom and hospitality-type businesses, there is a small stock holding component within a motel. This goes hand in hand with the next consideration, being cashflow. Cashflow – right from the first day of taking over a motel there is generally a good cash flow. Most guests today pay by credit card or Eftpos, and guests on account are limited to large companies only. In fact, many large companies have taken to providing key employees with credit cards
for their accommodation requirements thereby limiting accounts even further.
Taxation benefits – there are numerous taxation benefits and deductions available to motel owners such as depreciation of plant and property, living cost benefits, family members working within, and so on. Capital gains – there is always an opportunity to increase the value of the motel and make a capital gain upon sale depending on the quality of operation. The trend of motel values over the past 20 years has been a steady and consistent rise; this has resulted in good capital gains. As with any market however, real estate fluctuates so timing is still important. Finance – banks and financial institutions have traditionally been eager to lend money for the purchase of motels. Motels are viewed as a solid and secure investment, whether leasehold or freehold, and this good history gives financiers confidence in lending to purchase motels. Return on investment – the market determines the return on investment of a motel. There are numerous matters that affect the rate of return and the fact that each motel is different means at times it is difficult to compare one to the next. Some of the factors affecting return on investment include: Location – whether a motel is located on the coast or inland is a major factor determining the return on investment. Historically the demand for a coastal motel will be higher therefore pushing the value of the motel higher and the return on investment lower. Location is an important factor to consider when buying a motel, and are generally based on lifestyle or return. It must be considered that motels in desirable locations such as coastal areas will not show returns to the level that an inland motel will. RESORT NEWS - DECEMBER 2019
TIPS FOR BUYING MOTELS Inland locations may not seem as desirable from a lifestyle point of view as coastal locations (to some), however there can be substantially higher returns by buying a motel in an inland location. Condition or standard of presentation – if a motel is in poor condition, requiring repairs and maintenance or refurbishment, the market will expect a much higher return on investment than a motel that does not require this. Poor presentation affects the value of a motel considerably. High quality motels are always in demand, and as a result achieve sales on lower returns or higher prices. Age of buildings – a newer more modern building/motel will be in higher demand than an older building/motel, and will therefore sell on a lower return or investment. This does not mean that older motels will not achieve a low return. It will depend on how they have been maintained, when bathrooms were refurbished, etc. Size – a smaller motel traditionally sells on a lower return on investment, as there can be more competition for these motels within the “mum and dad” sector of the motel market due to affordability. Operational factors – this covers a wide area relating to the business operation itself such as the type of clientele the motel attracts, profitability, sales revenue, income departments such as accommodation, food and beverage, and the sustainability of the business going forward, just to mention a few. Potential for adding value – opportunity to improve a motel operation is of significant interest to many, if not all, motel investors and is often available to an incoming owner that looks at the business with fresh eyes. This opportunity may be a buying motive that affects the return on investment. Are there areas of the business that are underperforming? Where can improvements be made over and above the current operation? Keep in mind that almost no
motel business ever operates at its absolute full potential and that there is always room to improve with fresh ideas and renewed marketing strategies. The above items all have a role in the return on investment that a motel investor wants to achieve to satisfy their buying motives.
Leasehold or Freehold tenure There are many factors specific to both Freehold and Leasehold tenures that are a consideration for buying one or the other, and potential investors should understand the vital differences.
Freehold •
The Freehold tenure itself is attractive in owning your own property;
•
Size of land component and possible opportunity for expansion/value adding;
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Not having to pay rent and building up equity in a freehold asset; and
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Value of the land and buildings form the largest part of what one is investing in.
Leasehold •
Annual rental – high or low;
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Lower upfront capital investment;
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Lease terms – the lessee and lessor’s responsibilities; and
•
Length of lease – long leases available.
Throughout the early 1990’s motel operators were largely interested in buying only freehold motels and leasehold was very much in its infancy. In today’s market however, the benefits of leasing are highly sought after by the broader market who are trying to achieve a higher rate of return over a shorter time frame. Many choose to buy leasehold today due to the lower capital outlay required and the higher return on investment; in many cases double the return a freehold property offers. The ownership of freehold property is still attractive to those that do not want to pay a rental
© Copyright 2019 Resort Publishing • Phone 07 5440 5322
and who have the intention of leasing the property to retain as a passive investment. This is a highly sort after investment strategy for many motel owners. A large number of investors have succeeded financially from the motel industry over the years and continue to buy, sell and accumulate motel properties. How much cash (or equity) one has available will also play a major role in determining whether leasehold or freehold is the best option. A cash component of $550,000 will allow you to buy a leasehold motel up to $1,000,000. This will generally be a 20-plus unit motel of good quality, with a net profit, after costs, of approximately $300,000 p.a. to $330,000 p.a. On the other hand, the same cash component of $550,000 will allow you to buy a freehold motel up to $1.4 million. This will generally be a 15-plus unit motel of good quality with a net profit, after costs, of approximately $200,000 to $220,000 p.a. Note: These details and numbers are generalised and are constantly changing with the market. They are also dependent to a large extent on location, standard of quality, age of buildings and income per annum.
Due diligence It is recommended no matter what type of business you are buying that a thorough due diligence is completed to the buyer’s complete satisfaction. Most investors that do a due diligence employ the services of an accountant that has handled motel due diligence reports previously, and is a specialist in the motel field. A due diligence is conducted to confirm that the business is performing as presented, and to give the buyer piece of mind that what they believe they are buying is actually the case. Motels have a number of “tells” that allows for a quick assessment to see if they are performing as offered.
Finance The first step in gaining suitable finance for the purchase of a motel is to contact a wellrespected finance broker that specialises in financing accommodation businesses. They should have experience
in achieving finance approvals on motel acquisitions.
Building and pest inspections Building and pest inspections of motels are generally only requested by purchasers of the freehold property of a motel. It is rare that the purchaser of a leasehold motel will include a requirement for a building and pest inspection. A thorough inspection of a building by a licensed professional is a good idea however, if there is some doubt over the integrity of the structure and/ or a potential pest infestation. Minor issues are generally of no consequence to most and a report is only required if there is a real reason for concern. Often buyers are able to satisfy themselves of the building’s integrity by a visual inspection.
Industry specialists In order to avoid costly time delays, it is very important to consult and contract industry professionals. The use of suitably qualified and experienced professionals is a decision, that will make life much easier during the motel purchase process. To have an accountant, motel broker, solicitor and financier that specialise in the motel industry is extremely important in the transaction – and ideally you would want to contract experts that have worked together previously. Unfortunately, I have seen inexperienced or unqualified “professionals” handling motel sale and purchase transactions for clients and it ends up becoming more difficult and frustrating for all parties than it needs to be. It also ends up costing a lot more money. Most people are very excited about moving into their new motel and too often the process can be soured by not utilising the services of right industry people. A simple example is enlisting a residential sales agent to sell a business. It is highly recommended that you consult with the parties you are about to deal with in order to confirm their suitability for the job. RESORT NEWS - DECEMBER 2019
MODERN FREEHOLD MOTEL
Inland Queensland location with growing demand for accommodation. 10 spacious, very well appointed motel units with kitchenette, built in 2008. Large 2 bedroom manager’s residence and professional reception area. Spare land for an additional 7 units. Low cost operation with nothing to spend, presentation is immaculate. Excellent motel opportunity with very high 18% ROI. 10 Units
2,133 sq m2
Inland Queensland
Freehold $795,000 - Ref AFS114
BOUTIQUE QUEENSLAND ISLAND RESORT
Very high standard boutique resort complex – live and work in paradise. 18 large self contained units plus managers residence with resort pool and tennis court set amongst tropical landscaped gardens. Current DA for an additional 13 units on the existing site and approval to operate as a holiday resort or retirement village and strata title. Situated 50m from beach and a short walk to the marina terminal. High return available on this high quality property. 18 Units
4,064 sq m2
Queensland Island
Freehold $2,395,000 - Ref AFK107
SAILS SPORTS BAR ON THE MACKAY MARINA - TURNOVER $121,154/WEEK
Set in an enviable absolute marina & ocean frontage location, is one of Mackay’s premier entertainment facilities. Outdoor dining & entertainment areas, steakhouse, seafood dining & takeaway, sports bar, TAB & 25 gaming machines. Long term lease in place with favourable terms. Excellent opportunity for new and enthusiastic operator to continue to increase trading substantially. Huge potential with great trading figures.
Leasehold $2,900,000 - Ref ALS25
Mackay
Exclusive Agent: Andrew Morgan Queensland Tourism & Hospitality Brokers P
07 4953 1611 M 0417 608 041 W www.qthb.com.au
NORTH BRISBANE LEASEHOLD MOTEL
Situated in a high growth area of North Brisbane. Recently refurbished 34 unit ground floor motel, comfortable 2 bedroom 2 bathroom onsite residence, inground swimming pool, undercover and large vehicle parking. Solid brick construction in excellent condition. Exposure to a large amount of traffic each day, close to the CBD, restaurants and train station. Offers a high return on investment in a sought after region with strong demand for accommodation. All genuine offers considered. 34 Units
20 Years Remaining
Leasehold $695,000 - Ref ALL115
North Brisbane
MODERN LEASEHOLD MOTEL ONLY SEVEN YEARS OLD
19 high quality motel units, onsite 2 bedroom residence with direct internal access to reception, very low maintenance modern building which presents as new. Very low labour intensive operation and property. Positioned in an excellent motel town with historically very strong demand for accommodation. Operated under management for the last few years, new 30 year lease available with very low rental – only $4,473/unit site. Excellent motel opportunity that ticks all the boxes. Offers a huge 40% return on investment. Highly recommended. 19 Units
New 30 Year Lease
Leasehold $450,000 - Ref ALD113
Central Queensland
RECENT SALES D SOL
FREEHOLD MOTEL 16 UNITS CENTRAL QUEENSLAND
D SOL
LEASEHOLD MOTEL 14 UNITS NORTH QUEENSLAND
D SOL
LEASEHOLD MOTEL 16 UNITS CENTRAL QUEENSLAND
ER UND ACT R T CON
LEASEHOLD MOTEL 26 UNITS FAR NORTH QUEENSLAND
ER UND ACT R T N CO
FREEHOLD CARAVAN PARK 45 SITES NORTH QUEENSLAND
ER UND R E F OF
MANAGEMENT RIGHTS 36 UNITS NORTH QUEENSLAND
Exclusive Agent: Andrew Morgan Queensland Tourism & Hospitality Brokers P
07 4953 1611 M 0417 608 041 W www.qthb.com.au