4 minute read
Motel Market
How much is enough?
Why is it that whatever we have, we always want more? “The bigger the better”, people always say.
Twelve months aft er buying a new boat I said to myself, “perhaps I should sell it and get a bigger one”. It’s human nature to always want more, as the old saying goes, we always want what we can’t aff ord.
It is very common that we receive enquiries on a particular motel that is for sale and aft er some discussion the enquirer concedes that as much as they would love to buy that 35-unit motel at $4m, their budget will only stretch as far as $3.5m. The number of units in a motel is important of course, but at the end of the day, budget determines what someone can acquire. Buying on the basis of how many units the motel has, is only realistic if it’s within one’s means.
Beyond budgetary constraints, how a motel is to be operated is the answer to the question of how many units is the optimal amount. If a motel is to be owner operated or if it is to be run under management, this may determine how many units are needed to make it a success in the owner’s mind.
If a motel is going to be operated under management, then the management wages are going to need to be accounted for. If the profi t aft er management is not enough, then perhaps the size of the property is too small for what the owner is trying to achieve or maybe the business is just not trading well enough at that time and can be improved. Oft en if a motel is being purchased to operate under management, a Net Operating Profi t of say $100,000 may not be suffi cient, due to the manager’s wage being taken out of this profi t fi gure and loan repayments also to be deducted. The level of profi t remaining aft er the manager’s wage may not be suffi cient to make loan repayments and leave a surplus. A common Net Operating Profi t fi gure worked on by many motel investors is $200,000 aft er management wages have been expended with loan repayments yet to be made. The number of units required to achieve that is oft en a secondary thought, as a minimum level of profi t was the driving motivator. If we consider two diff erent motel investors, then the comments will be very diff erent. One who is buying to operate themselves as say a “husband and wife” business may be happy with 10 units, three-bedroom residence and no restaurant. The other may not want to operate the business themselves, thereby having it run under management. They may desire 30 units, licenced restaurant, conference rooms/ facilities, and a one-bedroom residence. Each business may be very successful in its own market. The number of units in a particular motel is not the defi ning factor for success. Business ownership revolves around profi tability (amongst other things) and what profi t can be achieved from the number of units on site comes down to how many of those units can be sold each night and at what tariff . The number sitt ing there on a property is relevant when they are all being sold each night or not enough are being sold. If the property is running at 100 percent occupancy, then room rates need to increase to bring that overheated rate down. Alternatively, if not enough units are being sold then council rates, insurance and other costs are being incurred on non-income producing assets, the opposite issue. So how many units are required for a motel to be successful? One issue lies in the defi nition of successful. It comes back to what an owner is looking for as a goal for occupancy rates, income, profi tability, or lifestyle. An investor buying a motel may wish for a minimum Net Profi t of say $100,000 aft er management costs. This level may be that investor’s defi nition of the motel being a success. The number of units required to produce that result may be of no real consequence. In contradiction to those who require large numbers of units, I have seen many motels over the years with minimal unit numbers produce very strong levels of income and profi t. One example in particular included only nine units yet produced a Net Operating Profi t of in excess of $250,000. Impossible some may say but nine units at 90 percent occupancy at $130 per night produced an income of approximately $384,000 and operated on a Net Profi t Margin of 64 percent. These are bett er than industry average fi gures however it was a diffi cult yet achievable goal that was reached. Therefore, a generalised comment on how many units are required to be successful or not, is in any case, diffi cult to agree with.
Andrew Morgan,
Queensland Tourism and Hospitality Brokers
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