Motels: Considerations & decisions
Flexibility in the workplace has changed over recent years and may well change again over the next couple of years. Whether the “workplace” (in general terms) tightens or loosens its stance on flexibility, either with flexible hours or a flexible location to work from, motels have always offered the owners/ operators a level flexibility. How the owner/operator chooses to run their motel business is entirely up to them. Either living onsite and working the business full time, or living offsite and having some involvement here and there. There are all manner of operational methods we have witnessed over the years that work for each individual situation. You make your own decisions to suit your structure and purpose. Motels offer this flexibility to suit your lifestyle.
More than ever, there is a greater desire to find flexibility in the workplace, so look no further. Motels are a great business option for those wanting flexibility. Your work hours can be tailored to suit and having the family living onsite allows for more family time whilst still allowing one to operate their business. No driving half an hour or more each way every day to get to work and losing an hour of your day.
Financially motels have been a very lucrative business option for a huge number of people over the long term. They have also been very rewarding and satisfying on a personal level, making them the ideal business type for many.
Starting the Process
Researching the web is a great place to start for any initial enquiries. As with a search on any topic, sorting good information from bad requires further investigation and patience. Talking to friends or relatives who are or have been in the industry. Speak also to experts, not those who “dabble a bit” and want to try to sell anything and
everything. Speak to those who specialise in the motel industry and have a proven longevity, not just those who come and go.
The options available are many and varied. Although a very common ideology, where one wants to live is generally not the best place to start. Instead, looking at the regions that offer the best motel opportunities is a better option. Can those areas fit in with the family or lifestyle requirements one has is probably the next consideration?
Consider the preferred tenure of ownership that may suit best. The main three types of ownership available for motel acquisitions are Freehold, Freehold Passive Investment and Leasehold. Each offers different benefits and burdens to the owner and one must determine what is most suitable. Weighing up the facts and comparisons between them will help determine what is suitable for each investor.
Achieving finance “pre approval” before going too far can save a lot of wasted time and money. This can only go so far of course as each lending situation will be different. Guidance on what you can and cannot purchase based on your financial capacity will be invaluable. Other factors such as serviceability will need to be dealt with on each individual business. Another major decision required to be made early on, is whether one is going to operate the business themselves or not. This may affect the type of tenure that should be considered. It was the case 20 years ago that
most motel owners were also the operators living on site. This is not always the case today with many operated on a more passive basis, either under management or under lease. Motels are an excellent business in this respect as they can be operated successfully without the owner needing to be onsite all the time.
Building and Property Considerations
1. Units – For some the number of units is all important, others not so. Many look at the offering in its entirety, of which the number of units forms only one part. The budget available will also affect this decision as the more units, generally the higher the price.
2. Restaurant/Dining – Some enjoy working the restaurant side of a business as this is the more social side, where operators can get to know and build relationships with their customers, thereby making the decision easier for the guest, as to where they will stay next time they travel to the locality.
3. Presentation – The standard of the presentation of a motel will affect the return on investment expected by the market. If hundreds of thousands of dollars are required to rectify poor standards or years of neglect, it will affect the price that is paid for the property in its current state. Motels that are not presented in the best manner can offer excellent opportunities to add value to the business/property by rectifying areas in need of work.
4. Location – the main positions motels tend to be focused are major highways, main roads, waterfronts and city centres. These areas tend to be places where demand for accommodation is at its highest. Location does play a role in determining the value of a motel as the demand for a coastal motel has historically been higher therefore pushing the value of the motel higher and the return on investment lower.
5. Residence – Motels usually offer an onsite residence. One must be aware however that although they are comfortable and large enough, they are generally not the size of a stand-alone house. There are substantial benefits to living onsite that include the lifestyle of a family living and working together, and the tax benefits that are available. The costs of living in a home in the suburbs are largely absorbed by the business in the case of a motel, such as food, electricity, council rates, rent, loan repayments, water, insurance, telephone, and much more.
Business Considerations
1. Lifestyle – The benefits of a family working together and the opportunities to grow with the business can be very rewarding. Delegating certain areas of the business to key staff members where one is comfortable to, allows more time to get out of the property and take time out for family, schooling or other social or sporting activities.
2. Return on Investment – This depends on many of the items included within such as location, standard of presentation, number of units, lease document, land area, etc. Outside the business/ property itself, the strength of the market and demand at that time plays a major role. Motels do offer very strong returns when compared to many other business opportunities.
3. Potential/Opportunity – The old saying is “no one buys a business unless they see potential”. There is generally potential in every motel business of some kind. Often investors fall into the trap where a motel operates on a very high occupancy rate, they think there is no upside potential. This is sometimes the best potential as the room rates allow for increase resulting in a lower occupancy rate, but higher profit margin, less wear and tear, etc. A new broom always sweeps clean and a new perspective,
vision and enthusiasm offers the opportunity to take a motel business to the next level. See what areas of the motel are underperforming? What new initiatives can be implemented to gain more market share? What areas of expenditure are too high and can be brought under control? An injection of funds to do a refurbishment that the previous operator did not want to do is a proven method of adding value to a motel.
4. Online Reviews – Read but be careful what one takes on board. The main thing is to consider the tone of the reviews in the main, and how they read, rather than individual reviews. If there are nine reviews on a motel that are positive and one that is not, then go with the nine, as that tenth review may not be legitimate. If nine reviews mention a specific issue with a property/business then consider just how big of a problem it is, and how easily it can be rectified. Sometimes issues can be easily fixed by a new operator, and therefore may be to the benefit of the buyer in the future.
5. Finance – Historically motels are known as solid and secure investments and therefore financial institutions (in the main) are eager to lend against them. They will generally lend 50% against the value of a leasehold motel and 65% against the value of a freehold motel. These percentages offer a good base to start searching however be aware some financiers may not lend as much as others. The balance percentage plus purchasing costs will need to be made up of preferably cash, or part cash and part equity against another property depending on the financial institution’s requirements.
6. Ingoing Costs – The cost of doing business can be high. Government stamp duty accounts for the largest portion of purchasing costs. Other costs include legal fees for advice throughout the purchase process, search fees for the property and business such as council searches, liquor
licence, vendor entity, etc. Further costs can then include settlement adjustments for prepaid advertising, council rates and also the purchase of Stock at Value in order to continue to operate the business. Working capital will also be required, even though motels are strong cash flow businesses. Set up costs for the buying entity will also need to be assessed based on the entity being created (if any).
7. Cashflow – In most cases and depending on the time of year the first day of taking over a motel generally results in a good cash flow. Most guests today pay by credit card or Eftpos. Guests on accounts are more limited to large companies only (of whom many are tending towards credit cards now). The type of clientele the motel has will have an impact on the cashflow.
8. Future Resale – When it is time to sell there is generally a ready market for both leasehold and freehold motels. If priced accurately most motels will sell within a reasonable time frame in normal market conditions when marketed correctly. If overpriced, they will not sell until seller price expectation meets the market.
Leasehold Considerations
1. Lease Terms – The terms of the lease and responsibilities of both Lessee and Lessor should be considered and advice sought from an experienced motel solicitor in regard to whether the lease is reasonable or too onerous on either party. Most motel leases are drafted with standard terms however may not necessarily end up that way in final copy. It pays to make sure one is happy with the Lease Document prior to entering the agreement. As with anything, as long as both parties act reasonably regarding leases and their terms, then both parties benefit in the long run.
2. What am I Buying – The right to lease the land and buildings for a certain period of time on specific terms and the tangible and intangible assets of the
business. This can include goodwill such as the reputation the business has built up, the telephone numbers, email addresses, websites, social media profiles, the business name, the plant and equipment, the right to the liquor licence being transferred, etc.
3. Who is in Charge – Many Lessee’s are unsure about their rights and the rights of the Lessor in a motel lease. Owning a leasehold or freehold motel means you as the owner make your own decisions and stand by them. A common misconception is that owning a leasehold motel means you have to answer to the Lessor. This is not the case however, as the Lessee is entitled to “quiet enjoyment”, under the terms of the lease, meaning they rent the building to operate their business from without the intervention of the property owner. Obviously there is a mutually beneficial relationship between the two parties, for both to have a successful motel business and property.
4. Rent – The annual rental of a motel should never be more than the Net Operating Profit After Rent. A new lease should have a commencing rental of approximately 40% - 43% of the entire Net Profit for the complex. There are other methods for determining motel rentals such as a percentage of turnover. A dollar figure per unit site is often utilised as a check or comparison method.
5. Lease Time – Motel leases mainly commence as a 25 or 30 year lease (inclusive of option periods). These are very long leases especially when compared to retail and commercial tenancies which are often 3 year + 3 year leases. Even a lease that has been in place for 10 years that has 15 years remaining, is a long term lease. It is rare that motel leases ever run down too low as it is in both Lessee and Lessor’s best interests to have a long term lease in place for the security of each party’s investment. The opposite may occur if the site is ripe for redevelopment, however there are many if’s and but’s in this situation.
Freehold Considerations
1. Passive Investments – The ownership of the freehold and business of a motel often leads to the owner selling the business to another operator and retaining the freehold property as a passive investment. The comfort and confidence in the strength of the motel industry often results in motel owners wanting to keep an investment in the industry whilst moving on to operate another motel acquired, or taking life a bit more easily whilst receiving a high return on their investment.
2. Finance – The cost to purchase a Freehold motel is substantially higher than a lease simply because the land and buildings are also being acquired. The interest repayments will be much higher so one must ensure that the business’ cashflow can cover the required loan repayments. There are many benefits to owning and operating a freehold motel and many people purchase a lease motel initially to build up funds and experience, with the ultimate goal of acquiring a freehold motel. Interest rates have been extremely low for a long time, however recent increases may mean further consideration of the acquisition budget.
3. Spare Land for Expansion –Generally motels on a large parcel of land are sought after by the market. Any with spare land offer the opportunity to expand and increase the number of units, income, profits and value of the business and property. Being able to add value to a motel is a big incentive for those who wish to build up the value of their investment. Always speak with experienced motel and accommodation industry specialist professionals with a long association in the motel industry to gain the best advice available.
CENTRAL QUEENSLAND MOTEL LEASE
Quality 4 star motel business o ering a high return. 10 self contained one bedroom apartments plus comfortable one bedroom owner’s residence adjoining reception with private courtyard. Excellent location in strong Queensland town with solid repeat business from various industries. Low labour intensive business with very low operating costs. Consistently strong trading for many years. Net Profit $202,078.
10 Units 19 Years Remaining Central Qld Leasehold $375,000
ABSOLUTE BEACHFRONT RESORT COMPLEX
Direct beach access and ocean views from the property, live and work in paradise with huge upside potential Includes 3 bedroom managers unit, separate self contained le able unit and reception/o ce valued at $700,000 Le ing Rights: 25 year agreement term (21 years remaining), 32 self contained units in the le ing pool Net Income $294,712, Remuneration $139,500 + GST per annum. Complex includes saltwater swimming pools, spa, tennis court and undercover parking.
44 Units 21 Years Remaining North Qld Management Rights $1,595,000
STRONG PERFORMING COASTAL MOTEL
29 high quality motel units and apartments with 3 bedroom owners residence. Solid block construction with BBQ area and inground swimming pool. High profile location in a large coastal town, close to a number of industries that have continual demand for accommodation. High profit margin on the back of low expenditure to operate. Operated by one person plus cleaners. Net Profit circa $480,000.
29 Units 25 Years Remaining North Qld Leasehold $1,650,000
