Motels: You’re in charge
If you’re thinking about buying a motel, the first step is to determine what will work for you — the size of the motel, the tenure, the budget, the location, the clientele, and how the business will be operated.
The decision to buy any business is most likely financial, however, there are many additional reasons for wanting to buy a motel. Yes, financially, motels are a very lucrative business option, but they are also very rewarding and satisfying on a personal level, making them an excellent business choice.
Everyone wants to be the boss, well, most of the time. Not answering to anyone and making one’s own decisions without being questioned applies to many businesses, including motels. Whether it is a leasehold or freehold motel, the owner is in charge. This means you, as the owner, make your own decisions and stand by them.
A common misconception is that owning a leasehold motel means you must answer to the lessor. This is not the case, as the lessee is entitled to “quiet enjoyment” under the terms of the lease. Simply, this means the lessee rents the building to operate their business without intervention from the property owner. Of course, a mutually beneficial relationship between the two parties ensures both have a successful motel business and property.
Motels are a great business option for those wanting flexibility, an attractive prospect for both business owners and employees. Your work hours can be tailored to suit, and having the family living onsite allows for more family time while still enabling you to operate your business.
At the starting line
Where does one go to find anything these days? The internet is clearly the first port of call and the place to start for any initial enquiries into buying a motel.
The search begins with sorting the wheat from the chaff. Separating good information from nonsense takes time, further investigation, and a lot of patience.
If you know someone who has been there and done that, they can be a wealth of information. Checking what is for sale and contacting specialist accommodation business brokers will assist greatly in determining what motel options may or may not suit. Brokers that specialise in motels can provide details on what is currently available for sale, whether advertised online or offered via an “off-market” campaign. The only way to access “off-market” listings is to contact the broker directly. Speak to the experts, not those who “dabble a bit” and try selling everything from houses to commercial properties. Instead, consult those who specialise in the motel industry and have proven longevity, Building long-term, mutually beneficial relationships is key.
Decisions. Decisions…
The options available are vast. Many people think that the town or area they want to live in is the most important consideration. If buying a house, yes, this should be high on the agenda. However, where you want to live is probably not the best place to start when buying a motel. Instead, focus on regions that offer the best motel opportunities. Buying a motel means buying a business first and foremost, so economic viability and sustainability should be paramount. Beyond this, can those areas fit in with your family’s needs and lifestyle?
Consider the preferred tenure of ownership that may suit you best. The three main types of ownership available for motel acquisitions are freehold, freehold passive investment, and leasehold. Each offers different benefits and challenges, so you must determine which suits your circumstances. Finance will likely play the biggest role here. There’s no point considering a freehold option if the budget doesn’t align with your other requirements. Weighing up the facts and comparisons will help determine what is suitable for you as an investor.
Securing finance or “pre-approval” before going too far can save a lot of wasted time and effort. 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 addressed on a case-by-case basis. My advice is to contact a reputable finance broker early on, specifically one specialising in the accommodation industry.
Another consideration that must be made early in the decisionmaking process is whether you will operate the business yourself. This choice may affect the type of tenure you should consider. Twenty years ago, most motel owners were onsite operators. Today, many motels are operated on a more passive basis, under management or lease agreements. Motels are an excellent business in this respect, as they can be successfully run without the owner being onsite all the time. Many other business types cannot offer this flexibility.
Consider propertyspecific items
Number of units: How much is enough? Determine how many units you would prefer to operate. The budget will help answer this question.
Restaurant/dining: If you are a social person, then this is the side of the business you will love the most. It’s where business operators can get to know and build relationships with their customers.
Standard/presentation: The presentation standard 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 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.
Location: This plays a role in determining the value of a motel, as the demand for coastal motels has historically been higher than inland motels. Demand increases the value of the motel via a lower return on investment (ROI).
Position: The main positions motels tend to focus on are major highways, main roads, waterfronts, and city centres. These areas are places where demand for accommodation is at its highest.
Residence: Motels usually offer an onsite residence, not a standalone house in the suburbs. Although motel residences are comfortable and large enough, they are generally not houses. There are benefits to living onsite that include the lifestyle of a family living and working together and available taxation benefits. Many costs of living in a suburban home can be 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.
Look into business matters
Online reviews: Read but be careful! Not all is as it seems. Consider the general nature of the reviews and how they read, rather than individual reviews. If there are nine reviews on a motel that are positive and one that is not, go with the nine, as that tenth review may not be legitimate or from a reasonable person. If nine reviews mention a specific issue with a property or business, consider how big of a problem it is and how easily it can be rectified. Some issues can be easily fixed by a new operator and may be to the buyer’s benefit.
Lifestyle: Again, 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 do so, allows more time to get out of the property and take time out for family, schooling, or other social or sporting activities.
Potential or opportunity to add value: The old saying is, “No one buys a business unless they believe they can improve it.” There is generally potential in every motel business of some kind. Often, one can fall into the trap of thinking that a motel operating on a very high occupancy rate has no upside potential. Sometimes, this is the best potential, as the room rates allow for increases resulting in a lower occupancy rate but higher profit margin, less wear and tear, and so on.
A new broom always sweeps clean, and a new perspective, vision, and enthusiasm offer the opportunity to take a motel business to the next level. Consider areas of the motel that 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. This is an area where one can take a position of advantage over competitors who do not reinvest in their asset.
Finance: 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 percent against the value of a leasehold motel and 65 percent against the value of a freehold motel. These percentages offer a good base to start searching. 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.
Purchasing costs: The cost of doing business can be high. Government stamp duty accounts for the largest portion of purchasing costs in Queensland. Other costs include legal fees and search fees, such as council
The old saying is, “No one buys a business unless they believe they can improve it.
searches, liquor licence checks, and vendor entity checks. Add settlement adjustments for prepaid advertising, council rates, and also the purchase of stock at value to continue operating the business. Although motels are strong cashflow businesses, working capital will be required.
Cashflow: In most cases, and depending on the time of year, the first day of taking over a motel results in good cashflow. Most guests today pay by credit card or EFTPOS. Guests on accounts are more limited to government or large companies (many of whom are now tending towards credit cards). The type of clientele the motel has will impact cashflow.
Return on Investment (ROI):
This depends on many of the items already mentioned, such as location, standard of presentation, number of units, lease document, land area, and more. Outside the business or property itself, the strength of the market and demand at that time plays a major role. Motels offer very strong returns compared to many other business opportunities.
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.
Leasehold specifics
Who is in charge: Many lessees are unsure about their rights and the rights of the lessor in a motel lease. As mentioned, the lessee is entitled to “quiet enjoyment” of the property. The lessee owns and controls their own business.
Rent: The annual rental of a motel should never exceed the net operating profit after rent. A new lease should have a commencing rental of approximately 38 percent
to 43 percent of the entire net profit for the complex. There are other methods for determining and checking motel rentals, such as a percentage of turnover. A rate per unit site is often used as a check or comparison method.
Lease time: Motel leases mainly commence as a 30-year lease nowadays (inclusive of option periods). These are very long leases, especially compared to retail and commercial tenancies, which are often three years + three-year options. Even a lease that has been in place for 10 years and has 15 years remaining is still considered long term. It is rare for motel leases to run down too low, as it is in both the lessee and lessor’s best interests to have a long-term lease in place for the security of each investment. The opposite may occur if the site is a potential redevelopment site.
Lease terms: The terms of the lease and the responsibilities of both lessee and lessor should be considered, and advice should be sought from an experienced motel solicitor to determine whether the lease is reasonable or too onerous on either party. Most motel leases are drafted with standard terms but may not necessarily end up that way in the 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, both will benefit in the long run.
What am I buying? The right to lease the land and buildings for a certain period of time on specific terms, as well as the tangible and intangible assets of the business. This generally includes goodwill, the telephone numbers, email addresses, websites, social media profiles, the business name, the plant and equipment, liquor licence transfer, and more.
Freehold considerations
Finance: The cost to purchase a freehold motel is substantially higher than a leasehold, simply because the land and buildings are also being acquired. The interest repayments will be much higher, so one must ensure that the business’s cashflow can cover the required loan repayments. There are many benefits to owning and operating a freehold motel, and many people purchase a leasehold motel to build up funds and experience, with the ultimate goal of acquiring a freehold motel.
Land area and spare land for expansion: 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. One must consider the cost of construction and the viability of adding additional units without overcapitalising, particularly if demand does not warrant it.
Capital costs: Under a lease, any costs incurred by the lessor, such as structural maintenance, replacements, and sometimes exterior painting (depending on the lease terms), will no longer be the lessor’s cost but the freehold going concern owner’s cost. These costs may not occur every year but are often substantial when they do.
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 result in motel owners wanting to retain a high-returning investment.
Speak with experienced and specialist motel industry professionals with a long association in the industry when considering motels as an investment or lifestyle opportunity. Once a suitable motel has been found, it is recommended to complete a financial and legal due diligence of the business and property to confirm that what one believes they are buying is indeed that.
EASY TO OPERATE LEASEHOLD MOTEL
Set in a main road location with exposure to a huge amount of tra c daily and within walking distance to the town centre. The motel has 13 units, including large self contained units, inground swimming pool, bbq area, undercover parking and 3 bedroom residence. The business is very easy to operate, currently by a husband and wife team and has an excellent trading history over the long term. The lease expires 17 August 2030 and the opportunity to extend the lease is available. 13 Units North Qld
$270,000
COASTAL FREEHOLD MOTEL
Situated in a high profile location, close to the town centre and beautiful tropical beaches is this recently renovated, well presented 12 unit motel. Set on approx. 1,800sqm, the complex includes a 2 bedroom residence, inground swimming pool and bbq area. The accommodation only business is easily operated by one person or a couple with no food preparation at all. FY24 Occupancy circa 68% with a high Net Profit and an excellent ROI available.
NEW 30 YEAR LEASEHOLD MOTEL
This motel o ers an excellent opportunity to gain access to the motel industry at an entry level price. The neat and tidy 12 unit motel includes self contained units, inground swimming pool, bbq area, undercover parking and two bedroom residence. The motel is located in a coastal Whitsundays town in a high profile position with a large frontage. The business easily operated by a husband and wife team with no food preparation. The motel shows a high return on investment with a low commencing rental. There is the opportunity to further increase the trading and value of the business.
New 30 Year Lease Offered Whitsundays LEASEHOLD $350,000
BEACHFRONT LEASEHOLD MOTEL & TOURIST PARK
Situated in Tropical North Queensland, this motel & caravan park has spectacular ocean and island views. Set on approx. 6 acres with esplanade and highway frontage, the property o ers a diverse range of accommodation options including 28 beachfront motel units, 12 park view motel rooms, 6 studio rooms, co age, 15 cabins, 89 caravan sites and 2 bedroom owners/managers residence. The business has a proven track record of year on year increase in profitability and shows an outstanding return a er management. Operated under management. Commencing rent only 19% of Turnover. O ers a 30% ROI.
New 30 Year Lease Offered Tropical North Qld LEASEHOLD $1,595,000
ABSOLUTE
BEACHFRONT VILLAS
Situated in an absolute beachfront location and o ered for sale are 8 x two bedroom villas with bathroom, kitchen, living area and patio. The resort complex includes pool, spa, gazebo, onsite parking, in an absolute beachfront location, 10 minutes to the Mackay CBD. Demand for accommodation in the area is very high and these units are highly sought a er. Current rental income per annum is $176,800.
8 x Two Bedroom Villas in one line Mackay FREEHOLD $1,480,000