Latest News

Newsletter

QTHB provides a range of specialist, industry updates and market updates for businesses in our areas of focus. Please complete the form below if you would like to receive more information in regards.

* Required





Caravan Parks
Motels/ Resorts
Hotels

Captcha Image
Subscribe to: Online Subscription

Archived news items

Tags

The Right Size

Andrew Morgan - Friday, December 08, 2017

Written by Andrew Morgan, Specialist Motel and Accommodation Broker

Some say the more you have, the more you have to sell.  Some prefer more than 25, others prefer less.  How a motel is to be operated is most likely the answer to any question around 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 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 profit after 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.

The number of units in a particular motel is not the defining factor for success.  Business ownership revolves around profitability (amongst other things) and what profit 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 sitting 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% 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.

In the past many people would say that a minimum of 16 units are required for a motel to be successful.  But one problem lies in the definition of successful.  It really comes back to what an owner is looking for as a goal for occupancy rates, income, profitability or lifestyle.  An investor buying a motel may wish for a minimum Net Profit of say $100,000 after management costs.  This figure/level may be that investor’s definition of the motel being a success.  The number of units required to produce that result may be of no real consequence.

Where did the figure of 16 units come from?  Most likely there is no real factual basis for such a comment.  I have never seen any evidence to support this.  In contradiction to this figure I have seen many motels over the years with less than 16 units produce very strong levels of income and profit.  One example in particular included only 9 units yet produced a Net Operating Profit of in excess of $250,000.  Impossible some may say but 9 units at 90% occupancy at $130 per night produced an Income of approximately $384,000 and operated on a Net Profit Margin of 64%.  These are better than industry average figures however it was a difficult 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 difficult to agree with.

If we consider two very different motel investors then the answers will be very different.  One who is buying to operate themselves as 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 require 30 units, licenced restaurant, conference rooms/facilities, and a one bedroom residence.  Each business may be very successful in its own right and own market, however the individual investor’s requirements will determine what makes that motel successful compared to another.

In general terms those who operate their business under management often request a minimum of approximately 20 - 25 units, however this can vary.  Those choosing to manage the motel themselves may only require as few as 8 units.  The decision on this will be answered by one’s goals or motives, such as what minimum profit level they require after all operating costs have been accounted for, whether they are buying a motel that is operating well or one that is struggling to perform, and what their borrowing capacity is and therefore loan repayment responsibilities.

Often if a motel is being purchased to operate under management, a Net Operating Profit of for example $100,000 may not be sufficient, due to the manager’s wage being taken out of this profit figure and loan repayments also to be deducted.  The level of profit remaining after the manager’s wage may not be sufficient to make loan repayments and leave a satisfactory surplus.  A common Net Operating Profit figure worked on by many motel investors is $200,000 after Management Wages have been expended with loan repayments yet to be made.  The number of units required to achieve that is often a secondary thought, as a minimum level of profit was the driving motivation.