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Tips For Buying Motels ( 27/03/2008 )
As seen in Resort News liftout Information Feature - Written by Andrew
Morgan, Partner, Qld Tourism & Hospitality Brokers
Why buy a Motel? Here are 5 reasons, although there are many more...
High return on capital invested; change of lifestyle; potential for
capital gains; strong cashflow and meeting new and interesting
people. All you need to do now is work out what type of Motel suits
you.
Some Moteliers starting out in the industry will buy a motel, operate
it for a few years, then sell. The majority do this and then look for
another motel, perhaps a larger one or one with a restaurant or one
with a higher turnover and profit. There are many people within the
motel industry who have owned and operated a number of different
motels over the years. These people have done very well in the motel
industry and have enjoyed a high return on their capital and a good
working lifestyle. Some of the benefits of owning and operating a
motel explained further include:-
• Residence & Living – motels offer an onsite residence for the owners
that provide many tax advantages and reduces living costs, including
food, electricity, council rates, insurance, telephone, travel costs
and so forth.
• High Returns on Investment – whether it be leasehold or freehold,
for the capital invested in a motel, a high return is achievable.
• Lifestyle – motels offer a good working lifestyle for the operators,
with the whole family able to live on site, and the meeting of new and
interesting people each day.
• Stock – there is a small stock component within most motels
including only drinks and some food items, whereas in other businesses
a large amount of stock is required to be carried at all times. The
major product sold in a motel is accommodation and service.
• Market – there is a ready market when you wish to sell as there is
always a strong market for people wishing to buy motels.
• Cash Flow – The first day of taking over a motel there is a good
cash flow. Most guests today pay by credit card or Eftpos, and in
most motels, accounts are limited to large companies only. Limited
stock means cashflow is not hindered by large stock purchases.
• Capital Gains – there is an opportunity to increase the value of the
motel and make a substantial capital gain upon sale. The trend of
motel values over the past 10 years has been a steady and consistent
rise in values that has resulted in good capital gains.
• Finance – Banks and Financial Institutions are eager to lend money
for the purchase of motels. Traditionally motels have been a solid
and secure investment, whether leasehold or freehold, and this good
history gives financiers confidence in lending on motels. Some Banks
are lending up to 75% on freehold motels and up to 60% on leasehold
motels.
• Growth Industry – The demand for accommodation is consistently
growing and this results in growth in income, profits and therefore
values.
What Type of Motel Would Suit You?
Finding the most suitable motel for your needs involves considering
the above benefits and which ones dictate what you are looking for.
Ask yourself the following:-
1. What level of return are we looking for?
2. What locality do we want to own a motel in? Coastal or Inland
3. Does the locality have the necessary amenities we require, such as
schooling, etc?
4. Is a Leasehold Motel or Freehold Motel most suitable?
5. Do we require a restaurant in the motel?
6. Consider an exit strategy prior to purchasing? How long do we
expect to own the motel for?
7. What type of clientele do we want? Tourist or Corporate
8. How much finance will we require?
9. What size residence will suit our family?
10. Do we want potential to build upon or room to expand the
business?
11. How can we improve the current business operations?
12. Do we want a “renovators delight”, or something that does not
require renovating?
The use of suitably qualified and experienced professionals is a
decision that can make life either very easy or very difficult in the
motel purchase process. To have an accountant, motel broker,
solicitor and financier who specialise in the motel industry is
extremely important in the transaction. Too many times I have seen
inexperienced or unqualified ‘professionals’ handling motel
transactions for clients and the process becoming more difficult and
frustrating for all parties than it needs to be. 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 specialists in the
industry. It is highly recommended to consult with the parties you
are about to deal with and satisfy yourself of their expertise in
order to confirm their suitability for the job.
Ultimately the market dictates the return on investment of a motel.
There are a large number of factors that affect the rate of return in
the market. Some of the main factors affecting return on investment
include:
• Condition or Standard – if a motel is in a poor condition, requiring
major repairs and maintenance or refurbishment, the market will expect
a higher return on investment than a motel that has been refurbished
and presents very well.
• Age of Buildings¬ – a newer more modern motel will be in higher
demand than an older dated motel and will therefore sell on a lower
return or investment.
• Location – Motels in desirable locations such as coastal areas will
show a lower return to that shown on an inland motel. Inland
locations may not seem as desirable from a lifestyle point of view as
coastal locations however the compensating factor is that
substantially higher returns can be achieved.
• Size – a smaller motel tends to sell on a lower return on
investment, as there is more competition for these motels within the
traditional “Mum and Dad” style motel market.
• Restaurant – how much income is attributed to the restaurant and
bar? A motel purchaser will look at a slightly higher return where
there is a large amount of food and beverage involved in the motel
business.
• Land – how large is the block of land and is there any spare land
for further expansion?
• Resale – will the motel be readily saleable in the future?
• Leasehold versus freehold versus Finance - the question of whether
to buy leasehold or freehold is a common one. There is no exact
answer to this question as it depends on the individual purchaser and
what they are most suited to.
Many years ago buyers would say that freehold was the only way to go,
however, today the benefits of leasing are highly sought after by a
large market.
How much cash or equity you have available will play a major role in
determining whether you buy leasehold or freehold. A cash or equity
component of $400,000 will allow you to finance a leasehold motel up
to approximately $900,000. This will generally be a 18+ unit motel of
good quality with a net profit after costs of up to $250,000. On the
other hand, the same cash component of $400,000 will allow you to
finance a freehold motel for up to approximately $1.3 million. This
will generally be a less than 15 unit motel of good quality with a net
profit after costs of up to $180,000. These details and numbers are
generalised as they are dependent to a large extent on the factors
above, location, condition or standard, age of buildings, size and
whether there is a restaurant and bar included.
It is recommended no matter what type of business you are buying that
a due diligence is completed to the purchaser’s satisfaction. Some
purchasers however are comfortable with what they are buying and do
not complete a due diligence. Most who do a due diligence employ the
services of an accountant who is a specialist in the motel field. A
due diligence is mainly completed to confirm that the business is
performing as presented and to give the purchaser some piece of mind.
A specialist motel broker will insist upon a vendor providing detailed
accountant’s profit and loss figures on the motel and at the same
time, clear with the vendor that a prospective purchaser’s accountant
can if need be, communicate directly with the vendor’s accountant to
satisfy any financial queries.
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