Essential Matters: Tips for Buying Motels
- Posted By Andrew Morgan
There are always a lot of questions that need to be answered when considering buying a business. The answers are generally revealed throughout the process of looking for and finding the right business to suit one’s circumstances.
The search for the right motel includes considering the positives and negatives for each from a personal point of view and includes the list of items below in helping to make a decision on what suits the individual’s buying motives, based on financial, family, lifestyle and other requirements.
The benefits of a high return business with a flexible lifestyle is part of what keeps people coming back for more within the accommodation industry. The opportunities available include but are not limited to:-
- Quality and flexibility of a work and lifestyle balance
- High return on funds invested
- Potential for substantial capital gain
- The personal satisfaction of building relationships with customers
- Living on site and the benefits that are included or;
- A combination of all of the above.
A good place to start the search is to talk with those who have been there and done that, or perhaps still do it. There are many motel owners within the industry who own more than one motel. Once they started in the industry one became two, then three and so on. It may be a location decision, economies of scale, additional units, higher revenue and profits or seeking freehold ownership that creates the desire for additional acquisitions. There is a large number of motel owners within the industry who have owned and operated many different motels over the years. They have been very successful in the motel industry and enjoy a good working lifestyle whether it be on a full time, part time or very limited basis.
A few of the characteristics and benefits of owning and operating a motel include, but are not limited to the following:-
• Onsite Residence/Home – motels generally offer an onsite residence for the owner, which helps to reduce their living costs substantially, including food, electricity, council rates, insurance, telephone, etc. One must be prepared that motel residences were never built to be stand-alone houses and therefore do not have the space of todays popular 4 bedroom, 2 bathroom house in the suburbs.
• Active Market – there is a ready market when you wish to sell, as there is always a market for people seeking to buy good motel businesses and properties. Other types of businesses may require more specialized skills or may not be as attractive to business investors, however good quality motels are always in strong demand.
• High Return on Capital Invested – for the capital invested in a motel a high return is achievable. When considering risk versus return, the statistics confirm motels are a solid and secure business to invest in.
• Cash Flow – the first day of taking over a motel there is generally a good cash flow. Most guests today pay by credit card or Eftpos and guests on account are limited to large companies only. Many large companies have now taken to providing employees with credit cards for their accommodation requirements limiting accounts even further.
• Under Management/Passive Ownership – the motel industry is ever evolving and a large number of motels today are operated under management. This is the opposite to where the industry was 20 years ago where whoever owned the motel lived on site and operated it themselves. If the day to day operation is not desirable then this can be a great way to get involved in the industry on a more passive basis, yet still offers the ability to stay involved as much or as little as one wants.
• Quality Lifestyle and Flexibility – if planning to operate a motel, the actual purchase is not only a business decision but a lifestyle choice also. Motels offer a good working lifestyle for the operators, with the whole family able to live and work together on site, and the meeting of new and interesting people each day. The flexibility available to the motel owner is part of the attraction for investors.
• Finance – banks and financial institutions are generally 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 to purchase motels. Current low interest rates are a real bonus to take advantage of.
• Low Stock on Hand Levels – there is a small stock component within a motel, whereas in other business types a large amount of stock is required to be carried at all times.
• Taxation Benefits – there are numerous taxation benefits and deductions available to motel owners such as depreciation of plant and property or alternatively more immediate write-offs expensing certain items, living cost benefits, etc.
• Capital Gains – there is always an opportunity to increase the value of the motel and make a capital gain upon sale depending on the quality of operation. The trend of motel values over the past 20 years has been a steady and consistent rise, that has generally resulted in good capital gains. As with any market it does fluctuate so timing is still very important.
Return on Investment
One of the first questions potential investors to the industry ask is, “what return on investment (ROI) can we expect to achieve?”.
The market determines the ROI of each individual motel. There are numerous factors that affect this rate of return. The fact that each motel is different in various ways means at times, it is difficult to compare one to the next, however the market does apply its general guidance.
Some of the factors affecting the ROI include:-
• Location – whether a motel is located on the coast or inland is a major factor determining the return on investment. Historically the demand for a coastal motel will be higher therefore pushing the value of the motel higher and the ROI lower. Location is an important factor to consider when buying a motel, decisions on where to buy a motel can be based on lifestyle and/or return. Inland locations may not seem as desirable from a lifestyle point of view as coastal locations (to some), however there can be substantially higher returns by buying a motel in an inland location.
• Condition or standard of presentation – if a motel is in poor physical condition, requiring repairs and maintenance or refurbishment, the market will expect a much higher return on investment than a motel that does not require this. Poor presentation affects the value of a motel considerably. High quality motels are always in demand and as a result achieve sales on lower returns/higher values.
• Age of buildings – a newer more modern building/motel will be in higher demand than an older building/motel and will therefore sell on a lower return or investment. This does not mean that older motels will not achieve a low return. It will depend on how they have been maintained, when bathrooms were refurbished, etc.
• Size – a smaller motel traditionally sells on a lower return on investment, as there can be more competition for these motels within the “Mum and Dad” sector of the motel market due to affordability.
• Operational Factors – this covers a wide area relating to the business operation itself such as the type of clientele the motel attracts, profitability, sales revenue, income departments such as accommodation, food and beverage, etc and the sustainability of the business going forward, just to mention a few.
• Potential for Adding Value – opportunity to improve a motel operation is of significant interest to many if not all motel investors and is often available where the next owner looks at a part of the business with fresh eyes and perhaps sees an opportunity. This opportunity may be a buying motive that affects the return on investment. Are there areas of the business that are underperforming? Where can improvements be made over and above the current operation? Keep in mind that almost no motel business ever operates at its absolute full potential and there is always room to improve with fresh ideas and renewed marketing strategies.
Leasehold or Freehold Tenure?
There are many factors specific to both Freehold and Leasehold tenures that are a consideration for buying one or the other. A few benefits of each to note are as follows:-
Freehold
The Freehold tenure itself is attractive in owning your own property, the size of land component and possible opportunity for expansion/value adding is available, not having to pay rent and building up equity in a freehold asset and the value of the land and buildings form the largest part of what one is investing in. The ownership of freehold property still attracts a wide market that does not want to pay a rental and who have a future intention of leasing the property to retain as a passive investment. This is a highly sort after investment strategy for many motel investors.
Leasehold
In regard to Leasehold Tenure, one pays a rental rather than loan repayments on a debt to a financier, therefore there is a much lower upfront capital outlay, the long term lease is seen by some as just as good as freehold tenure. Throughout the early 1990’s motel operators were largely interested in buying only freehold motels and leasehold was very much in its infancy. In today’s motel industry however, the benefits of leasing are highly sought after by the broader market who are trying to achieve a higher rate of return over a shorter time frame.
How much cash (or equity) one has available will also play a major role in determining whether leasehold or freehold is the best option. A cash component of $550,000 will allow you to buy a leasehold motel up to $1,000,000. This will generally be a 20+ unit motel of good quality, with a net profit after costs of approximately to $300,000 p.a. - $330,000 p.a. On the other hand, the same cash component of $550,000 will allow you to buy a freehold motel up to $1.4 million. This will generally be a 15+ unit motel of good quality with a net profit after costs of up to approximately $200,000 - $220,000 p.a. These details and numbers are generalised and are constantly changing with the market. They are also dependent to a large extent on location, standard of quality, age of buildings and income per annum.
Online Reviews
Read by all means, but don’t believe every review you see. Too often people get caught up with negative online reviews, focusing on the negative rather than the positive. Some pay no attention to other’s opinions/posts whereas others rely on them as part of their decision making process. The issue to be careful of here is that if there are nine good reviews and one poor, then how much relevance or credibility does that one review actually have.
Due Diligence
It is recommended that a due diligence is completed to the buyer’s complete satisfaction. Some buyers do not require a formal due diligence, and this is fine, as it is up to each buyer to decide what they require. Often their due diligence has been completed based on the knowledge and experience they already have. A due diligence is mainly completed to confirm that the business is performing as presented, and to give the buyer piece of mind that what they believe they are buying is actually the case. Motels have a number of “tells” which allows a quick assessment to see if they are performing as presented. Therefore, it is not difficult to do a quick check from the outset as to whether one believes the data appears (on the surface) to be accurate.
Finance
The first step in gaining suitable finance for the purchase of a motel is to contact a well respected finance professional that specializes in financing accommodation businesses. A specialist finance professional knows exactly how to get a loan application approved rather than saying yes at every point to the applicant only to have the application declined.
Building and Pest Inspections
The inspection of a building by a licensed professional is a good idea if there is some doubt over the integrity of the structure and/or pest infestation. Minor issues are generally of no consequence to most and a report is only required if there is a real reason for concern. Often buyers are able to satisfy themselves of the building’s integrity by inspection. Be aware however of excessively detailed reports geared more to residential property investors that highlight every minor flaw or paint chip and paint a negative picture as opposed to a simple answer as to whether the buildings are structurally sound.
Industry Advisors
The use of suitably qualified and experienced professionals is a decision which can make life either very easy or difficult in the purchase process. To have an Accountant, Motel Broker, Solicitor and Financier who specialise in the motel industry is extremely important in the transaction. Many times I have seen inexperienced or unqualified “professionals” handling motel sale and purchase transactions for clients and it ends up becoming more difficult and frustrating for all parties than it needs to be. It also ends up costing a lot more money for all concerned, particularly if the contract does not reach settlement. Most people are very excited about moving into their new business venture 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 in order to confirm their suitability for the job. Finally, listen to the advice and then make decisions based on the information and advice collected.