Tips for Buying Motels: Your in Charge

Posted By Andrew Morgan

The first step in commencing the process of buying a motel must be determining what is going to work for you. The size of the motel, the tenure, the budget, the location, position, the clientele, and the way the business is going to be operated.

In buying any business it is most likely a financial decision, however there are always many other additional reasons for wanting to by a motel. Yes, financially motels are a very lucrative business option, but they are also very rewarding and satisfying on a personal level, thereby making them an excellent business option.

Everyone wants to be the boss, well, most of the time. Not answering to anyone and making one’s own decisions without being questioned. This applies to many businesses including motels. Whether it is a leasehold or freehold motel, the owner is in charge. And 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 however, as the Lessee is entitled to “quiet enjoyment”, under the terms of the lease. This simply means the Lessee rents the building to operate their business from, without the intervention of the property owner. There is of course a mutually beneficial relationship between the two parties for both to have a successful motel business and property.

Flexibility in the workplace is attractive whether you are an employee or the business owner. 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.

At the Starting Line

Where does one go to find anything these days? Yes, the web is clearly the first port of call and the place to start for any initial enquiries. The search starts with sorting the wheat from the chaff. Sorting good information versus nonsense takes time with 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. The web will provide access to brokerage firms that specialise in the sale of motels. Checking what is for sale and contacting those specialise accommodation business brokers will assist greatly in determining what may or may not suit. They will also be able to provide details on what is currently available for sale whether it be advertised on websites or being offered via an “off market” campaign. The only way to get access to the “off market” listings is to be in contact with the broker. Speak to the experts, not those who “dabble a bit” and want to try to sell anything and everything such as houses, commercial properties, whatever else they can try their hand at. Speak to those who specialise in the motel industry and have a proven longevity, not just those who come and go. Create long term mutually beneficial relationships.

Decisions Decisions

The options available are many. Many think that what town/area they want to live in is all important. If buying a house, yes, I agree, this should be high on the agenda. However, where one wants to live is probably not the best place to start. Instead, looking at the regions that offer the best motel opportunities is a better option. Buying a motel means buying a business first and foremost, therefore the economic viability and sustainability should be paramount. Beyond this, can those areas fit in with the family’s lives and requirements?

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, and one must determine which suits best. Finance will play most likely the biggest role here. No point considering freehold if the budget will not marry up with the other requirements. Weighing up the facts and comparisons between them will help determine what is suitable for each investor.

Gaining finance or a “preapproval” before going too far can save a lot of wasted time and effort. This can only go so far 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. My advice is to contact a reputable finance broker early on. Also, a finance broker that specialises in the accommodation industry.

Another consideration within the decision-making process that is required to be made early on, which is whether one is going to operate the business themselves. 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 far from the case today with many motels being operated on a more passive basis, under management or 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. A lot of other business types cannot offer this flexibility.

Consider Property Specific Items

Number of Units – How much is enough? Determine how many units one would prefer to operate. The budget will help answer the 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 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.
Location – location 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 higher via a lower return on investment (ROI).
Position - the main positions motels tend to be focused 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 stand alone house in the suburbs. Although motel residences are comfortable and large enough, they are generally not usually 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 home in the suburbs 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, then 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/business then consider just 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 benefit of the buyer.
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, allows more time to get out of the property and take time out for family, schooling or other social or sporting activities.
Potential/Opportunity to Value Add – 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 when 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. 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 back into 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% 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. 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 searches, liquor licence, vendor entity, etc. Add settlement adjustments for prepaid advertising, council rates and also the purchase of Stock at Value in order to continue to operate the business. Although motels are strong cash flow 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 generally results in a good cash flow. Most guests today pay by credit card or Eftpos. Guests on accounts are more limited to government or 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.
Return on Investment – This depends on many of the items already included 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.
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 is in control of their own business.
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 38% - 43% of the entire Net Profit for the complex. There are other methods for determining/checking motel rentals such as a percentage of Turnover. A rate per unit site is often utilised 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 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 investment. The opposite may occur if the site is a potential redevelopment site.
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 regarding 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.
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 generally includes goodwill, the telephone numbers, email addresses, websites, social media profiles, the business name, the Plant and Equipment, liquor licence transfer, etc.

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’ 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 their experience, with the ultimate goal being to acquire a freehold motel.
Land Area and 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. 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 of a substantial nature when the time comes.
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 retain a high returning investment.

Speak with experienced and specialist motel industry professionals with a long association in the motel 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 what one believes their buying is indeed that.