Advantages
Steady Industry
The consistent occupancy rates and tariffs in the motel market provide a steady platform for growth and improvement, and give the motelier confidence that the market is unlikely to reverse in the long term.
Opportunity to Improve Profits by Raising Standards
The relationship between star ratings, occupancy rates and tariffs indicates the importance of quality. The higher the standard of accommodation the higher the occupancy rate and the higher the tariff a motelier can charge. A potential purchaser should note that the motel industry rewards quality, and a buyer who strives to improve his property should see a strong improvement in revenue and profit.
Location
Generally motels occupy prime commercial sites on major highways or in the commercial centre of towns. This means that if the motel proprietor wishes to convert his property to a different use, such as strata units, there is sufficient value in land and building to attract a commercial developer. Generally, the value of an asset is related to the stream of profits that asset produces. Motel owners have a second source of value that relates to the position of their asset and the value of other commercial properties in their immediate vicinity.
Relatively Easy Access to Finance
Bankers know that the motels are part of a safe, secure industry. That is why they will lend up to 65% against freehold motels and 50% against leasehold motels.
Live on the Premises
Living on the premise can be an advantage and a disadvantage. By being close to their businesses, motel operators do not waste any time commuting, and they can fix problems that arise after hours quite easily. The disadvantage is the feeling that some moteliers express of being tied to their business. Sydney commuters, who spend up to ten hours a week commuting, may not see this as a disadvantage.
Probability of Capital Gain
Motel owners who build up and improve their business can
expect to reap substantial capital gains when they resell. A
motel buyer, who purchases a property for $1 million with a 14%
return on investment, builds that business by 10% per year and
resells in three years with a 14% return on investment will reap
a capital gain of $331,000. If the motelier borrowed 65% of the
purchase price, then he would have made a capital gain of
$681,000.
If the same motelier takes the property from a low start rating
to a higher star rating, the capital gain would be substantially
higher.
Similarly, the purchaser of a leasehold motel can also achieve
substantial capital gains, providing he lease he sells has a
substantial number of years left to run. If a motel buyer
purchases a 25 year lease for $500,000 with a return on
investment of 33%, builds the business by 10% a year, and
resells that lease three years later with the same return, he
should realise a capital gain of $165,500. If the same motelier
borrowed 50% of the purchase price then he would have made a
capital gain of $415,500.
Once again, if the motelier improves the star rating the capital
gain should be substantially higher.
(Note that these simple examples do not take account of stamp
duty and other associated costs)
Known Customer Base
Because guests register with the motel, moteliers know exactly who their customers are. In many other businesses, particularly retail businesses, the customers remain anonymous. Motel buyers begin with a base of loyal customers which they can build on and expand. Motel owners with a computerised booking system or with access to a simple data base program can monitor their best customers and direct their advertising accordingly.
Stock, Bad Debts and Staff
Stock, bad debts and staffing issues can cause problems in
other industries. They seem to be absent in the motel industry.
Stock, with its storage, shrinkage and insurance problems, is a
minor aspect of the motel operation. Similarly bad debts, which
can bring many businesses to their knees, are almost unknown in
the motel industry. While corporate clients may be offered
credit facilities, the majority pay by company credit card.
In many businesses, a specialised labour force is absolutely
vital. In the motel industry, it is not hard to find part-time
workers for cleaning and housekeeping duties. Even temperamental
chefs tend to be less of a problem in country motels, where
alternate employment opportunities are limited.
Disadvantages
The disadvantages of owning a motel are
Live on the Premises
The advantages of living on the premises have been discussed above.
Long Hours
Long hours may be a problem, but there are few small business owners who enjoy a 35 hour week. In general, the motel owner must be available for most of the day, but his duties are not necessarily arduous, and it is relatively easy to find relief managers to enable the proprietor to enjoy a holiday.
Time Required for Sale
The time taken to resell a motel depends upon prevailing
economic conditions, the condition of the property, the state of
the trading figures and whether or not the price is realistic.
In general, a well presented property with well maintained
trading figures, a realistic price and a knowledgeable and
experienced business broker handling the transaction will sell
within six months.
As a potential motel purchaser you will come across many
properties with poorly presented figures, no statistics and an
owner who seems reluctant to impart any information. Do not be
surprised if properties such as these have been on the market
for a long time.