There are four main categories of motel ownership:
Freehold
If you purchase a freehold motel you will
own the land, buildings and the business which includes the
goodwill, stock, furniture and fittings. This is the most
straight forward form of purchase and it has a number of
advantages. There are no landlord/tenant issues, all decisions
regarding renovations and upgrades are made by the owner and so
the motelier has more freedom of action.
At the time of writing freehold motels offer a return on
investment between 12% and 15%, depending upon location. Sydney
and coastal motels offer the lower returns. The further west you
travel, generally the higher the returns.
Leasehold
Leasehold motels offer returns on investment between 28% and
35%. These returns are obviously higher than those offered by
freehold motels, but there are some drawbacks. The value of a
lease will decline as the expiry date of that lease approaches.
A 25 year lease offering a 33% return is good value. A five year
lease offering a 33% return is not.
For some reason, the market does not suggest a formula that
recognises the importance of the length of the lease. Generally
the advice to motel buyers is to be very wary of short leases.
They are difficult to on-sell. A 25 or 30 year lease is fine. No
one considers conditions three decades in the future. But a 10
year lease that will be resold in 5 years has very little value.
There are a few rough rules of thumb regarding rents. These are
not set in concrete, and different brokers may have different
ideas, but generally rent should not be more than 23% of revenue
and not more than 45% of the net profit before rent. The net
profit figure is more important, because motels without
restaurants will achieve net profits up to 60% of revenue,
whereas motels with restaurants will see net profits around the
40% mark.
The table below highlights this difference:
| Motel A | Motel B | |
| Restaurant | Yes | No |
| Revenue | $1,000,000 | $1,000,000 |
| Net Profit | $400,000 | $600,000 |
| Rent 23% Revenue | $230,000 | $230,000 |
| Rent as % Net | 58% | 38% |
Both motels pay rent that is 23% of
revenue, but because the revenue of Motel A is derived from food
and beverage as well as accommodation, rent as a percentage of
net profit before rent is too high.
Motel B, with no restaurant, enjoys a very comfortable rent that
is 38% of pre-rent net profit.
Investment Motels
If you purchase an investment motel, you are the landlord. The
lessee pays rent to you, and generally you can expect a return
on investment of around 9%.
As a landlord, it is important to know what repairs and
maintenance are your responsibility. Generally the landlord is
responsible for all external repairs – walls, roof and
driveways. That is why it is vitally important that you obtain a
building inspection before purchasing a motel. If the motel roof
needs replacing and the driveways need retarring in one year,
your return on investment for that year may very well be zero.
Also, while your tenant might be responsible for the upkeep of
all furniture and fittings, you need a lease that clearly states
what steps can be taken if the tenant does not comply with these
requirements.
Most landlords worry about losing their tenant. In the motel
industry, this is a secondary issue. Because tenants pay
substantial sums to acquire their leases, they are very unlikely
to walk away from the motel if business gets difficult. If,
however, they do abscond, the landlord now has a brand new lease
to sell.
(On this last point, it is important to get sound legal advice.
A bank may have a mortgage over the lease, preventing the
landlord from immediately selling a new lease. Also, a departing
tenant may leave the furniture and fittings in a very poor state
of repair, forcing the landlord to spend a lot of money to bring
his motel up to scratch before he can sell a lease).