Pacific Rim Business Brokers Pty Limited

5.  Types of Motel Ownership

There are four main categories of motel ownership:


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 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).