Entering the Motel Industry
Motels currently available, without being specific, range from small leased motels at $300,000 to large freehold complexes in the $millions. Within these motels the complexes range from highly organized operations to small lifestyle coastal motels. It is therefore important to establish the type of complex that would meet your requirements and suit your individual needs.
In general terms there are two ways of entering the industry, either you purchase the freehold land and buildings together with the business of the motel or you just purchase the “business” of the motel while renting the land and buildings, this is known as a “Lease”. Generally the decision as to which way you go is determined by the amount of capital you wish to invest and the type of lifestyle you are looking for EG: a “way of life motel” (say coastal relaxed low return for capital invested) or a “business motel” with a good bottom line.
It is often difficult for people first looking at purchasing a motel to come to terms with investing a large amount of money in a lease which does not contain any “bricks and mortar” as such. It is important to realize that when you purchase a lease you are buying all the chattels, i.e.: beds, furniture, carpets, drapes, crockery, cutlery, office equipment etc., almost everything except the land, bricks and mortar and roof. Also you are purchasing the right to operate that motel business in that building for the number of years on the lease. As long as you abide by the terms of the lease no-one can take that right away from you. Obviously then when buying a lease the length of the lease is an important factor.
With the purchase of a freehold going concern you are buying all of the above but also including the land and buildings. This is another way of entering the industry but as the returns on your investment are lower you would need to invest in a more expensive freehold than a less expensive lease to give you the same returns whilst operating the motel.
Under ideal conditions the cost of operating a motel will equate to 33% to 40% of the true turnover of the business (depending on the efficiency of the operator, items hired or owned and turnover mix). If it is a leased motel the ideal rental will be 28 to 33 % of the true turnover, leaving the balance of turnover to service any debt and provide an income for the operator. Please do not apply this formula rigidly as each operation must be looked at as a business on its own taking location, local environment, length of lease and history into consideration.
The Motel Association of N.Z. have compiled a book which may be of further interest to you. This book “An Introduction to Purchasing or Leasing a Motel”. can be purchased by writing to the Motel Association of New Zealand, P O Box 27 245, Wellington or visit their website www.manz.co.nz.
August 21 2008 | Changes in Motel Trends and Entering the Motel Industry | 4 Comments »