Motel: Own or manage? Business or lifestyle?
Do most managers lease or own the motel?
Do they hire managers or manage it themselves?
Is it more of a lifestyle or a big business investment?
These were some questions posed after one of my recent articles and so I thought they would be a great topic to follow on with. As most of you who have stayed in motels will know they can all be very very different. This is reflected in both the experience you get from staying in a particular motel, and also the experience for someone owning that motel.
Most motels are run under a lease situation. Without doing any specific research an educated guess would put the figure of lease motels at about 90 – 95% of all motels. This means that about 95% of motels have one entity owning and operating the business and they in turn lease the land & buildings from a different entity. On some occasions this can be the same person using two entities for tax purposes and on other occasions the two entities are completely separate people.
The decision as to buying a motel business only ( usually referred to as “the lease”) or a freehold going concern which includes the business, land and buildings is often governed by the amount of money available to invest. The return on investment for a business (lease) ranges from approx 20 -25% , a freehold going concern return on investment is around the 10% figure. Please bear in mind that these are rule of thumb figures and can not be applied rigidly to all motels as there are many other contributing factors in each motel.
If we take a scenario where someone has $1 000 000.00 to invest they may expect to achieve a $100 000.00 return on a freehold going concern or a $250 000.00 return on a lease. This would in turn dictate the type of lifestyle they could achieve in the motel. The freehold going concern may be an older 9 unit motel whereby the owner was required to do much of the physical cleaning themselves. Alternatively the lease may be a newer complex with more units and thus the owner is required to be in a more managerial type position with staff available to undertake the physical work. The lifestyle choice comes down to what the purchaser is most comfortable with
It is not just a difference between a freehold going concern and a lease which will give a different lifestyle but also within the different types of motels. A lease priced at $350 000 may have a $70 000 cash surplus ( earnings less expenses but prior to interest, tax depreciation and drawings). This would probably necessitate you having to do some physical cleaning and is sometimes described by non-motel people as buying yourself a job. It is very important to remember with motels however that as an owner there are practically no living expenses. Accommodation, phone, vehicles, power and insurance amongst other things are paid for by the business and a tax adjustment made at the end of the year. If employed elsewhere a person would need to earn the amount of these costs plus a third again for tax to get the same benefit. With living costs already taken out it can be argued that the cash surplus is a return on your total investment with no need to adjust for owners salaries as in most other businesses.
As we get to the more expensive lease operations the returns are percentage wise the same but dollar wise obviously more. Someone investing in a larger lease showing a return of $250 000 would expect a return of approx 25%. This would give them a business where they would do less of the hands on work and more management and promotion of the business. Once again all the living expenses are included in the business. If someone purchased this and employed a manager they could still probably expect after deducting a managers salary a return of about 18%. As we are seeing more of the larger more profitable motels within the industry the practice of having a lease business run under management has become more prevalent.
As you can see from all this motels can be both a lifestyle and a big business or a combination of both. There are many different and unique factors in each motel so the purchaser must be aware of these differences and ensure they choose a complex which will meet their needs. It is essential therefore to use the services of an experienced motel broker who understands motels, how they operate, the differences between them and how this all relates to the purchaser. Being empowered to make an informed decision at this stage can prevent a lot of distress after the purchase is complete.
September 01 2008 11:02 pm | Changes in Motel Trends and Entering the Motel Industry
Jared on 02 Sep 2008 at 9:05 am #
Hi Kathie.
Glad my comments could inspire.
VELDa on 03 Sep 2008 at 2:12 pm #
Hi do you have to pay lease money up front or can you pay it per annum
Kathie Shepard on 04 Sep 2008 at 1:57 pm #
Hi Velda
When you enter a motel you are purchasing the business so the payment for this is upfront.If it is a lease you purchase then as well as paying the upfront cost for the business you will pay the lessor a rental for the use of his land and buildings. This is paid on a monthly basis. Remembering though that when you leave the motel you will then have the business to sell.