Sounds like you've got it Keily.
Somewhat like anything else in commercial property,(and residential too) stability depends on the quality of the tenant.
However, the quality of the tenant depends on the qualities of the property, and it's ability to attract a quality tenant.
Chicken and the egg thing, depends where you start, meaning if you buy a tenanted property or a vacant one.
My strategy is to buy an operating quality motel leasehold .
I become the tenant, and I employ a manager to operate the business.
ROI is 20% under management.
LVR is 70%, ideally, finance permitting.
Investment motels where you're the landlord, ROI is around 9%. (it's gonna be tight for these investors if the interest rates rise).
Reason I post this info is so someone else who's wondering how to move forward may find it useful.
Hope you're all doing well, whatever your investment path.
Any comments or questions most welcome, I just love this country and it's opportunities for wealth creation.
Try not to make the wheels fall off it all, Ms Gillard.
thecrestAuguriesParticipant@auguriesJoin Date: 2010Post Count: 3
What an excellent and informative thread on Motel investing, thankyou to Crest!
We have residential property investments and our next step has explored possibilites of 'passive type' incomes with equity from the IP's. Car washes, storage places, even Motels…(freeholds). Been some incredibly frank, open, number crunching insights here Crest. Much appreciated.
Hope everything goes well for you guys too.
Thank you for that Auguries, and yes it's going well for us.
There are some great opportunities out there for the finding. We're in search mode for leaseholds to operate under management.
As you know, Passive income motel opportunities can be found by buying the Landlord side of an existing motel lease with a tenant in place who operates the motel and pays rent.
Or, you can also buy a freehold, needs to be earning around 16% ROI to split, employ short term management who know the plan, create a lease and sell it, that way you can write the lease yourself and to a large extent you can dictate the terms of the lease in your favour.
For example, clauses like :
25 years only, so you can sell some more years when it hits about 19 or 20, when lessees want to enhance it for on-selling.
Rent increases, how and when.
Periodic Maintenance, painting inside n out every 5 years, maintain star rating or equivalent, refurbish date.
Tenant owns all the replacement refurbish items like tiles, furniture, carpet, bathroom and other fittings hence tenant pays to replace.
Probably telling you what you already know.
The market is quiet right now, very few buyers, great time to be one.
Hope you find something suitable.
MickParticipant@motelmingleJoin Date: 2010Post Count: 7
We currently have a leasehold in country Victoria and are contemplating selling the leasehold or running it under management.
Just wondering if you could steer us in the right direction as far as paying the managers, such as contracts of numeration and duties.
Earlstongardens.athmanParticipant@athmanJoin Date: 2010Post Count: 7
I been watching this thread for a while now, its a good quality discussion. I’m interested in people’s opinions on motels with restaurants.
My wife and I are in the restaurant business. I find the sites, do the deals and fit them out, she (and family members) operate them. Then, I fix things when they break! We’re on our third restaurant now, and I recently bought another site to do a small cafe and apartment development. Its all going well and we like it, but we won’t do it forever because its a lot of work. We’re thinking of getting into a country motel in the next 5-10 years. My impression is that motels with restaurants are seen as a mixed blessing, because the restaurant typically breaks even at best.
Hopefully it could mean that the right motel with restaurant could potentially be undervalued relative to its full potential. If so, that’s good for us because we’re confident we can do well at the restaurant side as well as the motel side. However I could be dead wrong too. I’m interested in people’s opinions on the relationship between restaurants and motel valuations.
You're quite right.
Opinions vary on the benefits of a restaurant in a motel.
Some say it's great, puts bums in beds, attracts groups and corporates.
Others say they only break even and who'd want a business add-on that demands an extra 40 hours a week and only breaks even, or it's a constant source of problems – staff, costs, extra 40 hours per week, low profit, scarce erratic chefs.
We are not experienced with Food & Bev ourselves so we avoid investing in motels with restaurants. We prefer a motel surrounded by eateries so we can concentrate on accommodation and leave F & B to those who love it and are good at it.
However, Motels with restaurants attract more corporate guests – who want to book in, relax in a 3 1/2 – 4 star room, update the day's business or reports on the laptop, freshen up, few drinks, eat in-house, not have to wander a strange town at night to and from a restaurant or club, or worse still drive after a drink. They like it all on one bill, breakfast same place or delivered to the room. These motels also attract bus groups provided there are 26 rooms min.
Some motel restaurants also attract local business, which is a bonus.
There are many ads for motels for sale which mention that the restaurant part is closed, so there may be opportunities right there, if the local area's market conditions are suitable.
Motels are mostly valued on nett profit, all other things being more or less equal, unless there are significant other factors like for example it's sitting on 5 acres instead of 3000m2. So a motel with a closed restaurant is usually underperforming its potential. Opening the restaurant should increase the accommodation figures and add F & B profit as well. In a freehold motel, assuming typical cap rate is 15%, then an increase in nett proifit increases the valuation x7 – therefore every $1 extra nett profit adds approx $7 to the valuation. The restaurant of a 25 unit motel could add $50K to the nett hence $350K to the val. Nice CG so be ready to cope with CGT.
So, blessing for the experienced F & B operators, mixed blessing for the others.
thecrestathmanParticipant@athmanJoin Date: 2010Post Count: 7
Thanks thecrest, thats really helpful.
I have been looking through your information and I have a question. We are looking at a passive freehold investment in Queensland, we currently have commercial property and comparing the difference in leases. Can you tell me is a freehold motel has a provision or can have a provision for a market review at the option of the lease, 5 x 5x 5x, after each 5 year option a market review is in order and each other year cpi or 4% in the norm. We have only started researching motels, never crossed our minds before but returns look good. Any other downside to motel freehold against general commercial properties? Would appreciate your comments. Regards
I'm not anyone official on this forum, but welcome from me.
It would help to keep this short if you provide some info :
Level of investment approx $ ?
Geographical preferences ?
Proposed term of investment ?
What % of the investment cost are you borrowing ?
Happy to help. This info matters.
We are looking coastal Queensland. Price under $2m. with rental returns of around 9%. – 10%. Are you aware of motel leases and is there a provision under Qld law for a market review on rents. Some leaseholders have these in their leases and some don't. We would like to have this written into the leases(we are looking at one that the owner will stay on as a leasee and sign a new lease), that at the end of each option, e.g. every 5 years a market review takes place therefore an additional increase in rent happens, over and above cpi. What should we look for in a freehold motel, approx 30 – 40 rooms with regard to age of building, maintenance of building, grounds, electrical, hot water systems and roof. What are the downfalls of motel freehold against general commercial buildings? Do the owners of the freehold have lots of expense or simply buy and forget?
Hi The crest
Just reading previous posts and I would be interested in looking at your lease, this might highlight some areas of concern. Would this be ok. Also when you sold your freehold did you draw up the lease or did the purchaser and what lease term did you or the purchaser want.
My opinion only.
If you can think of it as a partnership with the lessee, and you ensure you have a lessee who has a reputation for being reasonable, it should run smooth.
Usually rent is not more than 25% of turnover. Rent can compound out of hand if it starts too high, ends up in court eventually.
Reviews are grey areas. Placing a 5 yearly rent review in a lease defeats the purpose of a lease, which is to eliminate any grey areas. I prefer to use CPI.
Brokers say "coast for show, inland for dough", it's true, so compare yourself, higher return=stronger biz & tenant.
Can't advise on Qld law relating to leases.
Ideal would be motel under 20 yrs old because usually the lessor is responsible for pipes and wires in walls & underground, drainage, structure, so that if a problem requires digging or removing bricks or structural repairs, lessor pays. Lessee is responsible for superficial stuff like furnishings, fixtures & fittings, re-paint, carpets, tiles, repairs, bathroom reno, HWS, A/conds, and internal / external superficial maintenance. So lessor is better off if the structure and things inside walls and ground are not 50 years old and hence likely to require replacement or repair. F/H owners have few costs with a newer motel.
Downfalls of motel vs commercial buildings ? More complicated leases; more components than an empty factory;
Leases vary considerably. The older ones are weighted in favour of the lessor. In legal terms, there is no superior position in the lessor/lessee relationship, however, some leases read like the lessee is an inferior being, and certainly is disadvantaged by some leases. No way to run a partnership.
When I sold the investment freehold, I rearranged a plain English lease on more even terms than the norm. I offered the F/H at a 10% ROI didn't have to listen to any requests to change the lease clauses.
The commonly occurring onerous lease clauses I dislike are :
Lessee gives the Lessor Power of Attorney over the lessee in the event of lessee default. ( POA is too much power).
Lessee pays the lessor's building insurance, (and yet no compulsion for the lessor to rebuild if destroyed by fire.) Unfair.
Lessee selling lease becomes held over as guarantor for new lessee until end of current 5 year lease period. Unbelievable.
Complying with any recommendations of AAA. (we found AAA very unreasonable sometimes, even demanding we render).
Lessee pays all lessor legal costs. (Lessors act faster when paying their own legals).
Rent review every 5th year according to value of business, (which is improved by lessee's hard work & expertise). Unfair.
If motel is destroyed by fire, Lessor is not obliged to rebuild motel or compensate lessee (how much did lessee pay ?)
Refurbishing and repainting every 5 years or whenever the lessor deems appropriate (might not need it yet).
PM me your email address and I'll email you a lease. Include your landline phone number if you want a chat.
Hi the crest
Thanks for the reply, your knowledge is excellent and we really appreciat the tip and advice. Will look over lease and compare to a commercial property lease.Lplate101Member@lplate101Join Date: 2010Post Count: 16
I was looking at buying a motel a few years ago but I bought residential instead ! !!
What attracted you to motel investment ?
What area of motel investment were you attracted to ?
Did that change ?
Why did you invest in residential instead ?
Here's a little Xmas cheer with mixed feelings.
There are some excellent motel leaseholds on the market right now for those seeking a motel.
And the buyers market continues.
We've found a great motel leasehold in good condition at the right price and in a strong location.
Now we're trying to move the purchasing process forward. However ….
In the market of motel leases and freeholds, we have entered the end of calendar year blank spot, where you can't get help on crunching numbers from an accountant, or find an active solicitor, or a broker who wants to work, so it means that making progress in the process of buying a motel leasehold or freehold very difficult. Naturally there's no sense from a Bank either at this time of the year. Feeling slightly frustrated by the Xmas blank spot, while at the same time enjoying the time with family and friends. Ho ho hmmm.
So guess I'll just go back and crunch the same numbers again in a different order and use the time to plan further.
A definition of "mixed feelings' could be the arrival of Xmas when you're trying to progress a property deal.
Hope you all have a very prosperous 2011.
thecrestalecpontingParticipant@alecpontingJoin Date: 2011Post Count: 1
Hello to all. I just discovered this site and this is my first post. and trying for the forums as for investing in various ways..
Welcome to the forum, enjoy yourself, it’s a powerhouse of info and help from members, it’s been a big help to me.
Like any Forum, add your help and input and members will help you in return.
Hope it’s as profitable and enjoyable for you as it has been for me (and many others).
Commercial property investors must be feeling the squeeze right now, with commercial loan interest rates near 9% which is about the same for many returns on commercial property. Makes it hard unless you have a big deposit.
But, don't forget, for those interested in motel leasehold investment, that motel leaseholds operated under management costing over $700K should return at least 20% under management, 30% plus a free home if you manage it yourself.
I'm a fan.