Q. Difference of 50% ?.
Well the ROI depends eventually on what you pay for it, but yes the difference can be that much in the extreme. It would be difficult to sell a motel on ROI of less than 10% to a buyer operator because an investor can buy one and be a laid back passive non-working landlord and get paid rent amounting to 9% ROI with no work at all.
Q. 35% Occupancy?
Assuming this is coastal, it’s still very low and there should be upside there BUT with the following provisos :
the motel is in good condition and does not require high expenditure, or
there are no unavoidable irreparable factors limiting occupancy like it’s next door to a nuclear reactor, or next door to a 5 nights a week battle of the bands venue,
or some other similarly poor location, or other “limiting factor”,
Occupancy can usually be lifted, but it’s nett profit that you bank, not occupancy, so think of both.
Send me details of the motel by PM and I can give you better info than my stabs in the dark on limited info.
thecrestDave The InvestorMember@dave-the-investorJoin Date: 2011Post Count: 3
Could you please confirm that you received my information by PM as I am not sure how to access your reponse.
DaveJacko10Member@jacko10Join Date: 2011Post Count: 2
Hi The Crest,
I have been reading up on this forum for a few weeks now and have really appreciated your feedback for other motel investors.
Today i signed up as I am interested in a leasehold Motel in Victoria. It also operates as a group accommodation facility for school groups.
The motel is located in coastal victoria in a destination town.
It has 18 units and a dormitory/hostel room.
It is listed at $720,000 with an average net profit of $170,000 for the last 3 years.
Gross sales are about $410,000.
I am hesitant with the asking price as the current market is quite vulnerable and banks don't seem to be lending a whole lot for leaseholds.
Can you offer me any suggestions?
Without knowing other details of the leasehold, on face value it is overpriced at ROI 24% ( Nett $170K is only 24% return on cost price of $720K ).
30% is more like the market rate, so price should be more like $570K, provided it is in good condition, minimal maintenance, reliable income etc. (remember school groups are low tariff but high wear n tear, sorry kids). Hope the rent is low. Economic downturn on spending and reduced consumer confidence will impact immediately on school groups and on parents’ excursion spending decisions except compulsory curriculum trips. Periods of tight lending reduces buyer numbers so that should reduce sale prices if it continues long enough.
But these comments are only based on very limited info you have provided and the whole picture of the leasehold may provide compensations.
What a difference a week makes in banking attitudes. Lending for motels has tightened since last week when the USA ‘s credit rating slipped. Banks spook like gazelles, or make a good show of it at any excuse. More reasons to use finance brokers, like the ones who regularly post their help on this forum and have thousands of posts to their credit showing how long they have been on the forum helping us. They’re the ones who deserve our business enquiries. Had exactly this problem with NAB this week and I’m fuming at NAB. Customer service from banks is really about the smile on the face of the tiger. And they serenade us about building relationships….? .
So when finance is tight, you need to structure a quality deal through your accountant showing cash flow projections, with a quality property and supporting valuation, and submit it through an experienced broker thereby surrounding yourself with a strong team.
Post more details if you want more info.
Re Finance for motels, I’d be very interested also if any brokers could shed some light on current lenders in this area.
Any info would be most appreciated.
NAB appears to be crying increased risk since last week’s economic shakeup. Any excuse.
thecrest41TeaBagsParticipant@41teabagsJoin Date: 2011Post Count: 1
I am totally new to this game called "Motel investment".
My back ground is small time builder / developer
I am looking at the possibility of building a motel. Yes only if the numbers stack up.
I have been searching the internet for some "financial KPI" for small motels and unfortunately
I can't seem to find any. Any ideas where I could look.
Most of my ratios are from a developers point of view. such as
Financial Ratios Debt to Assets Debt to Equity Debt to Mkt Value of Assets
Operating Ratios Return on Assets Return on Equity
Income Statement Gross Margin EBITDA Margin Net Profit Margin
Though since reading thru the previous comments on this forum I have realised there is so much more involved.
Silly as it may sound I never really looked at the motel business side of things, until now
So for me, this is a whole brand new game.
I realise now that there are many different sub-business / business structures that may be considered.
1. As a developer
2. As a builder
3. As freeholder motel owner – Owner – operator
4. As freeholder motel owner – Owner – operator under management
5. As freeholder motel owner – who sell the leasehold
I have no doubt a person of your wisdom could name many more..
Please let me know if you know more
1. My question is would you know the key KPI that the motel industry uses to compare one motel to another.
2. If not where would I need to look.
3. Why are you against investing in towns near the mines…?
4 . I use to play football down at Como football club, have you visited the hotel lately .
5. Do you grow bonsais?
I very keep to learn what I can,, thanks for any the help and the sharing of your experiences to this forum
Cup of tea any one…!
Sorry I don’t understand the term “KPI” .
Don’t do bonsai but admire them, it was a meaningful logo for us though (plant a tree, eat the fruit, not the tree).
Haven’t been to Como for years, but loved Blue Heelers.
There are a few other ways of motel investment and some typical returns are listed :
Tenant/Leasehold owner – operate under management,(pay rent to Landlord freehold owner) 22-30%
Tenant/Leasehold owner – owner operator,(pay rent to Landlord freehold owner) 30%
Landlord freehold owner – lease property to Tenant/Leasehold Owner. 9-9.5%
Landlord freehold owner – owner operated 15%
We used to avoid considering investment in mining towns because if mining slows or closes, investment stalls, exit strategy gone.
Preferred a more diversified customer base to spread risk. However, a 5 – 7 year in & out plan would be an acceptable risk in a strong area like Singleton or Muswellbrook NSW. Bob Brown is not encouraging us at all.
Comparison of the value of one motel to another is a valuer’s job, but we use a few different measurements.
To compare apples to apples, one must make them all apples.
That means levelling the playing field so that you are comparing motels on an equal basis, and this requires
considering a number of factors such as :
Cost required for renovation or repairs to bring each motel up to a standard where it’s operational without further unreasonable expense.
Running costs above normal.
Risk factors pending such as town by-pass, new construction of competitor, strength of local economy, etc.
Cost of periodic refurbishment – that time when you’re glad you have only 30 rooms not 75.
% ROI. – $ Nett profit divided by cost price x 100.
NPAR. – $ Nett profit after paying rent and expenses.
Annual average occupancy rate %.
RevPar – Revenue per average room available, calculated as total annual revenue divided by average number of available rooms, which excludes periods for rooms off-line for repairs.
Rent to Sales %.
Any upside opportunity such as expansion, upgrade or increase in tariff.
How much will rent be in 5-7 years time according to the lease formula ?
Quality of Lease clauses – friendly or onerous? Term remaining etc.
You could summarise by asking how strong and reliable is the nett income over the next 5-7 years ?
And all things considered, how much will that nett profit be ?
And how much did I have to pay to buy that income stream?
Ease of operation ? (nobody wants daily operational headaches from something with square wheels)
And will the motel be a desireable property to buyers when I sell?
And can I get my money back or better?
We’re not developers. But there are opportunities for those with reno experience
who could reno a motel suffering from low figures due to tired rooms,
operate under management for about 2 years to develop credible figures,
then sell or lease it out. (CGT)
Hope that sheds some light.
thecrestJacko10Member@jacko10Join Date: 2011Post Count: 2thecrest wrote:Hi Jacko10. Without knowing other details of the leasehold, on face value it is overpriced at ROI 24% ( Nett $170K is only 24% return on cost price of $720K ). 30% is more like the market rate, so price should be more like $570K, provided it is in good condition, minimal maintenance, reliable income etc. (remember school groups are low tariff but high wear n tear, sorry kids). Hope the rent is low. Economic downturn on spending and reduced consumer confidence will impact immediately on school groups and on parents' excursion spending decisions except compulsory curriculum trips. Periods of tight lending reduces buyer numbers so that should reduce sale prices if it continues long enough. But these comments are only based on very limited info you have provided and the whole picture of the leasehold may provide compensations. What a difference a week makes in banking attitudes. Lending for motels has tightened since last week when the USA 's credit rating slipped. Banks spook like gazelles, or make a good show of it at any excuse. More reasons to use finance brokers, like the ones who regularly post their help on this forum and have thousands of posts to their credit showing how long they have been on the forum helping us. They're the ones who deserve our business enquiries. Had exactly this problem with NAB this week and I'm fuming at NAB. Customer service from banks is really about the smile on the face of the tiger. And they serenade us about building relationships….? . So when finance is tight, you need to structure a quality deal through your accountant showing cash flow projections, with a quality property and supporting valuation, and submit it through an experienced broker thereby surrounding yourself with a strong team. Post more details if you want more info. Good luck Cheers thecrest
Much appreciated thecrest.
As i said my concern is that the price is too high. The current market is also a good point that you make, in that school expenditure will likely decrease and there will be less disposable income to spend on extra curricular activities.
The business has been for sale for quite a while, although i feel the owners are reluctant to lower the price to much. Obviously they are going to be biast in how much they beleive their business is worth.
The lease is 7500 per calender month and has 17 years remaining of a 25 year lease. There is also a 3 bedroom residence on site.
What other methods should i be valueing this business by? apart from ROI?
Also is reponse to a previous post "KPI" refers to Key Performance Indicators
Thanks for the KPI info. Good phrase to have.
17 years is shorter than ideal, so cause for a lower offer.
30% cap rate for a leasehold is based on an absence of a range of negative factors which if present may detract from the desireability of the business and property, several of which factors are major or higher than normal expenditure pending, or less than 21 years remaining on the lease. Buyers think …. ” hmmm 21 years on the lease less a few for me to operate it, then I sell with say 17 years remaining, hmmm, not long before it runs out, so let’s estimate the annual cost of amortisation of that lease by dividing the cost price by 21, and deduct that from the annual profit, because when I sell it with 17 years remaining, the annual cost will appear higher to a buyer (lower profit) and the end of lease will appear closer, negatives. “
But with a lease of 25 or 30 years, buyers tend to regard it as a life sentence and don’t bother to amortise it as a cost. Just human nature.
So, provided all other things are equal in a comparison, a 17 year lease is worth less than a 25 year lease.
Fixes are : (a) lower the sale price to compensate, or (b) vendor secures agreement with the landlord and buys more years from the landlord, and the lease document expiry date changes.
What other methods of valuing ?
Wow, big selection, but trying to put it in a nutshell :
Consider that you are buying a commercial income stream (leasehold) with a limited lifetime of say 5-7 years, before you sell. Then it is clearly about purchase price including purchasing costs, nett income after expenses and value of benefits during that holding period, and nett re-sale price after selling costs. Compare that as a ROI % and you have a rough basis for comparing various leases as apples to apples. Assuming you got your money back ( incl buy n sell costs) on re-sale, then % ROI is simply income divided by cost x 100.
Very simplistically it looks like :
INCOME + BENEFITS
(value of benefits ? up to you = cash, depreciation, free home, tax benefits, inclusions like internet, austar, pool, commercial food “wastage”, phone, utilities, no commute, self employment, high cash flow, low debtors, priceless kids business & hospitality training by osmosis, etc etc. )
Prepare for CGT triggered by re-sale.
Get expert qualified accountant opinions on this and anything else here, usual disclaimers apply because I’m not a financial planner, accountant or expert. Long live all the lawyers.
Here’s a link to an article written by a broker.
He says opinions vary, then gives his.
Rules of thumb must allow for various thumbs.
I have been reading your posts on Motels incl Investment which vastly interests me as I have been actively looking for this for a while now. Could I begin by saying your posts have been very informative & I have been lucky to come across your insights in the Motel world . I am also in the process of developing & building a motel at the moment. On the investment front though could I pls request you sedn me a copy of your standard lease mentioned by you previously??
As only one of the many Forum people, welcome to the Forum.
Glad you found some useful information. The Forum and others have helped me so repaying the cosmos works for me.
Information is our most precious commodity which we exchange here as freely as possible and if everyone contributes in some way then it helps others.
It sounds like you have embarked on an amazing journey and any information you’d care to share here would be welcome as you’d know from looking around..
I’ll see what I can find in a lease for you. Pls advise email address by posting here or PM.
Pls educate me on how to PM you….
Re the Motel, it is exciting however banks are extremely conservative at the moment & so are valuers, so it is a double whammy. Plus the QS professionals put a high figure on construction cost, which makes it challenging to justify project viability to the bank.
LVRs are becoming more conservative for total project cost, which means very high equity is required to make this work.
Calling BANks conservative on motel lending right now is charitable and conservative in itself.
Just got right royally waltzed around by a BANk for over 3 months “building relationships” ,
oh yeah that’s a good one, then they shrink their LVR at the last minute so you don’t have time to use a competitor.
Appalling behaviour even for a BANk, so unprofessional.
Where’s your motel site ?
To access PM,
left click on “thecrest” in blue header, then left click on “view public profile” ,
then left click on “contact” tab,
then enter subject & message,
then left click on “send email”.
Totally Agree with your BANK comments, unfortunately cant live without them!
My motel site is in Wentworthville Sydney
Do you know the area?
The nearest competitor is Formula1 about 1.5ks down the road on the Great Western Highway.
thecrest, By the way I have PMed you, Pls let me know if you have not recd itThx
PM worked fine. Sending material.
Formule1 owned by Accor do their homework. Their philosophy is choose a site which has the minimum level of traffic flow according to RTA & Council traffic counts, and must be near or next to food & fuel. In retail terms, they’re “category killers” and king of no frills, the vending machine of the accommodation industry. Not a fan, but at least they filter out the lowest paying guests in your geographical area so you don’t have them hassling you for a $59 room. Good area where you are. Years ago we operated the Banksia Motel at Bass Hill, wish we owned it.
Hope your project is a great success, sounds amazing, it’s way out of my league so I’d love to talk to you about it sometime.
thecrestboogaParticipant@boogaJoin Date: 2011Post Count: 1
<moderator: sorry, no spam please>
Hmmm, you’ve just joined, placed 3 posts all ads all the same, not helping anyone except yourself. Not really how the Forum works as I understand it. Genuine forum contributors who join to share n help others while getting help for themselves is closer to the Forum purpose I believe.