Generally, when buying a Motel business, it is the day to day business of renting out rooms that generates your investment return. The freehold going concern or leasehold is valued on the performance of the business. Whereas the passive investment is valued on the rent, location, and building condition. Motels in all forms are considered great businesses. This means the banks love to lend on all business types including freehold and leasehold Motels.
The value of a Motel;
Leasehold
With a leasehold business, you own the business goodwill, chattels, plant and equipment and through the lease document you have the right to operate your business at the freehold property for the terms and under the conditions set out in the lease.
The value of the leasehold business usually diminishes as the lease term shortens however, there are exceptions to this when the value increases.
Depending on location, leasehold motels will show between 30-35% return on the net profit after add backs. Banks usually lend around 50% of the value of the lease, depending on a buyer’s experience, business acumen and their individual financial situation.
Freehold
The benefit of purchasing a freehold going concern is that as owner of the property you can invest in capital improvements to increase turnover. Many freehold going concern owners prior to retirement, sell off the leasehold component and retain the investment, and therefore receive a rental income.
Freehold going concerns are very popular in the market and the demand tends to outstrip supply as most Motels have already been ‘split’. They are popular with individuals who want to have total control over the business and property and of course don’t want a landlord. Banks normally lend around 70% of the freehold value.
Investment
Freehold investments are usually sold on the value of rent return paid by the lease. The income is dependent on the location and age of the property. Banks will normally lend around 65- 70% of the value of the investment.
If you enjoy people and want a great return on your investment then a Motel may just be for you.