More people than ever are finding themselves in need of on-the-road accommodation. Whether it’s for the purposes of vacation, business or some other reason the number of motel guests each year is definitely on the rise. As the need for motels grows, more and more people find themselves toying with the idea of buying a motel.
If you are considering buying a motel, there are some very important considerations that you’ll need to take into account..
Essential Considerations When Buying A Motel
Maybe more important than anything else, you want to take a good, close look at how sound the structure is. Does it need a new roof? Will it need one in the near future? Is the heating and cooling system sound and up-to-date?
Are there any septic problems? Some motel owners will add onto an existing structure, but fail to update their septic systems to accommodate the additional usage.
What shape are the furnishings in? .. Just like when you purchase a home, you should consider the cost of potential repairs when buying a motel.
Does the motel have enough accommodation capacity in order for you to turn a profit? The selling price of many older motels may be good, but this could be because the current owners simply don’t have enough guest capacity to generate enough revenue, and they can’t afford to add onto to the structure. Before you sign on the dotted line, be sure to sit and crunch some numbers to give you a clearer understanding of the motel’s financial potential.
Where is the motel located? Does it have a good tourist turnover? Is it a seasonal motel? Is it off of the beaten path?
Buying a motel that travelers won’t necessarily know about or come across could mean you won’t be able to generate nearly enough revenue to make the investment a worthwhile one.
Other Things To Consider
Other considerations include, but are not limited to:
- Is the motel franchised? If so, be sure to scrutinize the franchise disclosure.
- Is the current motel management up to par? Will you need to hire extra employees?
- What’s the competition in the area like?
- Is there a possibility of future competition in that area?
- Is everything about the motel up to local, state and federal code?
- Are there any current contracts with suppliers?
- Will you be able to honor those contracts?
The hotel and motel industry is definitely a sound industry. This doesn’t mean that every motel is a sound investment. Before buying a motel, be sure to consider everything first.
Guidelines For Finance, Specific For Motels Only.
This section on finance is “Industry Specific” and only deals in providing finance for motels in the following combinations.
1. Freehold Motels including the business component
2. Leasehold Motel Businesses
3. Investment Freehold Motels
The first step is to find a lending institution who accept motels as an acceptable line of business and:
1. The business operation of the motel fits within the lenders guidelines.
2. The Applicants can prove that they are capable of operating the motel business.
The business and the applicants are carefully scrutinised by the lending institution and if the application is accepted the interest rate is set calculated on how the lender assesses the risk factor.
High Risk – Higher Interest Rate
Low Risk – Competitive Attractive Interest Rate
The scrutiny process can be exhaustive with procedures in place to use Industry benchmarks collected by the lender from all areas of the business spectrum.
Lending Percentages on the value of the motel:
Approximate maximum lending percentages on good risks based on the lenders value of the Freehold and/or Business.
1. Freehold Motels including the business component 60% to 70%
2. Leasehold Motel Businesses 50%
3. Investment Freehold Motels 70% to 75%
Other income and security could be taken into consideration allowing the borrowings to be increased.
The bottom line is that you must know the business’s true net profit to assess whether you can not only meet the interest component but also the other expected and unexpected costs that could appear.