Motel Mingle Forums Motel Valuations Freehold or Leasehold, newbies looking at the market

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  • #3682

    waynephilip

    Participant

      Hi All,
      we’ve been lurkers for a years or so now reading, researching, dreaming and head banging on the thought of getting into the “hospitality industry” of motels.
      can anyone and there are a few of you out there who can give their thoughts on both Freehold and Leasehold? myself personally i’d rather freehold, with the option of being able to lease it out once we have ‘had our fun and enjoyment’, inland against coastal.
      we are looking at NSW, mid to northern of the state, defiantly open to area.
      we’re not afraid of hardwork, having renovated 3 houses, a couple of investment properties and helped out friends with bathrooms, kitchens, and such.
      we have spotted a freehold for sale (mid north coast( coffs coast area)), totally run down, major works being needed (exposed brick walls needing plaster cladding, bathrooms, ceilings, with AC needed), alleged 26 rooms (25 with coach drivers room) on acreage, restaurant (partially running), room for expansion on many fronts, local international heritage site across the road, township of about 1500, major route between two major cities.
      oh and to top it off we estimate about 500-600K being spent on it to bring it up to an acceptable standard based on tradies assisting for a fast turn over of the rooms, us assisting where and when possible.
      the owner is asking far to much for a 13% occ level.
      sorry to be asking so many questions
      we can see the potential but need some thoughts from you guys in the industry now..
      kind regards and keep the great comments going..
      Wayne and Philip

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      • #6053

        PaulPaul

        Participant
        • Topics Started 26
        • Replies 80

          Well done guys – this is just the start of a whole new life for you. Tell me, have you done any motel work before? (Just asking…)

          • #6059

            waynephilip

            Participant
            • Topics Started 5
            • Replies 17

              Hi Paul
              only work done in a motel is well eat sleep and use the bathroom..
              we both are currently managers HR and Spares
              limited food experience but we know what we like
              I have done industrial cleaning before but again we both know and understand what is wanted by the guest and industry
              finance will be me and the accountant
              depreciation schedule will be done straight away with the scrapping done yearly on what we throw out
              wayne will be the designer as he has that flair and insight to it
              maintenance will be me
              renovations the both of us
              web site external company to make it work
              oh and the re-branding..
              so I think we have it covered, I hope..

          • #6049

            BusybeesBusybees

            Participant
            • Topics Started 22
            • Replies 232

              P.S. …. We stayed here some 30 years ago when my husband was best man for a wedding and i was 8 months pregnant with our 2nd child!!! It rained 9inches in 3 days… Had to come down the mountain so slowly (just about in reverse) cos Pete had gotten food poisoning from prawns the night before and the waterfalls were all overflowing over the road. Scariest trip I’d done for a LOONNGG time.

              • #6063

                waynephilip

                Participant
                • Topics Started 5
                • Replies 17

                  Hi Busybees,
                  buy chance was it the lookout or in town??
                  would love to know.

                  and thanks for your support..

                  • #6069

                    BusybeesBusybees

                    Participant
                    • Topics Started 22
                    • Replies 232

                      Hi waynephilip,
                      I am sure it was yours because I remember the ceiling in the bathroom letting in so much light (was good because Pete spent a bit of time in there…bad prawn!) and the room itself looked familiar.
                      I don’t recall too much of the outside, we arrived, got ready for the wedding, went to the weeding, drove back down the mountain the next day!

                • #6045

                  BusybeesBusybees

                  Participant
                  • Topics Started 22
                  • Replies 232

                    Woohoo!! Good luck and may it be everything you have dreamed for it and more
                    cheers

                  • #6041

                    waynephilip

                    Participant
                    • Topics Started 5
                    • Replies 17

                      Good morning all
                      well we have some fantastic news to share, we have gone unconditional on the contract with settlement to occur on the 20th of this month.
                      the motel if you would like to have a gander is the lookout motor inn, Dorrigo
                      fun times ahead
                      many thanks for your support and comments..

                    • #5933

                      BusybeesBusybees

                      Participant
                      • Topics Started 22
                      • Replies 232

                        Congrats to you both, Hope all goes to plan

                        • #6105

                          imageBallina Colonial Motel

                          Participant
                          • Topics Started 10
                          • Replies 87

                            As one moves in, another moves out. Yes, we have sold our freehold after thirteen years of hard yakka and will retire to the Sunshine Coast in June. Interesting that the purchasers come from Armidale, just up the road from you guys!

                            We know your new purchase and are aware of the challenges you have ahead and wish you the very best of luck.

                            To be successful, you have to be ‘visible’. And I think this will be your greatest challenge. Don’t put it to the bottom of your list; put it at the top. Your online presence is non-existent. Your website has no online booking button, which is a must these days and OTA marketing has also not been used.
                            Create something different and exciting and the punters will poor in.

                            • #6152

                              waynephilip

                              Participant
                              • Topics Started 5
                              • Replies 17

                                Hi Ballina Valley
                                First off congratulations on the sale of your business.
                                we totally understand what you are saying about being visible to the market and this is one of our main top priorities in the next few weeks.
                                this was one of the reasons why we went for this place, that and its run down nature and the lifestyle factor as well.
                                we have some many first things that we need to do from re-branding, internet presence, room re-models and re-launching.
                                here’s to the fun and games and who knows what around the corner.

                          • #3814

                            BMM

                            Participant
                            • Topics Started 6
                            • Replies 46

                              Hi WAYNEPHILIP, I will weigh into the conversation with or own experiences.
                              We bought the Freehold 12 years ago and the first 2 to 3 years saw a high growth in turnover and occupancy. However, in the last 8 years growth has been stagnant and profits have been hit hard with a major increase in online bookings and therefore commissions.
                              This said we make a reasonably solid income, and are very happy in our choice to enter this market.
                              You must be certain that the rewards meet the effort and hours that you commit to your endeavor and should be looking for an income stream that enables you to live in the fashion to which you presently have, or your enthusiasm may fade pretty quickly.
                              I would highly recommend Freehold against Leasehold, purely as I would advise people to buy their house instead of renting.
                              Landlords and Leaseholders will invariably clash over issues and at the end of the day, you want to be in control of your own business.

                              • #5910

                                waynephilip

                                Participant
                                • Topics Started 5
                                • Replies 17

                                  Hi All,
                                  just a quick update..
                                  Our offer and terms have been accepted, house sold, just waiting on the bank to come through with their valuation now.
                                  once we go unconditional, i’ll let you know what the motel is..
                                  Tell you what, this whole experience has been trying, very trying indeed.
                                  All going well this week we should have confirmation from the bank, then the fun begins..

                              • #3778

                                waynephilip

                                Participant
                                • Topics Started 5
                                • Replies 17

                                  @Ballina Colonial Motel, hehehe, sorry playing this one close to my chest at the moment, but i did speak to your wife today and please feel free to give me a buzz on the mobile, i’m busy most nights but you can get me after 3.30 on the way home from work..

                                  based on this years P&L the net profit with add backs will only be around the 50-60K mark, not enough to keep the both of us and i think this is being a bit generous as there is none to minimal maint. being done, so i would go out on a limb and say that if eveything was “kept right” then it would almost break even.

                                  i’m starting to think that this place should be given a miss indeed

                                  • #5929

                                    pnm

                                    Participant
                                    • Topics Started 4
                                    • Replies 17

                                      Congrats and good luck! Hope it all goes as you have planned ūüôā

                                  • #3770

                                    imageBallina Colonial Motel

                                    Participant
                                    • Topics Started 10
                                    • Replies 87

                                      I’m curious guys as to which motel you are looking at in the Coffs Harbour area, which is just down the road from me?

                                      I can’t find anything listed with any of the main Motel Brokers that fits your description. The only place my research took me that might fit the bill, was to the Bellingen Valley Lodge?

                                    • #3767

                                      imageBallina Colonial Motel

                                      Participant
                                      • Topics Started 10
                                      • Replies 87

                                        Wow guys, you are really taking on a challenge on this one!

                                        Two contributors have eluded to monies spent improvement/refurbishing a freehold property will ‘increase the value of your asset/asset appreciation’. This is not strictly true; you are buying a business not real estate and like any business its value is based off its profitability.

                                        As a freeholder and in the midst of the GFC, after five years hard slog, the value of my property was exactly the same as I paid for it, if not less!

                                        There is a set formula for valuation purposes, which as a going concern, brokers will tell you is based on a return of between 12-17%. In reality, if you spend fifteen minutes and go into one of the Motel Broker websites that show both the purchase price and the net profit, you can work out the return %s. I do this on a regular basis and the last time the average was about 12.5%, which coincidently is the figure the banks will be looking for if you need to borrow. So based on the 12.5% average, if the business is making $200,000 net profit (after add-backs), then the value will be $1.6m.

                                        Liz came closer to the truth when she said that as you improve the standard of your property then you charge higher rates (competition permitting), improved profitability, maybe a higher STAR Rating, improved reviews scores, reputation and occupancy. A freehold property with all the works done is much easier to sell and then a little ‘blue sky’ can be added to the price.

                                        Obviously with a freehold, you are not beholding to anyone; you are fully in charge of your own destiny, but you still need to make business decisions as to where the money is best spent. If you are going to spend $600k on improvements/refurbishment, then using the 12.5% return basis, that must generate you a further $75k net profit. That is a lot of bums on beds!

                                      • #3757

                                        waynephilip

                                        Participant
                                        • Topics Started 5
                                        • Replies 17

                                          Hi Liz,
                                          either way you go, our ideal would be 10% minimum return investment back into the business, be it advertising, renovation or general upkeep, gardens, better furnishings and linen.

                                          we’ve read up on the star rating system and wow, if you were to look at our current styling in our home, we would make 4.5 stars easy.

                                          and like many of you, when we go away, we pick the living daylights out of each place we stay, (would we want this or that, and how could we improve this room at minimal cost).

                                        • #3753

                                          Liz

                                          Participant
                                          • Topics Started 1
                                          • Replies 16

                                            Spending money on refurbishments as a Leasehold owner does increase the value to the Freehold owner but also gives the leasehold owner the opportunity to increase value to the Leasehold. If you continue to put back into the motel business you can steadily increase rates with not too many complaints of high room rates.

                                          • #3749

                                            waynephilip

                                            Participant
                                            • Topics Started 5
                                            • Replies 17

                                              @Motel Mingle
                                              apologies for the amount of question in the one blurt of questions.
                                              i agree , we’ll keep it to leasehold or freehold then..

                                              @Mountain Man
                                              the freeholder is retiring and selling off all of their assets, mainly racehorse stables and nags, so we’re thinking that this property was a ‘tax adjustment’ for them.
                                              so with regards to the option of leasehold on this one i think it will be out of the question.
                                              the dollar value they are asking is well and truly above anything in the area.
                                              the land has great potential for a number of things, truffeire on the non usable sloping land, area for kitchen garden, plus a green maze.
                                              also has the potential for extra units to be cantilevered out facing the escarpment.


                                              @Liz
                                              , Hi and thanks for that, but again this would be a freehold plus investment, im not to cash hot on a leasehold, as a current landlord, i know its a pain to have to pay for almost everything.. but then if its a tax adjustment, then the landlord does benefit.. ahh the pro’s and con’s of it all..

                                              @Busybees, its interesting that what you are saying about the drop off in trade, but i work in purchasing for Auspost dealing with machine spares being sourced locally and internationally, and as everyone knows POST is making some changes and adjustments (more to come), new reps trying for buisness, and those that we have the talk out there is that this year and next for small manufacturers and others is going to be a hard slog.
                                              but in say this, there is a world heritage national park nearby and their figures are slowly increasing..
                                              we are both people’s people and are not afraid of hard work indeed, especially as we have just done an owner build extension, i’m a sparky by trade, and wayne has built a muddy.. i do at least 9-10 hours a day at work and travel for another 2 hours on top of that, i think that it would be both a pleasure and a sentence (at times) being able to work from home..
                                              we know the saying about west for the $$ but its a major weigh up on capital appreciation against income against resale-release..
                                              we both have staff under us in our current managerial roles, and defiantly expect to pay through the nose for relievers..

                                              thanks all for your comments so far..

                                              maybe im dreaming about the potential?

                                              as for the good will portion, i would say that there is non at all , but i feel it has the potential to become a great accommodation buisness.

                                            • #3717

                                              BusybeesBusybees

                                              Participant
                                              • Topics Started 22
                                              • Replies 232

                                                Hi guys, and welcome to the Mingle.
                                                We are fairly new to the business having only had our leasehold for not quite 3 years.
                                                There are a couple of brokerage businesses that offer conferences, they are held in Sydney and Brisbane (and also in Victoria). We went to one in back in 2011, and found it extremely helpful. They not only give you the ducks guts of the business but if you take the P and L’s of places that you are interested they will also crunch the numbers and tell you if its worthwhile. They even told us back in 2011 that 2014 would be the year that make or break you, how true they were!! They offer advice on every aspect of the business and have professionals that are not directly associated with their particular brokerage firm. Should you wish the name of the brokerages just email me, unless Mick says its OK for me to put their names up here in the open. (I don’t want to give them free advertising but they service they offer is great!)
                                                This business has changed dramatically over the past 3 years, as any honest motlier will tell you.The rep trade has dropped off due to the internet and occupancy rates had dropped drastically also,I believe it had something to to do with the Aussie dollar (as it has started to improve as the dollar is dropping)
                                                Mountain Man’s advice on negotiating your lease is ALL important especially if the place is need of repair. Otherwise you pay for all the refurb and he gets all the return. Also the rates and building insurance is also something that you should push for, if you can.
                                                Most landlords will do 5 yearly increments to extend your lease, provided you are doing the ‘right’ thing.
                                                We were told that leaseholds were the go, but as I said, this business has changed that if we had our time again we too would have gone for a freehold. This is also what the brokers are saying at the moment.
                                                One other important message was, “Coast is for show, west is for dough”, so when looking for position, perhaps keep that in mind also.
                                                Should you decide on the freehold, then obviously any improvements you make is only increasing the value of your asset. If you are handymen, then all the better.
                                                The hours are long, and you do “fight” for every dollar, you are really tied to the job, again as Mountain Man said, relief staff are expensive, and its not like you can just close the doors and have 2 weeks off or even a weekend!! You do meet a lot of great people, and if you are a person’s person then this is the right fit!
                                                Wishing you luck, whichever way you go.

                                              • #3714

                                                Liz

                                                Participant
                                                • Topics Started 1
                                                • Replies 16

                                                  Leaseholds are not always a depreciating asset if you think you will own it for a long time. You can always ask the landlord to extend your leasehold, you don’t have to wait until it has finished.

                                                • #3697

                                                  Mountain Man

                                                  Participant
                                                  • Topics Started 2
                                                  • Replies 26

                                                    Leasehold is ok if your debt level is low, and if you are of the understanding that (unless you are very fortunate) you are buying a depreciating asset.
                                                    If it is a new lease, negotiate both the price and terms. Try to get the lessee to cover land rates and building insurance, and try to get a clause installed that says the owners must spend $xxxx each year on upgrading the infrastructure. Make sure the asking price is justified by hard figures, not projections.
                                                    After running a lease for 10 years, my recommendation would be freehold, at least there is a better chance of your asset appreciating in value.
                                                    With any motel: Don’t think you will be sitting in your recliner waiting for customers to come in…..it is long hours and relief managers are expensive. One of you being a handyperson is a great advantage.
                                                    Bear in mind that (for a freehold at least) you will pay a premium for properties near the coast. Generally speaking, an inland motel is only worth it’s return so you will likely pick up a better business.

                                                  • #3688

                                                    Motel MingleMotel Mingle

                                                    Keymaster
                                                    • Topics Started 38
                                                    • Replies 64

                                                      Hi Wayne and Phillip, first of all, welcome to the forums and I hope you get heaps of information here. Secondly I suggest that you keep your questions short or break them down into different topics. I think this will be more beneficial to you as others may be hesitant to answer as they may feel that they may not be qualified or experienced in answering all of your questions in the post.

                                                      How about we keep this topic to Freehold or Leasehold?

                                                      Finding answers.        Sharing ideas.        Solving problems.

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