Hotel managed properties

Hello,

My brother owns 19 motels … exactly what is your question.

Monolopy sell 4 houses buy 1 motel … it works

D

I too would like to know more about Motel investing,what would i need to see (figures etc) to determine the profitability of these,i suppose because so much might be cash payments for some overnight stays i would like some tips as to how to evaluate a good one from a bad one.
Thanks

They may be fine, however here's something to consider:-

They guarantee a percentage return based on sale price for a set period of years.  Have you ever wondered how they manage to continue with guaranteed payments to you during the guarantee period if this time also coincides with a decline in say tourism?  

It is fair to assume that there is a decline in visitor/tourism numbers at present because of GFC, growing unemployment etc – agree?

I would be seriously considering this as a non- investment product.  Just ask any lender at the moment how much they are prepared to lend against this type of investment – the answer may shock you.  The less they lend the higher the risk to you.
 
Generally these apartments have the rental guarantee built into the upfront price to cover the guarantee period.  To guarantee any payments into the future for accomodation type investments when there is no way to guarantee that the rooms will be used really raises some questions.

I agree with andrewbeech above.  Be careful.

and finally to illustrate, here's an example for thought:-

purchase price say $300,000 with rental guarantee of say 7% for 3 years.  (a fairly typical scenario)

The operator has to be paid and all the outgoings associated with such an investment also have to be paid (management fees, rates, maintenance etc etc).  
As a general rule your return is usually around 45% of gross monies received. 
Therefore to guarantee you $21,000 per year x 3 years the gross figure per room per annum must be approx $47,000.  Most of these style of establishments generally are around 3 to 4 star  so let's assume a nightly rate of approx $150.  This equates to approx. 313 nights per annum or an occupancy rate of approx 86% – a fairly high consistent occupancy rate is required considering the amount of accomodation competition in the market place today. 

This may sound long winded, but all I'm trying to say is be careful. 

Good luck with your decision.

Hi D – Wealth4Life
It seems this post and my personal messages and emails to you are either being ignored or ALL of them are not getting through for some inexplicable reason.  Hopefully I have not put you on a spot somehow, and hopefully your brother really does own 19 motels as you say in your post.  So in the spirit of mutual assistance on which this forum is based, I'm asking for a reply from you for assistance in reaching your brother so as an owner of 1 motel, I can ask him how he builds to owning 19 motels and admins that many.
Any assistance would be most appreciated.
Regards
thecrest

Hi Bluegrass
Is that 40%  a typo ? If not, it sounds pretty good to me.

Also I'm confused – would you explain what you mean by " a negative geared cash positive property " , which appears to me to be a contradiction in terms.

Also have to agree with you that motels are hard to finance as the banks want high LVR even from those with the right track record in hospitality. Buyers of these motels need these deposits and this is best case scenario –
Freehold 40% deposit — ROI 14% – 15% owner operated
Leasehold 50%  deposit — ROI  25% – 30% owner operated
Ouch on the deposit. Yes they can be hard to sell if not priced correctly and few ever are until the vendor has spent considerable time on the market and been conditioned down to meet the market and current conditions. However, each one will sell within 12 months if priced at market price, that being the appropriate price for what is is, where it is, what condition it is in,  motel market outlook conditions, and what it netts. (Conditions apply).

Those contemplating buying individual managed motel units should bear in mind those selling and managing it will want money for admin, cleaning and maintenance –  all at premium prices, some with overriding excess fees.
It really is a good lurk for the seller to refinance the motel this way and pay the buyer 4% for their money instead of the seller using borrowed funds from the bank at 7% ish commercial rates. Plus the seller's strategy shifts future operating costs onto the buyer comprising admin, cleaning and maintenance , plus refurbishment every 5-7 years, depending on the star rating and policy of the establishment.  The buyer provides cheap finance and pays some motel operating costs, that's what it's usually all about.
 The key is the homework. Which you're doing.
Cheers
thecrest