I’m looking at a deal at the moment which seems to be pretty good but I would like to know if any has some advice for investing in motels.
The price is $500K and the present owner would lease it back on a 25yr lease for $5000 per month.
There are 22 rooms and a residence and a licenced restaurant.
Are there any particular things I should look for or know about investing in motels?? I would appreciate your help.
Thanks
LeeI’d be looking at who pays for what with outgoings, maintenance etc.
State of repair overall,
Historic figures for renovation i.e life of fittings etc
Occupancy rates
Try & gather info on what price similar hotel/motels sell for & rent for
$5k a month sounds good now but in 25 years it will be of far less value – maybe index it to rise x% each year so you don’t lose the value of the dollarIt sound like you’ve got a great deal, however dont screw yourself by getting the lease wrong. As Anubis said do your research, and dont take a shortcut to setting this up either.
You could easily be on a winner, but if something is missed you’ll be reminded often over the next 25 years.
Good Luck…G7
Q.If the tenant goes under, what happens to the business?
A. You own a motel business as well (tenant cannot take the business down the road and leave you with a vacant building can he? The business is the building)If you did end up with the business, what rentals could you achieve?
(ie $60000pa divided by 52 weeks divided by 22 rooms = $52.45 per week per room) plus restaurant and bar and residence.Also, 25 year motel leases are worth money, it is an asset in itself.
Within the lease just ensure you have regular rent reviews, the tenant pays the outgoings and determine who is responsible for maintenance and refurbishments etc.
Cheers
JeffThanks for your replies.
The rent is increased by CPI each year with review after 5 years. Still not sure about outgoings but am in the process of finding out. As I would technically own all the fittings furniture etc I should be responsible for the maintenance, but would prefer this to be the tenants responsibility.
I’m also not sure who is responsible for the insurance – will need to find this out as I guess this would be quite pricey.
I’m quite excited by the prospect of the deal but am determined to take my time to do due dilegence and set the lease etc up properly.
I’m going to try and negotiate on terms not price.
Regards
LeeLee
If you are going to own the furniture and fittings then separate them from the land and buildings. These items depreciate in real terms at a much higher rate than the buildings, while you may achieve a better tax advantage in the short term you will eventually have to replace them.1. Price for land and buildings – return required
2. Furniture and fittings – return requiredYou may require 25 to 30 percent return on the furniture depending on the life expectancy of the items.
After deducting the furniture value from the purchase price work out how much you are paying for each room – sound good?
Cheers
JeffThanks Jeff
that is good advice. I will make sure I find out the value of all the included items.
Lee
Lee,
I bought a similar leasehold business several years ago and entered into a commercial lease with the landlord.I owned the furniture and fittings including things like HWS, aircon, carpets. These were part of my business and I was responsible for their upkeep/replacement/repair/depreciation.
I was responsible for all outgoings inc rates/water/all utilities/ interior painting & repairs/pub liability ins.
The landlord was responsible for the exterior painting/repair and the maintenance and repair of the fabric of the building/ins building/land tax
At rent reviews the rent was usually based on a figure of about 8% of valuation.So bsaed on that your 5k looks good, or it may be the property isn’t really worth 500k and the level of rent may just be a sweetener to get you in!
TomDo you need finance to complete the purchase? If so motels are seen as specialised securities, which means there is a very limited number of lenders that will provide finance and your lvr will be very low mainly around the 40 – 60% mark.
Mobile: 0425 358 293
Yes I do need finance. I have spoken to my bank and they said I would need a 40% deposit. I’m going to have to come up with a creative way of getting that as I only have enough for 20%. There is also a house included in the sale on a separate title so hoping to be able to on sell it maybe and have a longer settlement time to enable me to do this or pay 80% of sale price on settlment and the other 20% in 6 months.
Lee
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