A recent inheritance has us thinking about buying (outright, no finance) a motel unit very close to the centre of Brisbane. The popular motel on a main rd is earmarked for future development, but has four self contained units currently for sale.
We have been staying at this motel on our regular visits to Brisbane over the last 9 years. The rooms are spacious, relatively quiet and the place has always been well run. We have seen two or three management changes over this period.
Normally, over a 12 month period, we would stay here about 12 times, mostly on a weekend, for 1 night.. This would cost us $1500.
Apart from saving approximately $1500 per year, what sort of return and what pitfalls/costs could we expect from this type of investment?
We have spoken to the motel manager and will speak with the agent this week.
Thanks, Mal.
High management fees, high cleaning/linen hire charges, poor capital growth expectations, difficulty in exiting the property when you want to sell, tied to an onerous management agreement etc.
Are the units to be strata titled or sold on a sublease? Either way, it will be more difficult to get all owners to agree to a sale if the site is to be redevelopment & an offer made to buy the block.
Will the management retain ownership of any units? Ie their commitment to the motel.
Hi WeMal.
Scott makes so many valid points you must consider and you must explore all of them. Arguably one of the biggest things you need to consider is you would probably not want to enter into this sort of arrangement without being aware of 3 critical factors.
1. You will probably need to commit to a minimum 5 year plan.
2. You will need to look at, or find ways, to improve the property and/or its returns for re-sale down the track.
3. THIS IS THE BIG ONE! We have friends who run a similar arrangement and under their 5 year plan they have NOT had a single day off or away from the premises in the last nearly 3 years because no one else can fill their positions – and they overlook one of Australia's most superb beaches. Up at dawn and finish around 10pm.
I hope this and Scotts' observations have you researching real hard on this one.Hi Mal
Scott & Anthony have nailed it.
Assuming you are talking about buying one unit, not the motel.Why would a motel sell off popular units ?
If the motel is managing them for you, think about how or why this would be more profitable for them if you funded it instead.
Exit strategy depends on desireability of the property which depends on CG & nett profit and the security /reliability of nett profit
after costs of operation such as booking commissions or fees, net fees like wotif, advertising, cleaning, maintenance, repairs, periodic refurbishment, strata (if applicable), all of which are paid by the investor.For some accommodation operators, it's cheaper to finance each unit by selling them to an investor on say a 5% return basis than pay the bank 8%+ for commercial finance.
Others give the investor the leftovers or a pro-rata share of the pooled leftovers from all the units after operational costs are paid out, and the costs are often charged out at a very high rate above actual.
e.g. cleaning a motel unit takes 20 mins, 30 minutes max. actual cost $20. Investor is charged $75. Difference is management's commission.Investors replace the bank and guarantee to pay the fixed and variable costs, through quiet times and busy times,
definately a good deal for the operator.
Examine very carefully Scott & Anthony's points to see if it's also a good deal for the investor.Cheers
thecrestthecrest | Tony Neale - Statewide Motel Brokers
http://www.statewidemotelbrokers.com.au
Email Me | Phone Meselling motels in NSW
Thanks for the input so far. Seems it will be a bit of a learning curve for sure!
I’ll be speaking with the agent tomorrow. No doubt he will only tell me what he thinks I need to know.
Watch this space, so to speak.
Mal
Mal,
I have an apartment in Melbourne leased to a boutique operator. It’s an older style apartment in the french end of the city. The net return is 9%. You need to convince yourself that the deal is worth your money. I was happy with this investment as:
– it was a older (1930s) apartment with high ceilings, large and had character
– the block also has owner/occupiers
– once the lease expires, it will be able to be sold at a price higher than one under a commercial lease could
– the price was right
So there are some options out there that may fit the bill.Completely forget about being able to use it the few times of the year that you are in Brisbane. You need to treat any investment purchase as a business decision. You can get great deals for luxury hotels on lastminute.com.au etc.
With that in mind, you need to consider if you could do more with your money. Buy a house with 20% down which will most likely have better capital growth and put the rest of hte cash in a term deposit at 7% or diversify into shares. Weigh up all your options, do the math and take the best route.
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