30 Apr 2013
Words Tim Admin

Comparing a motel investment

In virtually all business sectors, owners fall into two categories – investors (passive) and operators (active). This is certainly the case in the motel industry. While both seek strong growth and returns, the investment aims and motivations can be quite different. Owner-operators are directly responsible for the performance of their investment, usually with a strong personal, emotional and lifestyle motivation. Passive investors, however, take a more dispassionate view, their eye purely on financial outcome.So, when considering motel freehold investment, they naturally size it up against other available forms of property investment. For me, comparisons between motel freehold investment returns and those generated by conventional property investments are contentious.Variable circumstances, and the very different nature of the investment types, make comparisons difficult. Still, the question is often asked. So, let’s take a look using general, ball-park assumptions.Residential investments – houses or units – might bring 4-5% after all out goings. Industrial warehouse or commercial office/shop spaces are selling on returns of under 8%, some as low as 6-7%.Motel investment, on the other hand, generally returns 9%, depending on construction standard, location and age, and may be as much as 9.5-10%.The argument I most encounter from investors, however, is that motel operators (lessees) are usually ‘mum and dad’ businesses, implying they are not as stable or reliable as national tenants or bigger operators.This is far less of a concern than you might imagine. In my experience, I have known of only two leasehold motel operations to go ‘belly up’. In both cases, the banks holding mortgages over the leases were quickly able to sell the motel leaseholds on to new operators, without the freehold investors losing out on rental returns.