How Many Motel Units?

AccomNews Thursday, July 21, 2011

0 2 minutes read

Is it 10, 20, 50 or 100 units that are required to make a motel business a success?

There is a wide variety of views in regards to how many motel units are required to make a motel successful. For every ten motel owners/operators there are ten different answers to this question. A common figure mentioned within the marketplace for as long as I can remember is that a minimum of 16 units are required for a motel to be successful. But what is one’s definition of successful?

I have no idea where this figure has come from or on what basis it has been determined. I can say that in contradiction to this figure I have seen a motel over the years that included only nine units yet produced a net operating profit of in excess of $250,000.

Therefore a generalised comment on how many units are required to be successful or not, is difficult to agree with.

The real answer to the question is different from one to the next. If we consider two very different motel investors then the answers will be very different. One who is buying to operate themselves as a husband and wife business may be happy with 10 units, three-bedroom residence and no restaurant. The other may not want to operate the business themselves, thereby having it run under management. They may require 45 units, licenced restaurant, conference rooms/facilities and a one-bedroom residence.

Each business may be very successful in its own right and own market, however the individual investor’s requirements will determine what makes that motel successful in their eyes in comparison to another that may not.

The method of operation plays a substantial part in how many units may be required by a particular operator. If one is going to operate a motel themselves versus operating under management then the number of units may make a substantial difference to their answer to the question. Generally moteliers who will operate their business under management will require a minimum of approximately 20 units, however this can vary greatly. Those choosing to manage the motel themselves may only require as few as six to eight units.

The decision on this will be answered by one’s buying motives, such as what minimum profit level they require after all operating costs have been accounted for, whether they are buying a motel that is operating well or one that is struggling, and what their borrowing capacity is and therefore loan repayment responsibilities.

Often if a motel is being purchased to operate under management, a net operating profit of for example $100,000 may not be sufficient, due to the manager’s wage being taken out of this profit figure and loan repayments also to be deducted. The level of surplus left after the manager’s wage may not be sufficient to make loan repayments and leave a satisfactory surplus afterwards. A common net operating profit figure worked on by many motel investors is $200,000 after management wages have been expended with loan repayments yet to be made.

I find that this is a common opinion within the industry, however each individual’s requirements will vary.