Units: more or less?

There have always been many different schools of thought on this matter and everyone has their own opinion. The most common discussion revolves around the minimum number of units that is required for a motel to be “successful”.

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 one problem lies in the definition of successful. It really comes back to what an owner is looking for as a goal for occupancy rates, or income, or profitability or lifestyle.

An investor buying a motel may wish for a minimum net profit of say $100,000 after management fees. This figure/level may be that investor’s definition of the motel being a success. The number of units required to produce that result may be of no consequence.
The figure of 16 units has had continuity and therefore it is assumed has some level of basis or may be more a result of it being rumour or picked up in conversation from one person to the next. I have never seen any evidence to support this ideology.

I can say that in contradiction to this figure I have seen many motels over the years with less than 16 units produce very strong levels of income and profit. One example in particular included only nine units yet produced a net operating profit of in excess of $250,000. Impossible some may say but nine units at 90% occupancy at $130 per night produced an income of approximately $384,000 and operated on a net profit margin of approximately 64%. These are better than industry average figures, however it was a difficult yet achievable goal that was reached.

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

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 30 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.

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. In general terms those who operate their business under management often request a minimum of approximately 20 units, however this can vary. 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 goals or 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 to perform, 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 profit remaining 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. The number of units required to achieve that is often a secondary thought, as a minimum profit level is the driver.

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