Sunday, October 22, 2017
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Motels as passive investments

This type of motel investment can only be described as a rarely available and tightly held commodity.

With the high volume of motels that operated under a lease today, it is surprising just how few are ever on the open market for sale at any one time. When they do come onto the market they do not remain available for long.

There was a time not so long ago when only former or existing motel owners/operators were interested in investing in motels as passive investments. They knew the industry well, they understood how a motel was operated and they knew travellers always require accommodation, no matter what the reason for their travel was, business, work, pleasure, etc. The wider investor market had not considered investing in motels and, not having any history or dealings within the motel industry, were not all that interested.

The late 1990s saw interest building in the motel industry as a passive investment opportunity from the broader market. Investors who had previously invested in residential, commercial or industrial properties, were now looking at the benefits a motel investment offered and asking themselves why they hadn’t considered a motel sooner.

The growth of unit trusts offered a new type of investor to the industry where smaller investments could be utilised to invest in the industry. This provided many benefits to investors and allowed them to diversify and dip their toes into the accommodation industry. Subsequently self-managed superfunds have now become a very popular investment vehicle for investors to purchase their own motel, with a secure long term lease in place.

Current bank interest rates have assisted to increase the demand for passive investment motels where cash in the bank at its current interest rate levels is not an overly attractive investment option. Some of the benefits that have attracted the interest of the investor market are:

High investment returns – Investors have achieved excellent returns on passive investment motels over the years. Market net returns on passive investment motels are currently at approximately 9 per cent plus on capital invested. The return to an investor compared with other investment options such as cash or residential property make them very attractive.

Low risk – Motels have proven themselves over the years to be very low risk investments. Solid and consistent occupancy rates in general and moderately increasing tariffs in most areas have resulted on the back of growing demand for accommodation.
• Fully tenanted – One way or another, a motel property that is leased almost always has a lessee. If a lessee/operator was to close the doors of the business the mortgagee would almost always appoint an operator to reopen until the business was sold. I can only recall seeing a motel without an operator once in the past 18 years, and it was reopened within a week by the liquidator who continued to pay the rent to the lessor. A very good record for any industry.

Freehold tenure/increasing land values – Freehold tenure and the ownership of a tangible product, being a commercial property. Motels are generally located on busy main roads or other desirable locations that are larger blocks of freehold land that increase in value over the longer term.
• Solid building structure – Motels are typically of brick/block construction and this type of structure requires minimal ongoing works. A move away from this type of structure to more cost effective types of building materials/construction means an adjustment in the maintenance requirement to be budgeted for over time.

Outgoings – Generally within motel leases the lessee pays all outgoings. Outgoings paid by the lessee include, but are not limited to property rates, insurances, repairs and maintenance, and electricity. Leases were originally set up this way so that the lessee had control of his/her own business and did not have to go to the property owner every time they needed a light bulb changed. The lessor may be responsible for a few items such as land tax (unless included as an outgoing) and structural repairs/replacements.

Building allowance/tax benefits – Relatively young buildings or those that have undergone major refurbishments (capital works) will have some level of building depreciation or write off allowable. This will vary for each property however the tax benefits in many cases can provide a major taxation benefit to the property owner.

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