Finance – Country Motels

Important Basics:

Before you can commence looking for a motel you must know what you can comfortably afford to repay from the cash flow of the motel business.
Say you have $200,000 in cash.
From typical lending ratios LVR (Lending Valuation Ratio) shown below your cash gives you an all up purchasing limit to $300,000.
On this purchase amount, basic entry leasehold motels are available.
Allow $40,000 to $50,000 for purchasing costs, unforeseen expenses and 3 months trading.
Balance in hand is now $150,000 and we will assume a motel values for $300,000.
You may be able  borrow $150,000 as 50% of the value of the motel business.

Bank  basic lending guidelines:

  • Leasehold motels they will lend 40% to 50% of an independent valuation.
  • Freehold Motels they will lend up to 60% to 70% of an independent valuation.
  • Evidence will be required for 3 years previous Profit & Loss accounts submitted to the Taxation Office.
  • A forecast of how you are going to operate the motel and expected cash flow for the first three years of operation.

It is extremely important to assess your finance potential with a clear understanding that if you do not get your finance right two things may happen.

  1. Under-estimate your turnover and expenses your daily existence is stressful.
  2. Continual pressure will be on you to rectify the position or to sell the motel at possibly a loss.

Don't forget to have additional funds in reserve if the motel is run down at the time of purchase.

Financial Assessment using our basic software:

If we use Industry benchmark percentages, a $300,000 Leasehold motel returns a 30% yield supplying a $90,000 net profit before GST, owners wages and borrowing costs.
The following software motel analysis will calculate a typical income and expense verifying the turnover and asking price, try it by clicking on the highlighted caption below and inserting $90,000.00 in the yellow box on the first page.
This program is a spread sheet prepared in Microsoft Excel 2016 so, you will need that software on your computer to operate the program. Also, it may ask to activate macros which is in order because you are downloading this program knowing its author.

What is a typical country Leasehold motel business worth?

Insert $90,000 in the yellow box on the front explanation page of the program being the income you would like to earn from the motel.
The results of this entry will show the Leasehold price at $300,000 and the Freehold price at $562,500.
Go to the explanation page and have a look at the margins and the stated rental which should give you an idea of what to expect from a motel at this price.
In the real world it is never as easy as this, however you have to start somewhere.

Remember, motels are a people business and their success is personality driven so it does not matter about the size of the motel it is what you genuinely put into it that generates long-term income and personal satisfaction.

Contact a Professional

Now that you have an understanding of the finance process the next step is to contact a professional who specialises in Motel Finance.
When purchasing a Country motel the best choice is to select from one of the major Banks.
They are up to date with lending trends and growth within the Country areas.