Maximising ROI: Why Choosing a Leasehold Motel Can Be a Smart Investment Move
- Posted By Jenny Chellew
As a professional Business Broker, I'm excited to share my thoughts on the benefits of purchasing a leasehold motel versus a freehold motel. Let's dive in!
Purchasing a motel can be a great investment opportunity but there are different types of ownership to consider. When it comes to motel ownership, there are two main options: buying a freehold motel and acquiring the business, land and property or purchasing the leasehold motel (business) and leasing the property from the landlord. In this blog post, we will explore the return on investment (ROI) benefits of purchasing a leasehold motel compared to a freehold motel.
What is a Freehold Motel?
A freehold motel refers to a property where the owner operator has complete ownership of the land, buildings and business. This entails taking responsibility for all property maintenance, repairs, renovations and upgrades required to maintain and operate a successful motel business. As the owner operator of the motel business, you also receive all the profits generated by the motel.
What is a Leasehold Motel?
A leasehold motel involves the leasing of both land and buildings for a fixed period, typically lasting between 20 and 25 years from a landlord. As the leasehold owner, you assume the ownership and responsibility of managing and operating the motel business while making rental payments to the landlord. It is important to note that leaseholders generally have the first option to purchase the freehold property if the landlord decides to sell, allowing for long-term ownership and maximising your investment. Furthermore, landlords may be open to negotiations regarding lease term extensions in exchange for upgrades that you invest in for the freehold property. This can provide stability and continuity for your business operations and potentially increase the value of your business investment over time.
1. Lower Upfront Costs
Purchasing a leasehold motel offers a significant advantage of lower upfront costs. Unlike buying the land and buildings outright, you can avoid a substantial initial investment. This allows you to allocate your saved capital towards operational expenses, marketing efforts, and selective property improvements to enhance revenue generation.
2. Predictable Costs
In a freehold motel, the owner operator bears the responsibility for all property maintenance, repairs, and upgrades, which can result in unpredictable costs. However, as a leasehold owner, you have a fixed rent amount to pay to the landlord and they are typically responsible for the majority of necessary building repairs and maintenance. This arrangement allows for greater predictability in your costs and facilitates better budgeting. It also enables you to allocate your capital more efficiently, directing it towards areas of the business where it is most needed.
3. Higher Return On Investment (ROI)
Although the rent payments seem like an additional cost, it can result in a higher ROI when compared to purchasing a freehold motel. This is because the purchase price of a leasehold motel is much lower than that of a freehold motel. This means that there is more potential for a higher ROI as the income generated from the motel business is typically higher than the leasehold rent payments.
Let's consider two identical properties in the same location: one is a freehold motel priced at $2,000,000, and the other is a leasehold motel with a purchase price of $800,000. Both motels generate an annual net profit of $250,000.
Freehold Motel ROI:
If you purchased the freehold motel with an outright payment of $2,000,000, the ROI calculation would be as follows:
ROI = (Annual Profit / Total Investment) x 100 ROI = ($250,000 / $2,000,000) x 100 ROI = 12.5%
Leasehold Motel ROI:
If you purchased the leasehold motel for $800,000 and paid an annual rent of $50,000, the ROI calculation would be as follows:
Net Profit = Annual Profit - Annual Rent Net Profit = $250,000 - $50,000 Net Profit = $200,000
ROI = (Net Profit / Total Investment) x 100 ROI = ($200,000 / $800,000) x 100 ROI = 25%
As we can see from this example, the ROI of the leasehold motel is much higher than the freehold motel. This is because the initial investment for purchasing a leasehold motel is substantially lower than purchasing a freehold motel. Even with the annual leasehold rent payment, the profits generated from the motel business make the ROI much higher.
Of course, there are various other factors that can influence the ROI of both options, such as ongoing maintenance, upgrades, and operational expenses. Additionally, there may be other risks associated with taking on a leasehold property investment hence, investors should perform their due diligence and build an investment strategy that takes into account all factors.
4. Flexibility
Another great benefit of purchasing a leasehold motel is the flexibility of the lease agreement. Unlike freehold motels where the owner is tied to a permanent property, leasehold agreements are typically for a fixed term with expectations above 20 years. This provides more agility and flexibility to adapt and make exit planning and decisions when necessary.
In Conclusion
While freehold motels provide more control and ownership over the property, purchasing a leasehold motel can provide several ROI benefits, including lower initial costs, predictable expenses, and higher ROI potential. Leasehold motels are an excellent option for investors who want to enter the motel business without a large upfront investment. However, it is crucial to conduct thorough research and planning to fully understand the risks and rewards associated with leasehold investments. Overall, purchasing a leasehold motel can be a wise investment decision that generates long-term profits with proper due diligence and an investment strategy.
As professional business brokers with years of experience in the hospitality industry, we can help you find the perfect motel to invest in whether you're interested in purchasing a freehold or leasehold motel. Don't hesitate to contact us to get you started on your journey towards motel ownership and a profitable investment. Let's work together to find the perfect motel for you!