Trying to find the elusive passive investment motel that is for sale is no easy feat. So why are motels with a lease in place so popular as passive investments?
Well, over 30 years ago the benefits that a motel under lease offered really started to be identified. Those in the industry could see what a secure and lucrative opportunity was at hand, however they had the inside running.
Today we find passive investment motels are rarely available on the market and are a tightly held commodity. More and more investors are buying freehold going concerns to create their own passive investment, by selling a lease themselves. With the high volume of motels that operate under a lease today, it is surprising just how few tenanted investment motels are ever on the open market for sale at any one time. When they do become available, they do not remain that way for long, generally selling quickly.
In the early stages of leases being put in place, it was largely only former or existing motel owners/operators who 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, whether business, work, or pleasure. The wider investor market had not considered investing in motels, and not having any history or dealings within the motel industry, were not that interested.
Over time as the high return and low risk benefits of motels were more recognised, interest built in the motel industry as a passive investment opportunity from other investor markets. Investors who had previously focused on other property types were now looking at the benefits a motel offered. Corporate investors as opposed to the traditional investor entered the industry. Many of these larger entities own numerous motel properties and even the smaller individual investors have continued to add more motels to their investment portfolios. Self-managed superfunds have continued to become a popular investment vehicle for investors to purchase their own motel, with a secure long-term lease in place.
Bank interest rates over recent years have assisted to increase the demand for passive investment motels where cash in the bank at its current interest rate levels is not an attractive investment option at all.
Some of the benefits that have attracted the interest of investors to motels as tenanted investment options 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 8 percent or more on capital invested. The return to an investor compared with other investment options such as cash or residential property make them very attractive to a number of investor types. The return levels have continued to face downward pressure over the years due to lower supply and higher demand
- Low risk: Motels have proven themselves over the years to be very low risk investments. Solid and consistent businesses operating from an investor’s building is what any investor is looking for. Good locations in busy positions often means the investment is underpinned by a strong land value component. Most of the benefit points listed here outline why they are low risk investments
- Fully tenanted: One way or another, a motel property that is leased almost always has a lessee, as opposed to other investment options. 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 on sold. The alternative is that the property owner operates the business themselves or under management until the business is on sold
- 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 which 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. Any move away from this type of structure to more cost saving 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 a minor matter needed attending to. 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 good taxation relief to the property owner
- High liquidity: Many investment options can be difficult to get out of once you’re in. Continued strong demand over the long term from the buying market means once a motel investment property hits the market, investors are circling. Low supply versus high demand equates to strong sale values.
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