Long topic, will try to be brief. Hope this is of some value to forumites.
Bought 12 room 3 1/2 star, centre of town, full brick, 3 bed res, pool, no restaurant, close to everything, position position. Lucky to find it. Been in tourism/hospitality a while.
Leasehold vs freehold involves complex personal decisions and commercial ones. Leasehold has lower purchase price hence higher ROI, diminishing value, usually 25 yr lease, can be on-sold or placed in hands of management, is a short term strategy. E.g. For a motel freehold value of $1m being offered for lease, you might have to pay $300K up front for biz & chattels, $30K closing costs, all outgoings like rates, water, all other running costs, rent of approx 10% of the balance of the freehold price ($1m less $300K=$700K x 10% = $70K p.a. rent.) = $6K per month in advance. When lease runs out, you walk away, it belongs to the lessor, owner of freehold. So, the lease diminishes in value year by year. Many buy a new 25 yr lease, improve figures and resell at 21 yrs for same as cost.
The circa 10% is the market rent expectation of the owner of the freehold who has leased his asset and wants a rent return. The rent is nett to the landlord, no deductions, landlord pays nothing, is only responsible for structural problems.
Get a sample lease from a motel broker. Don’t know if you would find a lessor willing to agree to a lease containing options to sub-lease.
Freehold, you own the lot. All the income is yours, you live and work on the premises, frees up another property. According to our valuer, there are several ways to increase the property value. But the main one is - Any improvement in motel nett profit is multiplied by 7 and is added to the property value. Capitalisation rate is between 12-15%, depending on the valuer, on his expertise with motels (12-13%), or if he’s ingratiating himself with the lender(15%). E.g. a nett profit of $150K using capitalization rate of 15% = a motel value of $1m. (12% = $1.250m).
St George will lend up to 60% LVR on a motel if it’s a solid biz.
Other decisions are Style of Motel, age/quality, construction, size, location, location, star rating, restaurant yes/no, residence, pool, location. . . .
Backpackers. Different market entirely. Everything is different. Needs young owner operators, could be leased out, but lots of cash could cause problems if under management. Different scene, not my bag, too old.
Hope this post is brief enough. Sorry it’s incomplete. PM me if you’re going to bite the bullet and want volumes.
Good luck, cheers
