Valuing Hotels/Motels

[Hellman]

Hi, I'm just wondering if anybody knows any formulas used to value hotels???

I've searched but there doesn’t seem to be that much information unfortunately. Of course I more than willing to buy books, etc on how to value motels/hotels (just in case anybody has a suggestion for me there!).

Thanks a million for any help.

 

[quiggles]

Unless you are planning to redevelop them (in which case only take the land value) you should value them as a business, largely on the profitability and outlook. Lots of good advice on that.

 

[Rick Traberg]

What does it matter , if the figures are good to you and there is a dollar to be made , you should be able to work out its value.

Cheers Rick

 

[Hellman]

So are there any quick formulas (I guess like the 11second solution) one could use as a filtering tool to filter out hotels that are seen to be too high?

As for business I guess then then we use current biz formulas, so... Does any one know what the average price to earning ratios hotels sell for?

Thanks for the reply quiggles

 

[Rick Traberg]

Id be chasing more than the 11 second solution that fomula should be for basic property not property that is open to risk as much as a motel. What happens if a new motel opens up near by or if it is in a area were holidayers go it is open to change of the economy. Dont want to put a downer on it just make sure it is good numbers, and that it is low risk for the numbers

 

[Hellman]

I realise that if I am going to spend over $1M on a motel I should just do more than the 11 sec sol ... (and with a minimum $300K deposit it should be positive cashflow!).

But it would be nice to know how motels are valued as part of my due diligence... esp. if I thought it was a great deal when in fact it was a standard or less than standard... Thats all. Saying look at the other hotels in the area is in my opinion not good enough because if the hotels in an area sell for a 9% cap rate (lifestyle, etc) and I can buy a motel somewhere else with just as solid figures for 15% cap I've just done my dough.... Which is not good.

Right now I'm looking at a motel with 20% return as EBIT (basically earnings before Interest (a major component) and Tax (less of a concern)). After debt servicing my proift is $100k. So basically a 10% return. So the question is assming that another motel isn't going to pop up next door, from the finance side, is this a good deal Vs other motels.... (the major problem I've got is the fact I've nothing to compare it too!).

Thanks for bearing with me....

 

[Mrs Bird]

Hi Hellman,

Are you buying management rights as well?

If so, are you going to manage it yourself?

Sounds like fun!

Mrs Bird

 

[fatboy4]

I think there used to be formulas (like x$/room/annum) and that this was varied depending on the location. I suppose commercial valuers have formulae but obviously you won't be engaging one (and paying $1000) every time you consider one. I believe you can get 10% passive return on motels in well located regional cities but there seems to be a fair amount of interest in them (I guess like other commercial property) which is driving up prices and driving down yields.

 

[keithj]

Hi, I'm just wondering if anybody knows any formulas used to value hotels???

I've searched but there doesn’t seem to be that much information unfortunately. Of course I more than willing to buy books, etc on how to value motels/hotels (just in case anybody has a suggestion for me there!).

Thanks a million for any help.

Hi Hellman,

If you look at lots of motels/hotels you'll see so many different opportunities. Some are sold on 0% yield as potential dev sites. Some in outback have v. high yields - maybe a mining town going downhill.

Then there's managed/owner run, leasehold/freehold and location - beach/highway/somewhere else and lifestyle/job.

Try to establish the value of the land/improvements, location and turnover/nett. I've never come across a simple formula for valuing hotels. Talk to a good accountant who may be able to help with ratios.

Some yield investors appear to be turning to hotels/pubs/caravan parks in preference to shares/Res IP ATM....

Also PM crest133 and read this thread.

And keep us all informed of your progress - even if it's -ve.

Cheers,

KJ

 

[Jimmyjamjars]

Hi Hellman,
If you bear with me, I will dig up what I can when I get home from holidays. When I was looking into that type of thing, I had a talk with a Motel/Caravan Park sales broker and he had written a Paper for a group of investors he was hired to lecture. He photocopied it for me and I have it at home somewhere. It has the formula on it he goes by when valuing them. If you would like to chase his number up yourself, its here
http://www.caraparksales.com.au/
cheers,
JIM

 

[crest133]

Hi Hellman
There is no 11 second or any other kind of short solution to choosing a motel. It is a specialist area and requires lots of chaff sorting. There are always a number of good motels for sale, and then lots of "overpriced ones" for reasons of requiring expensive refurbishment, or low ROI.
There are a number of options with motels and these are my suggestions for minimum reasonable returns (ROI) without any CG:
1. Buy freehold, operate yourself. 15%
2. Buy freehold, operate under management. 15% less $50-$70K management.
3. Buy freehold, lease it to an operator. 9-10%
4. Buy leasehold, operate yourself. 20-30%
5. Buy leasehold, operate under management. 20-30% less $50-70K management.

Location is nearly everything, and of course location relative to other essential factors ( which region, which town, location in town relative to competitors/local attractions/eateries/fuel ; star rating, number of equally rated competitors, traffic flow, room sizes, tariffs, street appeal, service, room quality. They were not in order by the way.
Restaurants complicate the issue. Motels more than 200 m from an eatery suffer without a restaurant on site. Restaurants can be a headache.
A motel surrounded by eateries is a complementary situation.
Formule 1 motels recipe for motel is threefold (in very simple terms) :
high traffic flows, near food, near fuel.
My last valuation cost $2400. Others were over $3K.
Cap gains are possible apart from the time factor with the land, by increasing the bottom line. Valuers use a cap rate of between 12-15%, so any improvement in bottom line is roughly x7 then added onto the motel value.
LVR is high, so a motel ties up capital. I'm in the process of discussions with St George Bank on how to get more of our tied up capital working for us. With security of 40%, we feel the Bank could ease that a bit and allow us to buy some IP's which we could sell off if they get the jitters. So far, they haven't said no, only that they'll take each IP scenario on it's merit.

Using residential real estate as security to buy a motel saves about 1% on interest. St George will lend at res rates (say 6.7%) on a motel (instead of commercial rates - say 7.7%) provided you offer res real estate as security.

Please provide a sketch of the motel you have in mind which would allow a more specific comments - e.g. number of rooms, construction type and date, star rating, location, restaurant, pool, chain, title, for a start.
I'll answer your PM as well, just as soon as I get through the busy motel morning cleaning routine, but I especially want to feedback the forum too, they have all been so good to me.
cheers
crest133

 

[geoffw]

Thanks Crest, an excellent post.

Don't forget that a business loan typically has a 10 year or less principal payback. If you're getting 15% return, operating it yourself, with a purely business loan, you are not getting very much income at all- a freehold I suspect relies, like residential RE I suspect, on cap growth. So a loan secured on residential RE can really help big time on cash flow as well as a slightly lower interest rate.

 

[crest133]

Hi Hellman
Any feedback on the motel ?
cheers
crest133