Motels have traditionally been attractive business purchase choice for many SME buyers for many years. Ex farmers have been recognised as a buying force in the motel sector. This may be because farmers have traditionally received a low retun on their investment for their farm profits. That is, the value of the farm is very high compared to the profit it makes. Therefore the twelve to twenty per cent return on investment buyer receives for his motel profit seems reasonable to that sort of buyer.
For example a freehold Motel making a profit of three hundred thousand dollars may sell for two million dollars, which is a fifteen per cent return on funds invested.
This is an example of a quality motel in a good area. If the motel is in a marginal area such as a wheatbelt town and has poor or falling occupancy levels, then obviously the ROI will be higher.
On the other hand, if the motel is in an excellent position in a popular seaside tourist town and has high occupancy levels and the opportunity to increase its room rates over time, then it will tend to sell for a lower return on funds invested percentage (higher price).
The underlying land value is also a consideration, because over time the land upon which the business operates may become more valuable for another use, such as conversion to offices, retail, or apartment residential....or as a mixed use development.
Therefore a buyer of a motel in a growing area with population pressures may, with patience, end up with a terrific capital gain when he or she sells out to a developer after waiting patiently for ten or fifteen years for property values to make the highest and best use for the property to be a use other than a Motel.