NZ businessman Sir Bob Jones commented in his book Jones on Property that ‘hotels and motels are like farms; they are no bloody good – offering a life-style, lots of hard work and a rotten return.’ This little remark made me chuckle as I couldn’t agree with him more.
I myself run a small motel on the Kapiti Coast. The motel was a business that my brother used to run. Unfortunately, when he was diagnosed with kidney cancer, this left a gap and various members of the family had to pool together to help the business survive. For me this meant giving up my (fairly) high-flying job in Melbourne, returning to Wellington and stepping into the shoes of my brother. There was nothing I could do about his cancer; I could only spend as much time with him as I could. But when it came to the business I found there were plenty of ways I could help.
It also happened that at the time of his illness we were suffering our lowest ever occupancy level, due to certain factors such as a recent online review that had devastated our business and left our motel vacant for three weeks just when our family needed money.
The things I learned in the process of turning around the business were invaluable to me, and while I won’t go into specifics here today, taught me a lot about how a traditional business model needs to function in the 21st Century.
The motel life is not one I would have chosen, but now that I am in it I can honestly say that there is nothing I would rather do, and for the meantime, is a great stepping stone and platform for future projects.
The different types of motel ownership structures
Before we have an honest discussion about the pros and cons of running a motel, we need to look at the different ownership structures. These make such a big difference to the way that you run your motel (and in fact the level of sleep that you are able to get at night) that they need to be examined from the outset.
Leasehold vs Freehold
In plain English, freehold is when you own the land and the buildings and leasehold is when you merely own and operate the business. (There are in fact many different types of leasehold where you may own all or part of the buildings, and also keep in mind that leases vary a great deal from lease to lease, depending on the terms.)
The main distinction here is that if you own the leasehold, you will not only have to pay the capital sum (ie the purchase price) for the business, but you will also have to pay an ongoing rental amount to the person who does own the land and buildings. (These rental amounts are sometimes set at such eye-wateringly high levels that I find it hard to believe many motels can stay in business.) Keep in mind that you only own the business as an asset, and therefore it is harder to get financing against the business.
While Freehold may appear to be the more attractive option, because you own the land outright and aren’t subject to ongoing rental fees or the cost of financing the purchase price on what is after all a fairly flimsy asset, the reality is that, with current property prices, buying a freehold going concern motel is well outside of the range of affordability of many starting motel owners unless they are exceptionally lucky or clever. Even if they can buy the FHGC outright, they’ll be saddled with debt that could take a long time to pay off.
On the other hand, buying a leasehold does present some interesting opportunities. But that is the subject of another blog.
So with that in mind, you need to note that everything positive I say about motels has to be taken with a grain of salt because we are in fact freehold owners of the business.
First, the bad
As with any business, there are disadvantages that come with it, and these need to be addressed first.
Virtually all motels will have the level of turnover where they need to register for GST. This is because the turnover from a number of units adds up very quickly. This is a very important thing, because a) GST ends up taking away over 13% of each dollar you receive into the business and b) many of your smaller competitors, bed and breakfast providers, and particularly those who register through AirBNB, will not be GST registered. Not only that, but many accommodation providers are these days reliant on booking sites to capture a significant portion of their bookings, and the average commission rate for these sites is 12.5% and more than likely to increase in the future. With these two pressures alone, you are looking at a situation where over 25% of each dollar you receive into the business ends up disappearing into the pockets of invisible entities.
So running a motel is not all plain sailing. As with any business, you will have the stress of dealing with staff, service providers, and also answering prank calls late at night.
Now, the good
That being said, however, there are many subtle upsides to the motel lifestyle.
Living Costs
Because you live on site, a significant number of your costs end up being covered through the business. One major cost that people need to pay, rent, is simply not a part of my budget.
Other expenses, such as phones, electricity and gas, and internet, also get covered by the business.
I’m not talking about tax here – tax is a separate issue. You may not be able to claim these expenses if you use a proportion of them for personal use. You should always consult your accountant if you need advice on this.
So, provided that you run a successful business, a motel can go a long way towards paying for your personal living costs.
Platform Business
Despite complaints I often hear from other moteliers about motels being a non-stop lifestyle, I have to say that this has not been my experience, possibly because we have really good staff and great systems (and a comparatively small motel to boot).
Yes, great staff and great systems cost money, but they go a long way towards minimising the stress associated with running a business. At the same time, they also provide opportunities for people locally that tie you in to the community.
As a result of this, I find it easy to run not just a motel, but other ventures on top of it. For a long time, I operated a consultancy business, while basing myself four days a week in the motel office. Nowadays, I run my own Ecommerce sites.
It is the perfect launching pad for an entrepreneur, particularly one who has slightly ADD tendencies.
I refer to it as a platform business on which I can base other businesses.
Free Time
Using my motel, and the Prep System, gives me the unique vantage point that I have just about unlimited time to work towards my various goals.
This is not to say I never feel behind the 8 ball – as with anyone, there are times where I feel like I am running out of time. And then the phone rings, and then I have to help a guest with their Sky TV remote, etc etc etc.
But overall I know I’m probably well ahead.
Finish That Novel
The main benefit, particularly for a writer, is that in addition to giving you income, it also provides you with a platform for you to complete your creative projects.
No doubt, this blog would not exist if I didn’t have a motel to run.
A Sense of Purpose
One time, when I was fired from my sales job, I went back to the motel. The biggest frustration about no longer being in sales was I no longer had the opportunity to deploy my skills.
By running a motel, it gave me a sense of purpose, because I was in sales still, in a way.
Business Training
There’s nothing quite like running a small established business to show you the fundamentals of how a business needs to operate and how it can be improved.
Apart from the sales experience (which I have plenty of), running a motel gave me some grass roots experience that is as good as any MBA (I might be exaggerating slightly here). As they say, work to learn, not to earn.
I also found that when I operated my consultancy business, understanding the inner working of an actual small business gave me a deeper appreciation of their common problems. It helped me to relate to business owners better, helped them see that my motives were genuine, and almost certainly helped me to close more sales.
Environmental Management
This is one that not many people would consider a benefit, but I do. Running the motel gives me control of the waste processing on site.
Because we do on-site composting through worm farms (I just set up two extra worm farms at the motel today), we can reduce not only our own environmental footprint, but also the footprints of our guests, by composting their organic food waste in worm farms on site.
This gives me the payoff of knowing that we are doing more than our fair share for the environment.
Because some of our costs are tied up in waste collection, it also reduces the operating costs of the business. It’s a win-win.
If you’re a business owner interested in putting a similar system in place, feel free to email me here.
Additional Land
The great thing about running a motel, particularly with lots of lush green acres around, is that there is a lot of adjacent arable nearby land.
For a guy like me, this is simultaneously a blank canvas and an excuse to get up to mischief.
In fact, all going well, I hope that some of this land will be diverted to setting up my own organic farm later in the year.
Tax Benefits
Because you run a business and you’re GST registered, you’re eligible for all of the normal deductions of a business. Consult your accountant on how this will apply to you.
Inflation Benefits
Operating a business gives you some power to set your own prices, and thus works as a hedge against prices ultimately going up.
While we try to provide the best rates in Otaki, relative to the quality of the units we offer, and many of our guests understand this, there is always the option that we could increase our prices (which we may ultimately need to do anyway due to increasing levels of demand).
This at least gives us the flexibility to adjust to price changes when they occur.
So there you have it. Some subtle benefits that most people may not be aware of that make me a big fan of motels.
Sir Bob Jones is no doubt right – they are not a great investment from a cash on cash return perspective. But there are many silver linings to such a model that in my view can tip the argument in the motel owner’s favour.
Writing this blog made me realise that the best strategy for overcoming inflation is to surround yourself with systems that eliminate costs. While it may not produce the same results for everyone, I have found that a well-run motel can have that effect.
