A motel business can offer a unique opportunity for investment and growth in the real estate market. Whether you’re an experienced real estate investor, real estate agent, or property manager looking to expand your portfolio, understanding how to accurately value a motel business is a necessary skill.
In this blog, we’ll be discussing the various methods of valuing a motel and how you should go about doing it. Before you start investing in motels, you should keep the following key considerations in mind.
Motel Valuation Methods
There are 3 fundamental methods used for building valuations. They are as follows:
1. The Income Approach
The Income Approach is a valuation method that is centered around the idea that the value of a motel is directly related to its potential for generating income. To identify this potential, you need to look at the following factors:
- Price per room – The price being charged for each room per night, which is then multiplied by the number of rooms and nights booked. This will give you the total revenue of that motel.
- Occupancy rates – This accounts for the percentage of rooms that are booked per month. If a motel has higher occupancy rates, that means it generates more revenue on average.
- Operating expenses – These are the costs associated with running the motel. They include staff salaries, utilities, and maintenance. They are running monthly costs, so you will need to deduct this from the total revenue to get an idea of the monthly profits.
2. The Market Approach
The Market Approach operates on the principle that you don’t invest in the first motel that you discover. You need to evaluate multiple motels in that local area and compare them against each other to find the best deal.
You can do this by:
- Conducting a comparative Analysis of local motels – You will need to compare the motel that you’re interested in with other similar motels that have been sold recently in the local market. You need to keep an eye on the prices they were sold at. By analyzing these prices, you can get an approximate value for your target property.
- Comparing the Price-Per-Room – Comparing motels by the prices they charge per room is a common valuation technique. You can do this by dividing the sale price of a motel by the number of rooms it has. This is generally used because different motels can have different room counts. But by creating a list of the Price-Per-Room, you can compare them more accurately.
3. The Cost Approach
The Cost Approach to motel valuation is the process of identifying the cost of constructing a motel from scratch or renovating it. This will help you come up with a fair cost for motels in your target area.
Here’s how you can do this:
- Identifying reconstruction costs – If the motel you’re targeting has fallen into disrepair, then your first step should be to estimate how much it would cost to rebuild the motel from the ground up. This should include the cost of construction materials, labor, and other associated expenses.
- Estimating for depreciation – Similar to other properties, motels lose value over time due to wear and tear. You need to estimate how much the motel has depreciated since it was first built or last renovated. This will give you an idea of what you may need to spend to get the motel up and running again.
Understanding Financials in the Hotel Industry
For any kind of investment, understanding the cash flow of the business is an integral consideration. If you’re looking to become a small business owner, then you first need to know what financials to look at to help you make an informed decision.
1. Income Statements
The Income Statement is an important accounting document that you need to review before making any investments. It lists all the sources of income and expenses that the motel has been exposed to so far.
What you need to be looking for:
- Monthly Revenue – This section will give you an idea of how much the motel makes from room rentals, as well as any other sources of income such as food or laundry facilities.
- Monthly Expenses – This section will include all of the motel’s operating expenses, including staff wages, maintenance costs, property taxes, and so on.
- Net Operating Income – After deducting the expenses from revenue, you will get the Net Operating Income. This will tell you how much money the motel makes as a profit. This is a crucial metric in motel valuation as it will indicate whether or not the investment is worth it.
2. Knowing the Occupancy Rates
Occupancy rates are an essential aspect of hotel real estate valuation because it is an indicator of how well the business is performing.
You need to look at:
- The Historical Data – A consistently high occupancy rate is a good sign that the motel is performing well. Beware of those with low occupancy rates.
- Variations per Season – Motel occupancy rates are affected by seasons. You will need to keep the location and tourist arrivals in mind to get an idea of which seasons the motel is popular in.
To value a motel business, you need to look at multiple data points to get the bigger picture. It’s always best to do your due diligence and research every aspect mentioned in this blog. This will help you make a safe and informed decision rather than having your investment go down the drain.