Commercial Real Estate News / Investing / Motels Are Starting to Recover. Here's How to Invest.

Motels Are Starting to Recover. Here's How to Invest.

Published: 10-22-21 Category: Investing

Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.

The front door to a room in a motel for sale.

This article was updated on 11/08/23.

Given that the battle against COVID-19 required many to stay at home and avoid traveling, it's no shock that motel markets suffered tremendously in the pandemic. Indeed, when people stop traveling for leisure, services devoted to making the most of that leisure time will face dramatic drops in revenue.

Thanks to the availability of vaccines, leisure and business travel are making a comeback. The recovery is very uneven, as some areas are faring better than others: Atlantic City, NJ is recovering well, while Orlando, FL is still missing a large portion of its hospitality & leisure jobs.

The recovery seems to be deeply tied to not just location but the type of accommodations. Motels next to highways and other high traffic zones have recovered better than their more distant counterparts.

Although recovery efforts are patchy across the industry, this uncertain time is a golden opportunity for commercial real estate investors to step in and grab available bargains. Indeed, reviewing motels for sale could add immense profits to your investment portfolio as recovery rates rise across the country. As with any investment, it's important to review all motels for sale carefully.

Here, we'll lay out what you need to know to make the best investment decisions possible.

How Do I Invest in a Motel Business?

Sitting down to examine a motel business is a wise idea. It's never prudent to rush through the research process. If you're looking to invest in motels for sale, here are a few things you need to know.

The financials. Above all, the current financials of the property are extremely important. While it's true that the numbers are depressed, you still need to know how much money is flowing through the motel.
The current repairs. Does the motel have a record of maintenance expenses? If so, what are the average maintenance costs from year to year? Avoid motels that seem to have lapsed in terms of overall maintenance costs.
Available staff. Does the motel have sufficient staff to keep it running? Can the owner give you more information about the quality of the employees?
Location. The location of the motel matters a great deal in terms of bringing up revenue. If out-of-town people can't find the motel easily, you'll have difficulty increasing profits over time.

Having a discussion with the current owner of the motel will reveal new information but also additional questions to ask before reaching any final agreement. The more questions you can get answered, the more insight you'll gain about investing in the motel business.

How Much Does a Normal Motel Cost?

You can absolutely expect to pay hundreds of thousands of dollars in upfront expenses for a normal motel or hotel, but costs can naturally vary based on location, amenities, and the quality of the building. Franchising a Holiday Inn, for instance, could cost you $50k in franchise fees alone, plus an initial investment amount of several millions of dollars.

Remember that you cannot just look at the acquisition cost of a motel. Many motels, especially ones with low revenue due to the pandemic, desperately need repair. This means you must hold back a generous amount of money to handle renovation costs. Refreshing the motel's design and improving the rooms is an investment, but one that leads to more travelers choosing your motel over others in the area.

How Do You Value a Small Motel?

If you're going to dig into purchasing a small motel for your commercial real estate portfolio, it's important to look at how to value the property. There are a few components to remember, such as the property's location, the number of rooms, and the current cost per night.

Although you can increase how much to charge for each room, a well-established motel is known to travelers for an affordable rate. In fact, motels are considered a top choice for weary travelers because they have fewer frills and are, therefore, cheaper than their hotel counterparts.

When it comes to the financials of a small motel, the expenses are just as important as the gross receipts revealing the property's income. Be sure to review expenses and understand how much the small motel of your choice is truly worth.

What Are the Profit Margins for Motel Businesses?

Like any other business, the profit margins for motels will vary based on how they're operated. High expenses chew away at profit, but a well-managed property will hold a decent profit margin. In the case of a well-run motel business, the average profit margin is 35% after expenses are taken out.

Compared to other businesses, motels have enough profit margin to make looking at motels for sale a worthwhile experience.

Tips for Running a Motel

Once you purchase a motel, determining how the operations should go is completely up to you. This is often where newer investors get tangled up in the proverbial weeds. Here are some good tips for running a motel:

Get solid people in place as soon as possible. Getting seasoned motel management is an absolute must if you don't know how to run a motel. They're worth it!
Review all financials and determine necessary repairs and upgrades. Attracting a steady stream of guests requires a property that's in great condition and very clean.
Make routine accounting checks. Watch the numbers carefully so that you can adjust operations without the sticker shock.
Encourage repeat travel stays. Service is still king in the motel business, and bad service will scare off travelers who will go to competitors instead of dealing with poor service.

As much as we like to give tips, the highest advice we can give you is to remain flexible. Running a motel firsthand will help you get a feel for what's needed. Focus on solving problems, providing customer service, and handling issues before they turn into major concerns.

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