The hospitality industry is often an overlooked source of investment, but it can be very profitable for experienced investors and those exploring new opportunities.
If you are curious about investing in the hospitality industry, you have come to the right place.
This article will cover the pros and cons of investing in motels, what you need to consider before investing, and how to get started.
Key Takeaways
Motels can provide consistent income and a good return on investment with high demand. You can invest in improvements to further increase the quality of the motel and create a more significant return.
Before investing in a motel, consider location, financial feasibility, property condition, and current management and staff.
To start investing in motels, you’ll need to set a realistic goal, conduct market research, evaluate different properties, find your best financing option, and consider any long-term improvements you may want to invest in.
Is Investing in Motels Worth It?
Motels create a relatively steady income by providing a cheap and simple hospitality option that offers amenities and convenience. Motels are a multi-faceted opportunity for real estate investment because of the flexibility they provide.
Motels are typically smaller than hotels and feature locations closer to cities, so many visitors choose motels as a cheaper option for short-term lodging.
Motels and the hospitality industry were severely affected by the coronavirus pandemic but have returned to pre-covid numbers recently. With more business in motels, the choice to invest in motels is increasingly profitable.
You can invest in motel renovations, operations, or expansions and shift your focus between facets to maintain a return on your investments.
Why Should You Invest in Motels?
Investing in a motel can be a comparatively higher-cost investment and requires maintenance over time. However, given the adaptability and consistency of the revenue they generate, you can create a reliable long-term return on your investment if done right.
Flexibility with room rates and upgrading amenities allows you to capitalize on the growing demand for motels.
When your motel has a higher demand, you can increase room rates proportionately to increase profits. You can also invest in newer and upgraded amenities to attract more guests at your discretion.
With this flexibility, you can navigate market fluctuations, and you’ll have opportunities to maintain profit and a solid return on your motel investment.
Pros of Investing in Motels
Investing in motels can be profitable for all types of investors. Here are some of the advantages of motel investments:
Substantial Income
Motels offer a very consistent income stream for investors because most successful motels serve multiple guests every night of the week.
There will always be guests on business trips, vacations, or visiting family year-round. If your motel offers high-quality service and amenities, as noted by your ratings, your occupancy rate will remain more stable and offer you a good return on investment.
Depending on the yield you earn from your investment, a high number of guests means a relatively high return and income.
Flexibility in Management
Another great benefit of investing in motels is the flexibility in the type of investment you make and the property management, allowing you to determine your level of involvement with the motel.
You can invest in multiple motels that belong to a well-known franchise and capitalize on their established reputation, or you can choose to invest in a single motel with more control over management.
You can hire a manager to oversee your motel if you want a more passive investment. They will be in charge of operations and handle the motel for you so that you can be more hands-off.
Potential for Value Appreciation
Motels offer a rare potential for value appreciation, which is the increase in the value of a property over time.
A steady or increasing occupancy rate in your motel will cause the property to appreciate, increasing its value. You can also invest in renovations and upgrades to amenities to increase the property value.
In addition, motels that do not have a high return but are located in a growing city could still appreciate over time.
Any additional investments in this motel will also make it more appealing to guests, increasing your return on investment.
Cons of Investing in Motels
While motels often offer consistent income and flexible management options, there are potential downsides to investing in them. Here are some downsides to consider:
Seasonal Variability
Motels may have more seasonal variability resulting in fewer guests at certain times of the year, especially if your motel is located in an area that has an “off-season”.
During busy times of the year, motels can have a lot of guests (maybe even full occupancy), allowing you to capitalize on the demand.
However, during slow times of the year, your motel might have fewer guests and suffer from slow revenue.
Operational Challenges
Another potential drawback of investing in motels is the operational costs. Motels require staffing, management, utilities, and maintenance. These expenses can cut into your return as an investor.
Additionally, if you’re hiring a manager to oversee day-to-day operations and they’re not meeting your expectations, you’ll have to step in and make changes so they don’t negatively impact your investment.
Dependency on Location/Travel
The success of a motel depends on the number of travelers that come through its location and the travel business in general. The travel industry has ups and downs; motels are among the first businesses to feel this shift.
If your motel is inconvenient to get to or in a location that doesn’t get many travelers, then it’s unlikely that it will generate a significant return.
Factors to Consider When Investing in a Motel
Before investing in a motel, there are several factors you should consider. These factors include:
Location
The location of the motel and the surrounding area can significantly affect the motel's success. A motel in a popular tourist destination or near popular travel sites will likely see more business.
Motels can also be catered to a specific type of guest more than another based on their location.
For example, a motel near a theme park would be better suited for a family rather than solo travelers on a business trip.
Location and nearby amenities can help you decide how to improve your motel to appeal to your target market.
Financial Feasibility
Before investing, it is crucial to analyze the motel you are considering to determine if the investment is financially feasible. You can estimate your return on investment based on the motel’s current revenue and expenses.
If the motel is not currently performing well, that does not mean you can’t get a good return with a few tweaks. However, if the motel has more severe problems and financial gaps, it may be worth a second thought before investing, as these are significant risks.
Property Condition
When you perform your initial analysis, you want to predict the expenses you must pay upon investing. It is essential to pay close attention to the condition of the property to determine its current value and any costs that will come up in the future.
For example, if many of the air conditioners are broken, and you’re in a hotter climate, that is something you’ll probably need to fix.
As an investor, you must invest money into upgrading the motel to attract more guests and increase your return, so the initial analysis of the property’s condition is essential.
Management & Operations
The last factor to consider is the management and staff that will carry out and oversee motel operations. The quality of staff is just as important as any other aspect of the motel, and you should take time to evaluate them.
You can step in and play a more direct role in the management if you want to, but if not, you’ll have to select a manager that you trust to handle things for you.
How to Get Started Investing in Motels
There are several different ways to get started investing in motels. Given the many options and factors to consider, it can initially seem challenging. However, we have broken down the process into these simple steps to make it easier:
Step 1: Define Investment Goals
The first step to any investment is to create a SMART goal. Your goal should always be specific and measurable. Give yourself a time frame to follow so you know if you are on track or not after making your investment.
It is crucial to set realistic goals and to establish practical actions you can take to achieve them. To help you with investment planning and creating realistic financial goals, consider enlisting the help of a wealth advisor.
Step 2: Initial Research
After establishing a goal, the next step is to conduct research on the hospitality market, popular areas, seasonal trends, and more. You want to be as knowledgeable as you can about everything related to motels.
I recommend finding someone who has been investing in motels for a while to see if they’re willing to talk to you about their experience and allow you to ask questions about the process.
The more research you do on motels and the market you are entering, the better prepared you will be to make your investment and determine the value of a property.
Step 3: Property Search and Due Diligence
Finding the right motel is one of the most important parts of your investment. To do this, you need to thoroughly analyze the location, prices of similar properties, profit margins, and the state of operations of all properties you consider.
It is always important to do your due diligence for every property by checking its condition and the available financial information. With this analysis, you can estimate the initial costs and risks you may face with your investment.
Through extensive comparisons and calculations, you can find a motel that is affordable for you and has potential for your investment goal.
Step 4: Financing
After conducting research and performing extensive analysis, you will have found the right property. The next step is to determine how you will finance this investment.
One option is to pay out of pocket with cash. However for most investors, this is not a feasible option, so financing will be necessary.
Similar to comparing property, it is equally important to research and consider multiple financing options for your investment. You should contact various banks for the best interest rate and lowest down payment.
It is also essential to consider the tax implications of investing in real estate. As a new investor, you must add these taxes to your financial plan.
Financing involves collecting and organizing a lot of paperwork for the bank. Luckily, Trustworthy can simplify this process for you by organizing all your financial paperwork for you in one secure place. Try us out for free!
Step 5: Improvements
Besides the initial cost of investing in the property, there are additional costs for any improvements you wish to make, including upgrading utilities, amenities, or staffing.
By making these improvements, you can increase the quality of the motel and attract more guests, which means better reviews, more customers, and eventually higher rates.
Frequently Asked Questions (FAQs)
Is it profitable to invest in a motel?
Investing in a motel can be profitable, but profits depend on many factors, including location, season, property condition, amenities, operations management, and staff. It may require additional effort and funding to ensure all of these factors work in your favor.
What is the average return on a motel investment?
The average return for hospitality investments varies greatly but can range from 6% to 12% per year.
What to look for when investing in a motel?
The main things to look for when investing in a motel are location, property condition, profit margins, and current management and staff.
Why are motels a good investment?
During busy times, investors can enjoy high returns and high demand and even increase room prices to capitalize on the growing customers. A higher occupancy rate means a higher return for investors, and busy motels can create a steady revenue stream.
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