Accounting for Motels & Short Term Accommodation
If you’re contemplating entering the tourism industry and you enjoy dealing with people around the world, purchasing a motel is a fantastic idea. You can enjoy the dual benefits of having onsite accommodation in a highly social environment whilst running a profitable business.
However, understanding all options and their associated pros and cons is critical before you make a decision. That’s where trusted motel accountants like the team at Lotus Smart come in, providing advice and accounting for motels & short term accommodation.
As most motels come with onsite accommodation, buying a motel is also a lifestyle choice for many in the industry. You can save money in terms of paying a mortgage for your residence and also save on living costs such as electricity, gas, food and laundry.
While there are many ways you can invest in a motel business, the following are among the most popular options.
Leasehold Motel
Under this option, you are essentially renting the building and running the business on it. The purchase price of a leasehold motel includes the cost of business including goodwill, plant and equipment, fixtures, furniture, customer list, business process, etc. You pay rent to the free hold owner as if you were renting a house and you will have the right to run the business. Any surplus left after paying rent and other operating expenses will be yours.
This could be the best option if you have a low budget and are new to the industry. A leasehold motel investment starts from $200k depending upon the number of rooms, location and profitability of the business. Whilst return on investment on a leasehold motel is relatively higher, you need to be careful with factors such as the terms of the lease, length of the lease and location of the business. You’ll also need to factor in motel business accounting to ensure everything runs smoothly.
Freehold Motel
Under the freehold motel option, you buy the land and building, but someone else will run the business on your property. As a landlord, you will be entitled to a fixed rental income, but the profit from the business goes to the leasehold owner.
The benefit of this model is that you can get a fixed income without worrying about the hassle of running the business. This is the best way to earn passive income, as the rental return from a motel can range between 8-10%. On top of a higher return on your investment, you can also reap the benefit of capital gain when you eventually decide to sell.
The actual rate of return depends upon factors such as the turnover of the business, size of the motel, location, complexity of operation, etc. You need to closely analyse each of these factors before making a decision to buy a freehold motel. This is an area where our accountants can provide invaluable assistance.
The purchase price of a freehold motel can depend upon the potential for expansion, size of the land, condition of rooms, age of the building, etc. A motel built recently will have greater demand than an older motel. Buying a recently built motel can also help you to minimise tax, as you can claim higher depreciation on the plant, equipment, furniture and fixtures installed recently. More importantly, the ongoing maintenance costs for a newer motel will be lower.
Freehold Going Concern Motel
This option is the combination of option 1 and 2 as stated above. You will own the land and building and operate the business as your own.
The investment level will be relatively higher, as you need to invest in the property as well as the business.
Which is the Best Option?
Unfortunately, there’s no shortcut to answering this question. You’ll need to consider a wide range of factors, including:
- Budget
- Lifestyle choice
- Investment profile
Ultimately, the choice is yours. But regardless of the model you choose, investing in a motel is generally a safe and profitable option as long as you invest in the right location and carry out proper due diligence before you buy. You’ll also want to partner with an accountant who has expertise in accounting for motels & short term accommodation.
Key Considerations for Due Diligence When Purchasing a Motel
- Find the right location: Your choice of location can be critical for the success of your business.
- Conduct market research: Before you start a motel business either as a freehold going concern, freehold or leasehold, you need to complete an extensive market research and competitor analysis. This will include finding out what your competitors are doing and determining the point of differentiation of the motel you’re buying.
- Finalise a strategic business plan: This should cover your business goals, mission, vision, processes, pricing, and products. The competitors’ analysis you conduct in step 2 above will reveal whether or not the price being charged by the motel you’re buying is competitive.
- Review the website, Google reviews and all online booking platforms: You need to clarify from the vendor if there has been too much negative feedback lately. A customer may have had a negative experience due to poor service, lack of cleanliness, or a poor phone manner.
- Review the financial statement and bank statement of the vendor for the last two years: You need to see whether the business can give you enough return after paying all operating expenses. Carefully observe the trend of income and make a note of any seasonal variations and the causes of those variations. Our accountants can assist you with this if you’re unsure what to look for.
- Organise a building and pest inspection: It’s worth spending a couple of thousand dollars to have peace of mind. A building and pest inspection from a suitably qualified person is particularly important when you’re buying a free hold motel. This will tell you the condition of the building and whether you might need to provision any capital for major maintenance.
- Find out the licensing requirement: This will require dealing with the local council and other Government bodies. It may require consultation with lawyers, engineers, and other consultants. At Lotus Smart, our team of expert accountants can advise you on the areas of consultation required.
- Open bank account/merchant facility: When choosing a bank, check things like proximity to the bank, rates for merchant facilities, and products/facilities offered to small businesses.
- Ensure a good mix of clients: There are many factors you need to consider when analysing the income from room sales of a motel. The obvious questions you will be asking are:
- What sort of clients does the motel attract?
- Is there any major project going on in the vicinity? This may mean that the accommodation will be used by many contractors and Government officials coming from other cities.
- What factors attract tourists in the area? Are there any major events during the year which attract people from other states or cities?
Getting guidance from an accountant, bookkeeper or solicitor who is familiar with the motel industry is essential. Because of their experience in the industry, they’ll be able to guide you through the entire process during the purchase and continue supporting you post purchase with services such as motel business accounting.
Other Key Considerations for a Motel Purchase
Like any other start-up business, you need to take care of the following things after you decide to take the plunge:
- Choose the right business structure: You need to consider the following main criteria when choosing the structure of your business:
- Tax implications
- Personal liability of the owner if something goes wrong in the business.
- Growth plan: Whether you have a plan to bring in additional investors in the business
- Cost of initial set up and ongoing compliance cost
- Protection of personal assets
Australian tax laws are complex and dynamic, and changing your business structure at some point in the future can trigger a capital gains tax or stamp duty. It’s important to think about both short term and long term consequences when setting up a business structure, which is something our accountants can help you with.
2. Determine your financial requirements and options available to arrange finance: We are often asked by our clients as to how much capital is needed in order to start a new business. Unfortunately, there’s no clear answer to this question. You need to carefully analyse the set-up cost and provision for the contingencies in case things don’t go to plan. As a rule of thumb, we recommend having adequate capital to manage the overheads and other expenses for at least 6 months. However, it all depends upon the type of the business you’re in.
3. Create a marketing plan: This should ideally include website, social media, branding, and digital media.
4. Choose your accounting software: For small businesses with an annual turnover of less than $5 million, we recommend a cloud-based solution offered by Xero or MYOB. Implementing good accounting software provides a base for your sound financial control and efficient decision making.
5. Obtain appropriate insurance coverage for your business: Examples include loss of profit, business content, public liability, work cover, etc. depending upon the nature of your business.
6. Register for GST, BAS, PAYG and superannuation
At Lotus Smart, our team of accountants are specialists in the motel business. Whether you’re buying a motel in a chain or purchasing an independent motel, our accountants can guide you each and every step of the way. We can assist with ATO compliance, bookkeeping and strategic business advisory services for running a motel business, as well as providing general accounting for motels & short term accommodation.
From an accounting perspective, you ideally want an expert who understands your industry because there are a number of steps you need to be careful with when buying a motel. For instance, choosing the right business structure is vital when it comes to capital gain, ongoing tax obligation and personal asset protection.
Lotus Smart’s accountants can provide a range of motel business accounting services to motel owners, including:
- Advice regarding the purchase or sale of your business
- Assistance setting up the right business structure.
- Bookkeeping and payroll services
- Assistance obtaining the appropriate insurance
- Assistance with preparation of cash flow budget
- Integration of your reservation software with accounting software
- Tax registrations, including ABN, TFN, GST, Workcover etc.
- Preparation of business plans, cash flow budgets and profit projections
- Preparation of financial statements and guidance on improving the bottom line
Contact our Lotus Smart Accountants today to find out how we can help you.