Understanding Motel Operating Profit: What to Include and What to Exclude

For motel owners, investors, and operators in Australia, understanding operating profit is critical for assessing financial performance, setting sale prices, and making informed business decisions. Operating profit, often referred to as net operating income (NOI) in the hospitality sector, represents the revenue generated from core operations after deducting operating expenses. However, determining what should and should not be included in this calculation can be complex, as it requires distinguishing between operational and non-operational items. This blog post outlines the key components to include in motel operating profit, highlights what to exclude, and provides practical insights for achieving accurate financial reporting in the Australian motel industry.

Why Operating Profit Matters

Operating profit is a key metric for motels, as it reflects the business’s ability to generate income from its primary activities—providing accommodation and related services. It’s used to evaluate operational efficiency, set budgets, and determine property valuations, typically calculated as a multiple of annual profit (e.g., 3.5-4.5 times net profit for freehold motels, per ResortBrokers). In Australia’s motel market, where values have risen 15-20% in high-demand regions like Queensland and New South Wales since 2021, accurate profit calculations are essential for maximizing returns and attracting investors.

What to Include in Motel Operating Profit

Operating profit should capture all revenue and expenses directly tied to the motel’s core operations. Below are the key items to include:

Revenue Components

1. Room Revenue: The primary income source for most motels, derived from nightly room rates. In Australia, average daily rates (ADR) for motels range from $125 to $135, with occupancy rates averaging 55-75% in regional areas (STR, 2024). Include all room-related income, such as standard bookings, group rates, and extended stays.

2. Ancillary Services: Revenue from on-site amenities, such as breakfast sales, vending machines, or laundry services. While many motel restaurants have closed due to high costs, those still operating should include food and beverage income.

3. Booking Fees and Commissions: Fees charged to guests for direct bookings or additional services, such as late check-outs or pet-friendly accommodations. Include revenue from online travel agencies (OTAs) like Booking.com, net of commissions.

4. Event or Meeting Room Hire: If the motel offers conference or function spaces, include rental income from these facilities, which can be significant in regional hubs.

Operating Expense Components

1. Staff Costs: Wages, benefits, and superannuation for operational staff, including front desk, housekeeping, and maintenance workers.

2. Utilities: Electricity, water, gas, and internet costs directly tied to guest services. Energy-efficient motels may have lower utility expenses, boosting profitability.

3. Cleaning and Supplies: Costs for linens, toiletries, cleaning products, and laundry services. These expenses have risen with inflation.

4. Marketing and Advertising: Expenses for digital marketing, OTA commissions (typically 15-20% of bookings), and local promotions to attract guests. SiteMinder notes that motels investing in direct booking platforms can reduce OTA reliance, improving margins.

5. Repairs and Maintenance: Routine maintenance costs, such as fixing plumbing, HVAC systems, or room furnishings, to maintain guest satisfaction.

6. Insurance: Property and liability insurance premiums specific to motel operations, which have increased due to rising climate-related risks in regional areas.

7. Franchise or Branding Fees: For motels affiliated with chains like Choice Hotels or Best Western, include royalty fees or marketing levies, typically 4-8% of revenue.

These items reflect the day-to-day costs of running a motel and directly impact its ability to generate profit from core operations.

What to Exclude from Motel Operating Profit

To ensure operating profit accurately reflects the motel’s operational performance, certain items should be excluded, as they are either non-recurring, non-operational, or related to ownership rather than management. These include:

1. Capital Expenditures (CapEx): Major renovations, property expansions, or equipment upgrades (e.g., new HVAC systems or roof replacements) are capital investments, not operating expenses. For example, a $500,000 refurbishment to modernize rooms should be excluded, as it’s a one-time cost aimed at increasing long-term value.

2. Debt Service: Interest payments and principal repayments on loans or mortgages are financing costs tied to ownership, not operations. These vary by owner and should not affect operating profit calculations.

3. Depreciation and Amortization: These are non-cash accounting expenses that reflect asset wear over time. While relevant for tax purposes, they don’t impact day-to-day cash flow and should be excluded.

4. Owner’s Salary or Drawings: For owner-operated motels, personal salaries or profit distributions should be excluded. Instead, include a market-based manager’s salary (e.g., $80,000-$120,000 annually) to reflect the cost of hiring a professional manager, ensuring consistency in profit calculations for valuation purposes.

5. Non-Operational Income: Income from unrelated activities, such as leasing part of the property to a third-party retailer or selling surplus land, is not tied to motel operations and should be excluded.

6. One-Time Costs or Gains: Extraordinary expenses, such as legal fees from a lawsuit, or one-off gains, like insurance payouts for storm damage, should not be included, as they don’t reflect ongoing operations.

7. Property Taxes: While some debate exists, property taxes are often excluded from operating profit in Australia, as they relate to ownership rather than operational management. However, this can vary by valuation methodology, so clarity is key when presenting financials.

Practical Tips for Accurate Profit Calculations

To ensure motel operating profit is calculated correctly and aligns with industry standards, consider the following:

• Maintain Clear Financial Records: Use accounting software to separate operational and non-operational items. Tools like Xero or MYOB can help track revenue and expenses accurately.

• Standardize Manager’s Salary: For owner-operators, replace personal drawings with a market-rate manager’s salary to normalize profit figures. This is critical when preparing a motel for sale, as buyers expect consistent metrics.

• Review Contracts: Franchise fees, OTA commissions, and supplier contracts can significantly impact expenses. Regularly renegotiate terms to optimize profitability.

• Benchmark Performance: Compare your motel’s profit margins to industry averages to identify areas for improvement.

• Engage Professionals: Work with accountants or hospitality consultants familiar with the motel industry to ensure compliance with Australian accounting standards and accurate profit reporting.

Why It Matters for Investors and Operators

For investors, an accurate operating profit calculation is essential for determining a motel’s value. In Australia, freehold motels are often sold based on a multiple of net profit. Misclassifying expenses, such as including CapEx or owner’s drawings, can inflate or deflate profit, leading to inaccurate valuations.

For operators, understanding operating profit helps identify cost-saving opportunities and revenue drivers. For instance, a motel owner who reduces OTA reliance by 10% through direct bookings could boost profit by $20,000 annually, increasing the property’s value by $80,000-$90,000 at a 4x multiplier.

The Bigger Picture

As Australia’s motel industry continues to attract institutional investors like Aware Real Estate, NRMA Parks and Resorts, and Starwood Capital Group, standardized financial reporting is becoming increasingly important. These investors rely on clear, consistent profit metrics to assess acquisition targets, particularly as motel values rise in high-demand regions. By including only operational revenue and expenses in profit calculations—and excluding non-operational items like debt service or CapEx—owners and operators can present a transparent picture of financial health, maximizing appeal to buyers and lenders.

In a market where tourism is projected to grow 6% annually through 2027 (Tourism Australia), and motel supply remains constrained, optimizing operating profit is more than just good accounting—it’s a strategic move to capitalize on a thriving industry. Whether you’re running a family-owned motel in regional Victoria or eyeing a portfolio acquisition, getting the profit calculation right is the first step to unlocking value.