I am very new at this. Can anyone please tell me (1) what are the risks with investing in serviced apartments??
Some banks will not lend on a serviced apartment but they seem to not be able to tell me why. (2)Can anyone be able to help me out????
Serviced apartments are considered riskier due to their limited security. Income streams can be variable and costs can be significant – while the figures may stack up during the research stage the ongoing success is dependent upon the quality of the management structure.
As management rights can be bought and sold on the open market the management of your asset can be inconsistent.
The critical issue for me is the inconsistency of income. Usually there are peaks and troughs and in some instances income and costs are shared equally and yet in other instances the room only earns income if it has a resident. There have been instances of managers owning apartments in a building and making sure their unit is filled first.
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Thanks heaps for your advice, much appreciated. If you could get a serviced apartment and, through a renatl agreement, be guaranteed rent for whole year, even if it was not rented out, would it make it a better option?? even though you may during peak times get less rent then it may be rented out for.
Don’t be seduced by the attractiveness of a guaranteed rent – someone is paying the guarantee, often it is you in the purchase price.
You also need to find out how the gurantee is secured. I distinctly remember seeing a rental guarantee provided by HIH.
It seems to me you are pursuing a cashflow positive scenario and you’ll need to be aware that returns on serviced apartments are ‘more attractive’ due to the fact they often qualify for a 4% building depreciation rate whereas a standard building only qualifies for 2.5%.
<Inserted 24/1 – Depreciator has just confirmed that serviced apartments don’t attract the 4% depreciation claim. So you will also need to check whether or not the cmpany is using 4% or 2.5% in their cashflow calculations>
The critical point is in your first post – banks don’t like financing these properties due to the risky nature of them. They are a niche property and only attract niche investors – I much prefer a standard property with many would be tenants, security of tenancy and income and above all the capacity to sell with reasonable certainty if the world goes pear shaped.
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Would it be very wise to get a independant valuation done on it?????
Absolutely – your lender will organise one for you – assuming you are accessing a traditional lender.
If you intend accessing finance from the developer/seller then certainly get an independent valaution. If this is the case then it reinforces the fact that serviced apartments are too risky for most banks and they do not recognise them as suitable security for their money.
A warning bell if there ever was one.
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Do these type of apartments rise in value slower than say a tenanted apartment??
paulpfsfinanceMember@pfsfinancePost count: 171
I used to be a manager for a Finance Broking Company that was attached to a Property Marketing Company. When I was there we had to finance heaps of serviced apartments. The reason why the lenders don’t like this type of property is that there is a real limited market if the lender had to repossess the property as owner occupiers could not buy the property to live in and the there was a limited market when it came to investors. They are what the lenders call unacceptable security and it got to the stage that some lenders would only lend between 50=-65% of the purchase price.
You will also find the purchase price normally contains a furniture pack of say for eg $25,000-. When a valuer goes out to do the valuation he will take off the cost of the furniture pack off the purchase price and then do the valuation on that figure.
Lenders are also very vary of rental guarantees.
So in a nutshell for eg if you were to purchase a serviced apartment for $300,000- and there was a $25,000- furniture pack the valuer would do a valuation on $275,000- purchase price. if the valuer was to do the valuation at the $275,000- the purchaser would have to come up with $25,000- for the furniture pack plus anything from 35%-50% deposit on the property if they could find a lender that would accept serviced apartments as security.
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Development Finance SpecialistRikkyMember@RikkyPost count: 313
I personally dont like any thing to do with appartments due to the fact that you are not buying any land (practically no land). Buildings do not go up in value they go down in value as it becomes old or run down (in most cases). Land is what goes up in value . The only reason most investors Buy land with a house or unit etc on the land is because it gives them income a long the way. Anyone that gives you rental Guarantees are makeing you pay for them in the price.
Cheers Rick[drummer]brahmsParticipant@brahmsPost count: 485nordicskierMember@nordicskierPost count: 85
I think there is a bit of chicken and egg in the Serviced Apartment issue. The banks don’t want to lend on something they would have trouble off- loading. The reason they can’t off-load serviced apartment easily is because banks don’t like to lend money on properties that won’t sell easily. And so on and so on etc etc.
If I was a financial institution, I would lend money on anything if I knew I could off-load the asset quickly in a fire sale if I repossessed the property. I don’t think serviced apartments are any different fundamentaly from many of the other products banks lend on. Risk of sale-ability. That’s all there is to it. Factor in a percentage loss of not having a piece of dirt/swamp/pavement and it all works. I think the serviced apartment market is a quiet hidden market with opportunities and pitfalls just like any other.
Improve your nordic skiing – become an accredited instructor with http://www.apsi.net.au/nordicbrahmsParticipant@brahmsPost count: 485
Size matters as well with serviced apartments – if the property could easily be marketed to the general investor or owner occupier market then lots of banks are ok about the apartments.
If your considering a motel room sort of thing, its difficult, however, if its two bedrooms with separate kitchen and living areas, then the risk is substantially mitigated in the lenders eyes.
Do you have any details of what your looking at?
BrisbaneeesholeMember@eesholePost count: 63
Rick, regarding your comment about land being the bit that appreciates, I have heard this a lot from various people. However, Hans Jakobi (real estate guy who promotes positive cashflow strategies) seems to suggest that this is a myth and that units generally appreciate in line with houses.
I am trying to find some evidence to prove him wrong but haven’t yet. If only land appreciated (therefore don’t buy units cause they won’t go up) then if this holds true over the history of the property market in Oz since 1788 when the first fleet landed then you would see houses escalate to $1m today (say) while the units next door are still 3 pounds (having not moved from their 1788 prices because they have no land content). I’m using a ridiculous exaggeration but do you see my point? If you look at the market now, in an average sydney suburb, you might find a 3 bedroom house on a 700sqm block at around $650k, and a 3 bedroom townhouse at around 450k, and a 3 bedroom unit at around 380k. 10 years ago the house would have been worth about 250k, the townhouse about 190k and the unit 150k. To me, that doesn’t sound like wildly different capital growth between the different types of dwellings.
What do you think? Am I way off the mark here? Would appreciate your comments.
eesholegiddoMember@giddoPost count: 152
Hello paul and eeshole and all,
I have experience with units that are being used as serviced apartments and they are returning cf+ well and truly. However these are built as res units so that cap gain prospects are not affected.
(they are nearly new)[cap]They are ground floor, with normal density for same so there is some land content there – about 200 sq m per unit.
When I sell, I expect to get only value of res units plus the extra fittings, but in the meantime I get cf+ which would be difficult to do with a new building in this area otherwise.
I am managing them myself, and so pocketing the extra cash myself.
I believe in retaining control, and would not invest in a managed rent guaranteed unit.
That is just me. I do not know your situation at all.
[cap]Millionaire in trainingMember@Millionaire-in-trainingPost count: 154
I had a serviced apartment in South Yarra, bought before the boom and put on the market in the mddle of it. Purchase price $171k plus $10K for furnishings and costs. It took 18 months to sell, two agents dumped it ( without telling me in this time). It eventually sold for $230k some 7 years later.
Yes the income was guaranteed and it had a 4% or CPI increase and each year on rental income. The rent review date ( 5 years) coincided with the intro of the GST which then gave the leasing company a chance to not icrease the rent that year but in fact decrease it. The only come-back I had was an independent assessment whereby I would have had to pay their costs too if I was wrong.
And I have yet to calculate the Cap gains tax on my measly earnings.
Also several buyers came looking for private residential apartments and the banks were reluctant to lend on a 1 bed unit les than 50sq mtrs in sixe.
Did I make money, well i have yet to quantify that. I got loads of depreciation, but at the end of the day on the day of auction ( it didin’t sell that day), I saw the place had not been looked after as well as I expected from a reputable hotel chain. There was a broken door lock ( read torn off) a hole in a wall and the aircon needed cleaning cause the tenant had allowed occupants to smoke in the place despite it being lease as a non-smoking room.
I am not bitter about it all as there wee heaps of learnings.
Interesting stuff though. Recommended by a financial adviser, mortgage broker gave conservative advice and as I said two agents nicked off on me
I think I will be depending on my own investment radar from now on
.dynamic diMember@dynamic-diPost count: 7
From my own experience, I would be hard pressed to consider buying one. We bought a serviced apartment in Sydney nearly 5 years ago for @227K, 1 bdr plus carspace and a guaranteed net rent of 6%. No one has been able to sell their apartments until recently at a discounted price of $210K. The new rental guarantee will be 4%-5%.
We are trying to offload our apartment and will be discounting it heavily for a quick sale. A lesson learnt for us, but moving on. Fortunately it is the only serviced apt we have and all our other properties have done well.
Just be very careful with what you are buying.
Dianaashb23Participant@ashb23Post count: 7
Sorry to bring this topic up again, but I’m a little confused. From the sounds of it, most of these reply are centered around buying the serviced apartment from the construction company I take it – or from the outset anyway (One post talks about a furniture package).
I was looking at one (in Melb CBD) where the agreement has been in place for some time now (not sure how long) but I presume it is in it’s second lease term (just started). The stated return on the current lease is approx 7% nett, with 3% annual increases, until 2011. Does this constitute a rental guarantee? I haven’t seen the lease yet, but from my experience with leases (admittedly I only have dealings with shopping centre leases), the rental is fixed for the term of the lease. Also, it states that has a further 3 five year options, is this when the rent can go backwards? What happens if the options are not taken up? Does it still have to be a serviced apartment, or can it be converted?
From my calcs, if it was done interest only for the first 3 years, even at 105% lend (deposit would have to be secured against our exsisting residence I suppose) it would be positive, and then after that we could do principle plus interest and still have cash left over, assuming there is no massive hike in interest rates. Even if the property did go down a little, if we kept it long term it would eventually be paid off, with earnings, so effectively we’ve got an asset which we’ve paid nothing for.
What do people think? Sorry to re open this debate, but the answers given previously don’t seem to cover these circumstances…..fordmodelt2001auMember@fordmodelt2001auPost count: 1
My Quest serviced apartment investment in NSW has been an absolute disaster. After all the apartments have been sold to investors, Quest then sell the franchise to an operator who becomes the tenant and has bought the right to use the Quest name for the business. If you end up with a bad tenant as we have, the lease allows them to rip off the owners left, right and centre. After the first 5 years, the tenant offered us a 35% reduction in rent for the next term and we have been fighting through the legal system ever since. Our tenant simply makes deductions from the rent whenever he feels like it, often with no notification and no paperwork to show what work was supposedly done on our behalf, without our approval. Apparently most serviced apartment leases in NSW are based on the Quest lease, and my advice would be not to touch any of them with a 10 foot barge pole. The system in Queensland for all serviced apartments is much better as the owner always has the option to terminate the lease with 90 days notice, so it's in the tenant's interest to work cooperatively with the owners and keep them happy.
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