Forums / Property Investing / Help Needed! / Leasing an apartment to a hotel

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  • Profile photo of mistadomistado
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    @mistado
    Join Date: 2006
    Post Count: 16

    Hi first time to this site, I am contemplating buying an apartment in a hotel from a previous owner / investor and leasing it back to the hotel…this would be my first property investment and as such I would appreciate any input or comments from anyone who has done the same or has any views on this
    thanks

    Profile photo of Fast LaneFast Lane
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    @fast-lane
    Join Date: 2004
    Post Count: 527

    Buying an apartment to lease back to hotel may look like an attarctive investment but often can be hard to finance and re-sell. Mak sure that your apartment is in a rental pool, not rented individually as well.

    There are heaps of these for sale everywhere so if you do jump in make sure the returns are good enough to warrant the investment.

    Profile photo of mistadomistado
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    @mistado
    Join Date: 2006
    Post Count: 16

    Thanks fastlane, what do you mean by rental pool vs individually rented / how would this affect me ?, Would it also be true to say apartments like these appreciate at a slower rate than normal apartments(ie ones not based in a hotel)…

    Profile photo of Fast LaneFast Lane
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    @fast-lane
    Join Date: 2004
    Post Count: 527

    Now that I think of it, if you are leasing back your apartment to the hotel, rental pool issues wont exist in this instance.
    These investments can appreciate more or less compared to normal apartments. If the returns are good and everything else is going well respectable CG’s should be there. These type of investments are typically bought for CF primarily and any CG’s are a bonus.

    Profile photo of mistadomistado
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    @mistado
    Join Date: 2006
    Post Count: 16

    Yeah was talking to some guys and that was the conclusion that it would be more CF than CG, and this would then incurr tax, whereas a property that was more CG would then only incurr a once off CG tax and that at possibly 50% off…still looking into it so will keep asking questions as i stumble along..one other question i have applied for permanent residency and am living in WA, will purchasing an investment property disqualify me from getting a first time home loan buyers grant when i do finally purchase my first home..any thoughts..

    Profile photo of Mortgage HunterMortgage Hunter
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    @mortgage-hunter
    Join Date: 2003
    Post Count: 3,781

    Owning an IP will not stop you getting the FHOG when you buy a home. Unless you occupy the IP.

    I do not think this sort of investment is suitable for long term wealth generation. With the large depsoit needed you will tie up more equity than you need to.

    Historically they are also hard to sell.

    I prefer to see people stick to well performing middle class residential real estate or similar.

    Cheers,

    Simon Macks
    Residential and Commercial Finance Broker
    ***NODOC @ 7.15% to 70% LVR***
    [email protected]
    0425 228 985

    Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.

    Profile photo of DazzlingDazzling
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    @dazzling
    Join Date: 2005
    Post Count: 1,150
    I prefer to see people stick to well performing middle class residential real estate or similar.

    Oh well….I must be a great disappoint to you Simon…sorry mate. [biggrin]

    Profile photo of geosangeosan
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    @geosan
    Join Date: 2003
    Post Count: 4

    From personal experience i wouldn’t touch it. I am in the process of selling an apartment in QLD, after losing a substantial amout of money. If you want a really good negative geared property go for it, but be aware of the problems that may catch you out.

    I’ve had this property for over 5 years, and it is only now that i can actually sell it, after having to hold it until i got some good rental returns. It would actually be close to being positively geared now, but looking down the track, and knowing the history of this place, now is the time to move on – I will be pricing it so that it will be attractive to all those negative gearing investors out there!!!

    The majority of the problems were with the original “managers”, who we discovered was trading without a licence. The whole process started when the manager shafted his business partner (actually somehow managed to legally steal his partners share!). To get motions through the body corporate, the manager went and bought another unit in the complex (why? – because he could!)

    The majority of owners even got together on a regular basis, and submitted a complaint to the QLD office of fair trading over his actions. Despite having a file that was quote 10 inches high unquote, and the investigation being handed to the most senior investigator in QLD, and the manager offering to return the majority of commissions that he took, what did they do ?

    NOTHING!!!!

    Why did we not just take him to court? This person had so much money, that he would have just tied us up in court with delays, costing us legal fees. why? because he could!! The Body Corporate had already paid around $40,000 in legals as a result as his actions.

    It was 2 years wasted. Sorry to be so negative about this concept, but i will only do deals in future where i have complete control of the situation.

    Cheers,

    Geoff

    Profile photo of shake-the-diseaseshake-the-disease
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    @shake-the-disease
    Join Date: 2005
    Post Count: 97
    Originally posted by geosan:

    . If you want a really good negative geared property go for it, but be aware of the problems that may catch you out.

    ………….

    I will be pricing it so that it will be attractive to all those negative gearing investors out there!!!

    You seem to not understand negative gearing at all. I can tell you that your investment is extremely unattractive to an investor more interested in CG than income (ie, your “negative gearing” investors).

    In fact your experience sounds a warning to all those chasing primarily income in property investment.

    Profile photo of mistadomistado
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    @mistado
    Join Date: 2006
    Post Count: 16

    Just contacted to GM of the hotel ..the deal they are offering is that if i lease the apartment back to hotel (apartment value 160,000), they will pay for whatever additional stuff needs to be bought for the hotel. The room rate goes at 120 a day and i will receive 60% of the monthly income from the room rate and the hotel will receive 40% of the income (and from their share of the income they will maintain any daily / monthly upkeep). I will additinoally have to pay the monthly electricity bill…..The hotel has chains all around the country so seems fairly well established..coinidentally i have been living in an apartment in the hotel for the last 13 months just needed a place next to work..and worked out ok for me..so i havent noticed any administration disputes, although the hotel cafe is undergoing refurbishment over the next 3 months….

    Personally my thinking is 160,000 i could pay that off in 5 years max without any rental income, but with rental income it should clear faster than that. So i will be with an IP that should give me a steady income ..i know that there is the issue of my total CF being taxed, but still it would prove as a source of steady income. …. or am i showing how naive i is…[blink]

    PS shake the disease yuo mentioned problems with negative gearing property, what specifically may i ask..

    Profile photo of geosangeosan
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    @geosan
    Join Date: 2003
    Post Count: 4

    To clarify a few points for you. The rental pool refers to the unit being centrally controlled by the on site management, as opposed you doing the bookings yourself – I know of several cases where this is done, but mainly refers to holiday bookings (resorts). In your case, it is the rooms that the hotel actually rents out on your behalf.

    You will need an ongoing rental agreement for this which will specify the rates that you will receive per day the room is used. Be carefull with electrity costs, my last one was over $600, when the average was about $240. They are outside both your & the hotels control.

    Who pays for repairs? Most agreements in my experience allow the management to spend your money up to a certain limit (maybe $500) without your approval. For example, if a door lock is broken at 2:00am, they will call a locksmith to repair it asap.

    The other consideration is the occupancy rate. If the actual rate turns out to be only 50%, then you can kiss half your income good bye!

    Hope this helps,

    Geoff

    Profile photo of mistadomistado
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    @mistado
    Join Date: 2006
    Post Count: 16

    Thanks geosan, in my case the hotel rents the rooms out and as i understand it all repairs will come out of the hotels 40% profit cut..but i will definitely look into it.. Since i have been living in the hotel i have been observing the occupancy rate and its pretty good plus am buddies with the concierge and he has shown me the occupancy rates first hand. The electricity bill is something that one just has to deal with i guess, Is this tax deductible..? In your case geosan is the agreement you have with your hotel such that the profits are 60% to 40% favouring you… thanks for the info

    Profile photo of geosangeosan
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    @geosan
    Join Date: 2003
    Post Count: 4

    Electricity, along with all expenses are tax deductible. With regard to the split up of the money, my unit is actually in a resort in QLD. I am charged 12.5% mngt fee, plus 5% marketing (covers QANTAS brochures, etc), plus all outgoings (eg. cleaning at the end of a stay).

    With the new managers i have had over the last 2 yrs, they stated that the costs should be between 38% & 43% (this includes mgnt fees, linen, pabx hire, pay tv, etc), which they have been (shame the original managers couldn’t (wouldn’t!) obtain this, but life goes on). So I guess your 60-40 split would be quite reasonable, particularly if they are responsible for all repairs.

    I guess the bottom line is, you have to be happy with the figures, and as long as you have an exit strategy if something goes wrong.

    Cheers,

    Geoff

    Profile photo of mistadomistado
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    @mistado
    Join Date: 2006
    Post Count: 16

    Thanks..exit strategy..i havent really given any thought to an exit strategy..any suggestions would be welcome…

    Profile photo of mistadomistado
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    @mistado
    Join Date: 2006
    Post Count: 16

    On a totally different note: I have come accross another add by a company for self service apartmetns whereby you buy the apartment and the company running the self service apartments pay 6.5% of the purchase price back to you as a monthly income regardless of tenancy and you pay no on going fees, All furniture within the apartment is your and I can claim depreciation on it. The lease with the company lasts for 10 years so 8 yrs left. I dont see very much grtowth in terms of Cg but still with negative gearing and tax benefits seems pretty good deal; Any thoughts anyone

    Profile photo of awinnerawinner
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    @awinner
    Join Date: 2005
    Post Count: 8

    Any opinions on mistados post anyone?

    Ive come across one of these too, the apartment price is probably a bit lower than a similar residential apartment, you have a lease with the hotel who pay all outgoings so your return is known (indexed to cpi) .

    Eventually i suppose the hotel will not take up the lease and the you will have a 100 apartments looking for a tenant but surely you would have made some CG in the next 7 years.

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