Hi all,
I inspected a unit recently in Sydney CBD and was generally happy. Points below. If you could let me know any potential issues/concerns I should be looking out for, that will help me make an informed decision. I have done some calcuations, and though it is not positively gearned, the outlay is affordable.
* Studio, 1 room apartment
* 60 Sq M
* Price – $330,000
* Rent – $440 p/w
* Rental guarantee – long term lease in place
* Serviced/managed apartment, with furnishings
* Close to railway station
* In an apartment block of 220 units.
* Vacancy rate not really an issue because the management company pays me (the landlord) the rent. But vavancy rate is relatively low.
* Seems to be an investment-only property
* Built in 2001, relatively new
* Primarily for corporate use, and short-term stays, although it can be used for owner-occupier if necessary (though not the norm in this particular apartment block)I have heard that there are risks with serviced apartments – my question is, if there is a rental guarantee, what is the concern?
Appreciated your assistance.
Regards,
AjayFinance will be one issue to consider. Being in the city will make it more difficult to finance and being a serviced apartment will also mean it more difficult.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Terry – why would financing be harder because the apartment is in the city?
Additionally, what is the issue with "serviced apartments"? I have heard people saying this in the past, but I haven't yet heard a good reason for it.
What are the levies? Who is the rental guarantee from? Is the $440 per week NETT or Gross? What part of town is it in?
NN
NN – rental guarantee is via leaseback from the agent who manages the apartments. The $440 is simply the weekly rent, I assume it is NETT. It is in Sydney CBD, not far from Townhall Station.
Strata $3600 per year
Council $600 per year
Water $560 per yearThe management fee is probably 25%. Check with them regarding the management fee. You can't assume that you will get nett weekly of A$ 440.00. It is the trap by the leasor.
Service apartment has the history of low resale value and low growth.
management fees are not 25%. It is a leaseback arrangement, therefore the management fee vendor has already been deducted from the rent, hence the rent is $440 per week.
Hi ajayayyar,
the Rental guarantee sounds good in theory but should the company who manages it goes bankrupt or another company takes over management, that rental guarantee wont be worth the paper its written on, I would definately find out the vacancy rate of the building is
because if the above happens you might have to rent it out as a normal aparment and it might not achieve $440pw and that will hurt your cashflow ..there is also 220 units in the block, there will always be a percentage for sale at any one time there is no scarcity their and therefore I believe thats why you wont get the growth out of it and not to mension the banks will want a lower LVR which means you have to tie up more of you own cash in it..
rental yields are good at the moment in Sydney CBD
eg. I just went uncondional (on friday) on a 53sqm studio with annexed bedroom(looks like a 1 bedroom) with balcony and district views(5th floor)
a sercure carspace in a modern(1998) sercure residential apartment block (31 apartments in the block) right near central station in Surry hills on chalmers st I got it for $325,000 on 95% finance at 7.63% (CBA) interest rate IO loan, its currently renting $400 pw
strata $750pq the lease runs out soon and the one next door is renting $420..all im saying is you can get good yields and better growth from residential apartment than you would from this executive apartment without the risk..
good luck happy investing
Hi ten_burner,
I agree about the 220 apartment issue, and the fact that this does not make the property as "scarce". That is the only aspect that is bothering me about the investment at the moment. Having said this, if it is a good apartment, it should appreciated long-term, though perhaps not as quickly.
Vacancy rates are at around 5%.
Regarding the company that manages the units, they are quite solid, and public listed – Oaks Property group I think.
Regards,
Ajayajayayyar wrote:Hi Terry – why would financing be harder because the apartment is in the city?Additionally, what is the issue with "serviced apartments"? I have heard people saying this in the past, but I haven't yet heard a good reason for it.
Hi
The mortgage insurers generall won't insure for inner city suburbs as they consider these higher risk. This includes suburbs bordering on the city such as Pyrmont and Ultimo in Sydney. This will mean you won't get a LVR over 80%. Banks may also consider the area higher risk and reduce the LVR to about 70%. I haven't checked this for a few years so things may have changed.
Serviced apartments are also considered higher risk – not sure of all the reasosns but they are generally harder to sell. So the LVR can be limited to 70% because of this too.
Also if it is in a huge building this can make it hard too as these are considered higher risk too.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terry is right i think circa 70% would probably be the maximum LVR. ( I do have 1 lender that will do 80% but the rate and costs are slightly higher than the norm).
With a serviced apartment if you have signed a Management Agreement for a period of years then if the lender reposesses the property they have a limited market they can sell it to i.e No Owners Occupiers.
Secondly some lenders have a maximum number of units they will lend against in a large complex maybe say maximum of 3-5% so maybe max 11 in the complex. It boils down to exposure in a particualr sector of the market.
Richard Taylor | Australia's leading private lender
Hi Guys
in Ref to what Terry said about LMI, I have found as long as it is over 50sqm I havent had any problems getting LMI and 95% finance for CBD residential 1 bedroom/studio properties, I always thought there would be less risk in CBD apartments where there is greater demand than apartments in the outter suburbs…?
can you please explain why there is more risk in inner city suburbs Terry ?
happy investing
Hi Ted
Thats not my opinion but the lenders and mortgage insurers. Maybe you used St George who have their own LMI company?
I guess one reason they find inner city more risky is because of all the high rise apartments. Sometimes these buildings have various problems with Strata and building issues and having too many eggs in the one basket could be risky.
Another reason is probably left over from a few years ago where there was a rapid increase in new apartment buildings appearing in the city.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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