If you have traveled, whether for business or pleasure, it is likely that you have stayed in an apartment with services. It is similar to a hotel room, but it offers a more spacious and featured experience, having more amenities for guests, such as a kitchenette.
According to an IBISWorld report, the growth of domestic and business tourism has been one of the factors behind the annual increase in revenues from the serviced apartment industry by 5.9% from 2012 to 2017.
But is this a good investment option for an everyday investor?
What is a serviced apartment?
A furnished apartment is generally furnished and available for long or short-term stays. Most of these apartments have a kitchen and often have separate bedrooms for guests. The apartment is usually located in resort style complexes with additional amenities such as a swimming pool and a gym. It is also sold under the name of strata.
Investors could buy this type of property with built-in rental guarantees which set a minimum rate for rental returns, vacations, maintenance and damage. The management company does a lot of the upkeep and management of your serviced apartment, although you generally pay a higher amount in management fees than you would pay with a standard residential property investment.
However, this type of property could present certain risks, which we will explore throughout this article.
Leases
The serviced apartments offer two different types of leases, according to the agreement with the building operator:
Long-term lease. In this type of lease, the apartment is offered for long-term accommodation, functioning as a hotel room. It is used exclusively as a rental property and as an owner; you do not intend to use the property yourself.
Short-term lease. With a short-term rental model, you have the option of using your serviced apartment on occasion. The operator can rent it when it is not in use by the owner. This is typical of resort properties where investors may wish to use their property as vacation accommodation.
The advantages
There are many reasons why a serviced apartment could work for you as an investment because it offers some attractive benefits, some of which:
Guaranteed rental income. When you buy an apartment with services, you conclude a rental contract with a management company, as opposed to a tenant. The company will then pay you the agreed rental rate for the duration of the lease, which could include pre-negotiated rental reviews to ensure you get a fair market rate.
Lower costs and charges. With this type of property, certain expenses of the owner are borne by the tenant, which could lead to higher rental profitability.
Maintenance is taken care of. Daily maintenance of this type of property is generally provided by the on-site management company. Cleaning, minor repairs and accidental damage may be covered by the lease. Although major repairs or replacement of devices are your responsibility, they are supported by the management company and you are billed as the owner.
Risks to consider
The guaranteed rental income promised when investing in a serviced apartment is enough to attract all kinds of investors. However, there are risks that you need to consider before purchasing this type of property for your portfolio. Some of them are:
Financial risk. Investing in an apartment with services can be expensive. While its benefits are attractive in offering rental guarantees, you still need to make sure it will last if things don't go as planned. Like any property, location, price and demand are things you should look for. According to Paul Bieg, director of Duplex Invest, you should also know exactly how long the lease is for and the terms of the lease are also very important.
Weaker capital growth. The 2019 real estate investment sentiment survey found that 49% of investors who responded said long-term capital growth was their preferred strategy. If you are investing for capital growth prospects, investing in a serviced apartment may not be for you. These properties generally have lower capital growth because they are exclusively offered to investors, which minimizes demand, so they are more suitable for cash flow investors.
It could be difficult to find funding. Lenders may hesitate to finance your investment. If you find a lender to finance it, you may need to pay a higher deposit amount to mitigate the riskier features of the industry. Some lenders may even have more stringent criteria that you must meet before obtaining financing.
It is not for all investors. If you are just starting out in your investment career, an apartment with hotel services may not be suitable for you as it is suitable for a very specific investment strategy and "can only be suitable for around 10 % of investors, "says Bieg.
"Lenders will never reach a maximum LVR of 80% but in most cases it is 70%, which will exclude most investors who are trying to build a portfolio and maximize their cash or their equity. Serviced apartments are generally better suited to an experienced investor using an SMSF, ”he explains.
Financing of an investment in an apartment with services
Finding a lender to finance this type of investment could be tricky. Lenders can think of a serviced apartment as a unit, which is an owner-occupied house, says Bieg. The type of agreement that the property has in place could determine whether you get financing or not.
Lenders can only provide 70% of the purchase price, or even less, if the property has a "restrictive agreement" in place, according to Jessica Darnbrough, spokesperson for Mortgage Choice.
"If the serviced apartment does not allow permanent occupancy under the management agreement, it would be considered a" restrictive agreement "," she explains.
Lenders consider serviced apartments with "restrictive agreements" to be high risk, as they can be difficult to resell if the borrower defaults on the borrower.
After balancing the pros and cons of investing in a serviced apartment, it is best to consult a professional who could help you make an informed decision as to whether this investment is right for you.
Spending money, especially for a complex investment like this type of property, could be very risky. Exercise due diligence and thoroughly study the serviced apartments industry before giving the green light.
Top suburbs:
Willoughby east
,
alderley
,
Chermside
,
dulwich hill
,
rockville
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