If you invest in a serviced apartment you'll purchase the property and then lease it back to an operator.
The apartment can then be rented out as either short-term or long-term accommodation.
Serviced apartments provide almost-guaranteed rental income, but can be harder to sell on, because the resale market is limited. Because of this, capital growth can be lower than other property investments.
How do serviced apartments work?
If you've travelled for business, it's likely you've stayed in a serviced apartment. A serviced apartment offers the amenities of a hotel room, such as a cleaning service, fully furnished rooms and room service, as well as the benefits of an apartment, like a kitchen, lounge area and work space. An example of a serviced apartment is Mantra, Quest or Oaks.
Serviced apartments are available for both short- and long-term stays and the units are often owned by individuals, who lease them back to the operator for use as accommodation.
For the owners of serviced apartments, the agreement with the property’s operator may take a number of different forms. However, there are two general models of serviced apartment agreements:
Long-term lease
This model allows the operator to offer the apartment for short- or long-term accommodation and to operate it in much the same way as a hotel room. In this model, the owner of the apartment does not use it as a residence, but solely as a rental property.
Short-term lease
A short-term lease allows the owner intermittent use of the property, while the operator can let it out for short-term accommodation when it’s not in use by the owner. This is often the case with resort properties, where the owner may use the property as holiday accommodation for part of the year and allow the operator to let it out for short-term accommodation for the rest of the year.
What are the benefits of investing in a serviced apartment?
Pros
They provide a guaranteed rental income. The operator leases the apartment from you and the responsibility is on them to fill the room.
They can offer good rental returns. The operator usually leases for a fixed price, which is typically higher than other forms of residential property.
You don't have to perform maintenance or repairs. The ongoing maintenance and repair of a serviced apartment is carried out by the operator.
Cons
Capital growth can be lower. Serviced apartments typically have poor capital growth because they are offered solely to investors, which therefore dampens demand.
The resale market can be difficult. Because these properties attract a very specific type of investor with a very specific investment strategy and risk appetite, the market for resale is limited.
Their performance often depends on their management.
Banks can be hesitant to lend. Lenders may require a bigger deposit to mitigate what they see as the sector's riskier features.
Our expert says: Use third party help to minimise risk
"If you're thinking about buying a serviced apartment, you need to weigh up the positives and the negatives. You also need to do your research and analysis as to whether the apartment you want to buy will yield the results you want.
It might be best to engage with a buyer's agent and mortgage broker to talk through your plans. They will be able to discuss the risks, help you find the right property for your goals and navigate the more complex lending landscape that comes with serviced apartments."
The lender will have requirements, such as the size of the apartment and the style of apartment.
The amount of finance you can access will depend on the nature of the property. As a guide:
If the apartment can be released from its management agreement within six months of purchase to be used for permanent occupancy, lenders may be willing to finance up to 80% of the property’s value.
If the operator has a restrictive management agreement that doesn’t allow for the apartment to be used for permanent occupancy within six months of its purchase, most lenders will only finance up to 70% loan-to-value ratio (LVR).
If the apartment is part of a resort-style property, lenders may only be willing to finance 50-60% LVR.
While it can be more difficult to buy a serviced apartment with a smaller deposit, it’s important to keep in mind that serviced apartments are often less expensive than other types of investment property. If you have a deposit saved, it may go further purchasing a more affordable serviced apartment than it would when spent on another more expensive property type.
And, while financing a serviced apartment can be trickier, it’s not impossible. You can talk to a mortgage broker who can help guide you through the process of financing your investment.
Frequently asked questions about investing in serviced apartments
No, if you buy a serviced apartment it must be as an investment property. However, depending on the agreement with the operator you may be able to have intermittent use of the property. This is often the case with resort properties where the owner can use the apartment as occasional holiday accommodation.
When banks lend money they like to know they can mitigate their risks. They want to know the borrower can repay the loan and if they can't that the bank can take and sell the property. Serviced apartments are more of a risk to the lender because they are harder to sell on and because rental yields aren't guaranteed.
Serviced apartments face different challenges to regular apartments and other properties. If the apartment or complex is poorly managed the rental yield may not be what you would like it to be. The right serviced apartment however can offer a guaranteed yield.
Serviced apartments are also very specifically only available to investors, and a certain type of investor at that. This means the capital growth can be lower than other properties. It also means they are harder to resell because the buyer pool is smaller.
Banks are also less willing to lend for serviced apartments. Although this can be overcome by offering a higher deposit and demonstrating why you think it will generate a good income.
Sarah is the author of How to Raise Rich Kids. With over 20 years of experience in property, finance and investment journalism, she is a trusted expert whose insights regularly appear across television, radio and print media, including Sunrise, Channel 7 News, Bloomberg and Yahoo! Finance. She has previously served as managing editor for Your Investment Property and Australian Broker. Her expert advice has been shared in the media over 4,000 times. Sarah holds a Bachelor’s degree in Communications and a Tier 1 Generic Knowledge certification, which complies with ASIC standards.
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