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Should you invest in a serviced apartment?

Investing in a serviced apartment can offer some attractive benefits, but it also comes with its own particular set of risks.

If you’ve travelled for business, it’s likely you’ve stayed in a serviced apartment. These properties offer a more spacious, more comfortable alternative to a standard hotel room, as they often come with a kitchen or kitchenette and living area.

According to a 2021 research report from IBISWorld, the Serviced Apartments industry is projected to expand over the next five years as it recovers from the COVID-19 pandemic. found that business travel and tourism has boosted the serviced apartment sector and increased demand. According to the report, the serviced apartment industry in Australia accounts for around $2 billion in annual revenue.

So with strong revenue growth ahead, how do serviced apartments stack up as a property investment?

How do serviced apartments work?

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.

Can you get finance for a serviced apartment?

In spite of the tighter lending criteria, it is possible to get finance for a serviced 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.

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