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.
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If you’ve travelled for business, it’s likely you’ve stayed in a serviced apartment. These properties offer a more comfortable alternative to a standard hotel room and are popular among business travelers and tourists. While you may have enjoyed the amenities of a serviced apartment, you may not have considered them as a property investment option. However, serviced apartments can offer investors some unique benefits.
A 2017 study by IBISWorld 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 $3 billion in annual revenue and saw an annual growth of 5.9% from 2012 to 2017.
So with strong growth and revenue, 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, furnishings and room service, as well as the benefits of an apartment, including a kitchen, lounge area and work area.
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.
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.
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?
Serviced apartments can offer a number of benefits that set them apart from more traditional investment properties.
They provide a guaranteed rental income
Serviced apartment agreements often put the risk of vacancy on the operator of the block of serviced apartments. This means that the operator leases each individual property from its owner for a fixed price and then rents the apartments to people seeking accommodation.
In this model, a fixed rate is offered to the owner of the property and the owner receives rental income whether or not the unit is occupied. This alleviates the risk of long periods of vacancy that often comes with other investment properties.
They offer good rental returns
Because many serviced apartment agreements offer a fixed price to the property owner, the rate of returns can often be much higher than it is for other types of residential property. The most recent CoreLogic Hedonic Home Value Index showed that the gross rental yield across the combined capital cities is at 3%. By comparison, serviced apartments offer a net rental yield in excess of 6%.
You don’t have to perform maintenance or repairs
The ongoing maintenance and repair of a serviced apartment is carried out by the operator. This means that you won’t have to worry about fielding maintenance requests from property managers or repair complaints from tenants. In many serviced apartment agreements, the operator is your tenant and carries out repairs themselves.
What are the risks of investing in a serviced apartment?
Investors are often warned to be wary of serviced apartments and there are some good reasons why. While they can provide a reliable source of income, they also have drawbacks that set them apart from more traditional investment properties.
Capital growth can be lower
Most people invest in property with an eye towards future capital gains. While savvy investors look to generate cash flow with their properties, their primary goal is to buy a property that’s likely to increase in value.
If this is your preferred strategy, you may want to think twice about investing in a serviced apartment. Serviced apartments typically have poor capital growth because they are offered solely to investors, which therefore dampens demand.
The resale market can be difficult
When you look to sell your serviced apartment, you may face difficulty in finding a buyer. 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
The attractive feature of a serviced apartment for most investors is the guarantee of regular, ongoing income. However, this guarantee is only as good as the serviced apartment’s management.
There are some large operators in the serviced apartment market, such as Mantra and Quest, who have a high degree of stability, offer brand recognition and have well-defined and trustworthy agreements with property owners. However, the serviced apartment market also includes an array of smaller operators. While some may be excellent, others may be less viable, more volatile and represent a riskier investment.
A poorly-managed serviced apartment could rise and fall with the strength of the tourism and business accommodation markets. Should the operator of your property suddenly go out of business, your guaranteed income could evaporate.
Banks can be hesitant to lend
Financing for serviced apartments can be more difficult to obtain. Lenders may require a bigger deposit to mitigate what they see as the sector’s riskier features. Some have very strict criteria around the size and use of serviced apartments and will seldom be willing to lend for items like furniture, which owners must pay for themselves.
Can I 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. 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 obtain a higher LVR, 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 serviced apartment than it would for another 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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