The investment selling company says of the $260k apartment:
quote:
“The available apartments are to be marketed exclusively to investors on the basis of a guaranteed return, depending on the investor’s choice of apartment. We believe the return will prove attractive given the design and quality of the apartments and the success and experience of the tenant,…”quote:
Guaranteed Return : For the first two years the rents are fixed. Annual rentals increase by 4% pa in the following years, rent review to market is to be undertaken at the end of the fifth year. 4% pa increase for the balance of the term. At the end of the first ten year term, rent is reviewed to the market and then increases by 4% pa.quote:
Who pays the Rent : The guaranteed rental income will be paid by the tenant, which is affiliated with XXXX, being Australia’s largest operators of serviced apartments. On top of this, the chairman of XXXX is personally guaranteeing the above rentals.Elsewhere in small print, it says that the
quote:
Starting Amount For Depn of Building Costs is 125,000Does that mean that the developer built the apartment for about $125k, added in furniture etc, possibly added in a few $k for rent guarantee and then sells it for $260k?
Cheers
KeithHi Keith,
Sounds about right, they would have also had to buy the land, do all the water works, electricity to each site, subdivisions, etc and landscaping and recover costs for the common areas (e.g. pool, driveways, paths, stairwells, etc). This is probably another $10K to $20K across each apartment without taking the land component into account.
Hi kjajha,
Having gone down this path before, I just want to ask you whether you’ve thought about why they offer a rental guarantee? Yes, they onsell the property at a higher cost once they have fixed it and then you can ‘claim’ depreciation (hope my spellings okay) on the fixtures and fittings etc.
Please go into this deal (if you so choose) with your eyes open. If they built it for 125k and sell it, having already factored in rental guarantee, then onsell it for 260K, who’s getting the profit (obviously the builder and co.) and how long will it take you to make money from this deal?
Personally I think you should walk. Good luck with whatever decision you make.Cheers
Sooshie [
]There are no problems, only solutions!
Hi Keith,
Just thought to relate an interesting scenario to this – especially regarding rental return. Not sure where you’re located, but I’ll use Melbourne as a good example of what guaranteed rentals means.
Early one evening take a drive past the recently completed app’t developments on the Yarra / Docklands district. Remembering that most constructions will not commence unless there’s 60% sold off the plan, take a look at the number of units with lights on to guage the occupancy rate.
Many of these developments were marketed with the same ‘guarantee’. At the end of the day, you’re financing your own rental for the first few years & if the app’t does get rented, it’s a bonus for the developer, not the investor….
Michael [
]Hi Keith
And a big “Hi” to everyone on this forum! Long time reader, first time poster…I feel like I know you guys already
The quote from your post looks very similar to the recent contract I received from a company marketing serviced apartments(e.g. guaranteed returns, depreciation etc etc.
I’m still yet to buy my first investment property (probably end of this year), but after immersing myself in the loads of info out there, it seems as though the returns on the investment really dont add up when you take into consideration the amount of cash you have to outlay….Sure, they offer you 2 weeks free accomadation a year etc and guaranteed returns for 5 to 10 years, but looking closer at the contract there seem to be too many middle men taking their cut so I’m sure investors could do better elsewhere….correct me if i’m wrong anyone out there who has successfully invested in serviced apartments…
I tend to agree with Sooshie, walk away and look for a better deal…
Cheers
Damon
btw anyone from s.a. on the forum?
hi
on this question i actually purchased a torrens title townshouse and furnished it and let it as a serviced apartment. This can also be used for residential accomodation.this gave me 4% dep on the building and not 2.5%.
It all depends whose giving the guarantee normally the rents are a bit lower but if a company that specializes in accomodation gives u a long term lease it is ok i have found.
The rents are a bit lower but no hassles with other isues.
If are buying just a serviced apartment that has no other use then becareful.
all the best
I’m definitely a newbie here – just spent couple hours reading through (and benefiting from) the discussions.
Just as a follow-up on the issues discussed in this threat, would the situation be any different if the long-term lease is with a hotel operator (they operate in a few cities in Australia and Asia) ?
The location is a little bit unusual. It’s right next to a corporate park – where the hotel will get most of its business, I guess. But also because its uniqueness, it’s rather difficult to assess the amount of uplift the developer has added.
Appreciate any advice on the risk factor of dealing with a hotel targetting business travellers (instead of being one of the service apartments in the CBD) and how one can estimate the fair current market price of the unit.
Serviced Apartments – My thoughts
When you sell anything you want to make your product available to everyone in the Market.
Serviced apartments usually have long term leases attached to them, sometimes up to 25 years. This gives peace of mind for your rental income and usually makes them fairly affordable to own. But – (there is always a but) if you have a long term lease can you sell to an owner occupier? (the answer would be no) So the only person you can sell to is another investor. Investors only make up around 30% of property owners. You have just reduced your market by 70%.
More bad news – If you have ever tried to get finance to buy a serviced apartment you will find that most banks don’t like them and like you to put enormous amounts of other equity so they will do the deal (NAB and a couple of others are a little different here) So your 30% market has probably been reduced by half again. We now have a market of around 15%.
So in a nut shell the capital growth on a serviced apartment most probably will not be the same as a standard apartment.
On the bright side though – if you have a lot of equity and you can’t sleep at night worrying about rent and you really want an IP then serviced apartment may be your cup of tea.
I reckon that there is better stuff out there though.
Petters
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