Hi established forum contributors
I have the opportunity to buy an investment unit in a block of fully serviced apartments. I am considering going for 105% finance. There is One cost – purchase price (plus closings) then no further outlays whatsoever, just a set amount of rent paid to me monthly. The apartment managers have a 5+5+5 lease and they lease back each unit from the owners. The actual income works out cash neutral on investment, but I wonder if it is a sound investment in terms of being virtually risk free plus gaining equity/possible capital gains.
Any suggestions or possible loopholes to look for would be greatly appreciated.Sincerely
sairah
Hi Sairah,
You will need to check what size the unit is as anything under about 50 sqm causes some concern for some lenders. They often also have a reluctance to use any growth as security for other properties.
Being a serviced apartment it will attract a higher depreciation rate for the included furniture as such the cashflow shown to you may be a little ‘distorted’. You will also need to find out what occupancy rate the sellers use to calculate the cashflow situatioon and also whether or not this stacks up in comparison to the wider market.
Check cleaning costs and whether or not the rents are pooled. Non-pooled rents may see your unit remaining vacany for extended periods of time and may eat into your cashflow.
Have your solicitor read (you too of course) the management agreement and make sure you fully understand your responsibilities and also theirs.
One question – have you recently come back from holiday in this area?
Derek
[email protected]Property Investment Support Available. Ongoing and never stopping. PM welcome.
Hi Sairah
These investments have a lot of positives about them if you get in at an early stage. The main things you look for are if they have a guaranteed return or if it is occupancy based. If it is occupancy based that can be a problem.
If it is a full leaseback arrangement where all costs are inclusive of the leaseback agreement (Strata fees, rates etc) they are good. Especially if you can include a ratchet clause for the first 5 years term. This means your return can only increase each year. It will never be less than the previous years, cpi adjusted. With tax incentives you can make a good return from these types of properties.
Hope this helps, I have looked at quite a few of these types of investments. If you have any other questions email me.
Regards
MicHunter House Hunters.
Specialising in finding your dream home in Newcastle and the Hunter Valley or your perfect investment property throughout Australia.To join our database [email protected]Hmmmm Sairah,
Where is the location of the apartments ? and are they new ?
Usually there is a reputable hotel/motel type management operator in place and on site (maybe 24 hrs?)and the place is run like a hotel/serviced apartment. Your rent guarantee (6.5% or 7.5% ?)typically has an escalation clause attached, (either fixed percentage or cpi) and hence in theory the property increases in value in line with the rent increase. Kinda like a commercial property where you cap up the rent rate to work out the asset value.
Usually low risk and pretty passive as an investment, but not necessarily the best for capital appreciation. Get more opinions before you make a decision…KPThank you all for your thoughtful replies. In answer:
1.No, not returning from holiday, I am currently residing in the area, short term. No cleaning costs, no pooled rental.
2. Guaranteed fixed income, no maintenance, rates, not dependant on vacancy rates, full lease back.
3. Have equity in another property to use as finance.
4. Income is adjusted for CPI annually. Currently on 6th year of lease back, another 4 years to run on current lease, plus further 5 option.
5. No tourism market – construction workers, but I take your comments about volatility in, as they also apply here.Thanks again, I value your experienced comments.
sairah
Hi Sairah
In my experience a sound platform is that the property may have a dual purpose. For example a townhouse in larger groups are being used as serviced apartments re:Quest.
If you dont want to continue with this arrangement then the property can be used a residential tenancy.
Rents are generally lower with management operator companies who run the serviced side of it.
However irrespective of this if the lease says a figure for a certain time then u get paid irrespective if it is used or not.One thing you need to be aware of is that the leases i have seen gives them the option after say 5 years, however you have not got the choice not to proceed. So be sure it says by mutual agreement this has to be very specific.
Hope this helps
regards
Alf
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