Serviced Apartments 7% Plus Return

I can’t coment on the city nor the country really with ‘serviced appartments’ I know of one guy who is about to biuld two of them out the back of his house, because he has a great view of a peaceful gum tree valley and creek area.

He expects to pay $70,000 for both apartments ( he has a lot of contacts and is getting things done cheaply) and put them on Strat title and says he will rent them at $400 a week. Which I have doubts about, but am going to keep in contact with him as he biulds them and see how he goes with them.

This is in a country town and a place where I have never seen ‘Serviced Appartments’ there before. So he’s having a go at doing something new for the area of about 12,000 population.

I imagine they would do well in tauresty places.

Hi Desktop,

If it is a good enough investment it should be able to stand on its own two feet – without a guarantee.

Derek
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Property Investment Support Available. Ongoing and never stopping. PM welcome.

First red flag – “Melbourne apartment”

Second red flag – “leased as hotel/motel rooms” = minimal to zero upside in terms of capital growth.

Third red flag – apparently reliant on 3-4 percent annual rent increases [which is not likely on an ongoing basis].

Fourth red flag – the “major” hotel or serviced apartment chains are handing the risk over to independent owners. If the property was a solid investment, they would want ownership.

Fifth, but not final, red flag – thinking this investment would/could be “hassle free”.

Having experience in hotel lease/ownership – and working with some of the biggest brands in the business, I can assure you there is no “guaranteed” rental/room rate increase [revenue] on an annual basis. The rate is very much reliant on occupancy trends and competition, alongside other factors.

The length of the lease, i.e. 15-25 years is somewhat irrelevant. To remain competitive at best, the property will need to undergo an upgrade/renovation every 5-10 years. Is this cost incurred by the lessee or apartment owner?

Who is the “established hotel chain”?

I don’t mean to insinuate that this is a bad investment, but based on the information provided the reality is it will probably end up this way.

You need to track down some of the large number of unsophisticated [term used in the business] investors in Melbourne who have lost money in these deals.

Conduct in-depth due diligence, be very cautious moving forward – in terms of their contract provisions – and most importantly, have a clear “exit strategy” [before handing over a cent] which can be implemented at any time without losing the shirt off your back.

— Michael

“you can dispute the new rate however then you must pay for an independant valuator to determine the current market rate!”

— The hotel chain will maintain a room rate that they are confident will sell – and achieve the required occupancy.

The rate can decline – or discounts apply throughout the year, to achieve target occupancy and revenues.

There is no guarantee the rate will increase – and unless stated otherwise, there is no guarantee it will not decrease.

If the hotel chain restricted itself in either case, the risk would be too high – because they cannot predict market conditions including competition.

“it will be very difficult to rent the apartment out, and if you did, would receive such a low yeild competing with all the other major apartments nearby.”

— A prime reason sophisticated investors stay clear of these investment scenarios.

“another hotel chain took over the whole complex. does that mean they will take over all the existing lease? if not, will they want to negotiate another deal?”

— Any hotel chain experienced in these lease arrangements has sound exit strategies which can be implemented at any time at minimal cost.

It is almost certain that any other chain/group acquiring the head lease will have the option to restructure this lease.

However, this should be disclosed to the property owners in the purchase contract – it is often a small provision which is easily disregarded but very important.

“there is nothing in the contract regarding spending more money in the future for furniture.”

— Furniture is only one expense. Rooms occupied on a nightly or short-term basis require regular maintanence.

Aside from general repairs, who covers the bill if the room is trashed?

“the deal is that they (the tenant) will pay for all maintenance”

— How do they define “maintenance” – make sure who pays for what [taking everything into consideration] is clearly defined in the agreement.

“and if they replace anything, they will own the new item.”

— I understand you are referring to “chattels” i.e. furniture, appliances, etc and based on your comments the apartment is furnished.

If the lessee replaces an item then retains ownership, this adversely affects the value of your property because you paid for a furnished apartment which includes these chattels.

Needless to say the chattels generally incur a premium with these transactions.

“i am really interested to know why the hotel chains dont buy the apartments themselves. why on earth would they sell the rooms off to private investors and then lease them back.”

— There are hotel chains which only lease because they specialize in managing hotels and not owning property. Or they do not have the financial resources to acquire the property.

However, the above scenarios generally coincide with one party/partnership owning the property.

The managed apartment scenario discussed here often reflects “risk management”. The developer is handing over his risk to the apartment owners, and the lessee is handing over their risk to the apartment owners.

If the market turns due to oversupply, etc, the developer is clear and the lessee has the option of selling or terminating the lease – which can result in a loss. Either way the apartment owners generally incur the greater cost.

“its obvious that these apartments will attract very little if any capital growth and that you’re limited with what you can do with it.”

— This comment in itself is a key reason why the apartment is not a good investment.

Forget passive cash-flow which may cover your outgoings over time. If there is no capital growth, there is no point investing.

Wealth derives from “capital growth” not passive income – although both can be realized in an investment.

— Michael

I think the city Serviced Appartments are different scope and arrena to the country ones! I haven’t really heard of many in the country , so i can’t speak of much!

I hope to go down and see how this guy is going, hopefully soon. They should be biult now; he said it was going to take three weeks until he got started and it’s about 8 weeks since i last spoke to him , so they might be finished.

About his situation:

I calculated the cost of it in a worst case senario and he would still come out in front (CF+) if he has to just rent them at the regular rental price and that including 6 weeks vaccancy. It’s in a good town where getting them rented won’t be a problem.

The serviced appartment bit is to get the top dollar or ‘The cream of the crop’. But if worst comes to worst he could just rent it on a weekly or monthly basis. That’s what i like about the idea, because he’s biult or biulding it cheap, he can rent it for Positive Cashflow anyway.

So his risk of doing it this way is minimal. Looking forward to going down and seeing him and getting all the details to see the update on where he’s up to!!