I have been approched to go thirds in a hotel room in a Coastal Town in WA. It will not be completed until end of 2008 and you only need to put 10% deposit down now and pay the rest when the hotel is completed. This is a turn key figure – so no extra money will have to be paid.
Can anyone give me any advise on these sorts of deals as it looks quite good on paper. They have also given us the option for the first year to take 6.5% net return or you can go in a pooled income. I was wondering if any one has ever bought a hotel room and if they are CF+ and what sort of returns you might get. I have done countless spreadsheets anticipating the rental returns and it does look positive even with a occ rate of 50% but want to know if there are any hidden catches……
Any help on this matter would be greatly appreciated.
Regards
Julie [thumbsupanim]
Hi Julie,
I suggest that you search for previous posts about hotel rooms. There have been plenty of questions asked.
The general consensus is that these types of investment seduce people because of their returns. You also need to consider financing, growth and capacity to release and/or use equity later.
Something more standard is a better place to start in my opinion.
Derek
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http://www.pis.theinvestorsclub.com.au
0409 882 958
Skype – derekjones2113Is it a ‘room’ or an apartment?
If it is the latter, be wary if somebody is telling you that you can claim 4% deduction on the building under the Short Term Traveller provision.
Also be wary of cleaning costs. In my experience, cleaning costs for holiday apartments can be up around 20% of the gross rent. this often isn’t fully disclosed in the glossy marketing guff.
ScottTax Depreciation Schedules
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http://www.depreciator.com.autajee,
The last thing on earth to invest in are “serviced apts”.
They (management) increase the unit’s price to cover the rent.
So YOU are actually paying your own rent !!!
It takes years for the equity to grow to the purchase price.
Very hard to sell as only investors seeking a decent return are interested in buying.
Banks treat them as a liability. So you need a big percentage of the price for the deposit.Don’t go near them.
The builder makes money.
The developer makes money
The management team makes money
Only YOU that doesn’t make money.bruham.
Hi Depreciator,
Thanks for your comments. No-one has told us that you can get a depreciation of 4% for short term travellers provision but we have been given a depreciation schedule by Depro for Capital Works and Plant Allowance. Can you claim these two?
Regards
Julie [thumbsupanim]
tajee,
You can claim depreciation (not 4%) on any property investment.
That’s no big deal.
Four percent when you’re down the toilet for thousands of dollars, doesn’t make sense to me !!!If you notice that most of these hotel rooms are run by the big business end of town.
(Proberly not in your back water of a country town. Which means even more dillergance is needed.)
Stockland property, Mirvac and most big listed property trusts.
That’s where they make a killing in their profits.I have shares in a two of these listed property trusts.
Commonwealth office property trust and Stockland trust.Only stupidity would allow you to go down this path.
Again, I say back away from this type of investment.Hopefully, your friend.
bruham.I have concerns about these sorts of things.
Firstly WA seems to be booming now. Who knows what will happen in 2008. Be prepared for the worst.
2nd, going thirds. Did you know when you go for finance in the future, you will be assessed as owing the whole amount (if there is a loan) but will only be able to take into account 1/3 of the income.
3rd, getting finance for these sorts of things can be very hard
4th possibly hard to sell due to the specialised nature of the market.
Terryw
Discover Home Loans
Parramatta
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Originally posted by tajee:No-one has told us that you can get a depreciation of 4% for short term travellers provision but we have been given a depreciation schedule by Depro for Capital Works and Plant Allowance. Can you claim these two?
Hi Julie,
Depreciation for residential buildings includes a capital allowance (the building, roof, etc) which typically is for 2.5% of construction costs/annum for 40 years. Bear in mind 40 x 2.5% = 100% claim for building costs.
If the property is designated as short term stay you are able to claim 4% of construction costs/annum for 25 years. Bear in mind 25 x 4% = 100% claim for building costs.
Now which has been used on your report – it is easy to find out. Look under the capital allowance column and if the figures run for 40 years the building is being depreciated as a standard residential and if the capital allowance column is running for 25 years then the building is being depreciated as ‘short term stay’.
It is easy to find out which is which if you get a little confused by the terminology – capital allowances will largely be the same every year for the life of the claim period.
If I remember rightly the ATO has tightened up the definition of short term stay accomodation and much of what was previously depreciated under this basis now falls outside the new guidelines.
Scott will be able to clarify the determining factor/s.
As well as capital depreciations (the buildings) you will also be able to depreciation the plant and equipment. These items are typically furnishings, white goods, blinds, carpets etc etc. Each of these items have their own depreciable life and will be identified individually.
But – in investment terms depreciation is the icing on the cake it is not the reason for buying. The issues identified within this thread are large and significant and give substance to the ‘do not buy’ message.
Derek
[email protected]
http://www.pis.theinvestorsclub.com.au
0409 882 958
Skype – derekjones2113A work colleague of mine bought into a off-the-plan motel 7 years ago in Port Hedland, WA. First 5 years was not too bad as they were guaranteed minimum returns. They tried to sell out during this period but couldn’t find a buyer. Since the guarantee period expired their returns have plummeted to almost nothing most of the year. They and every other unit holder has been trying to sell without any luck (no surprise). As a group they’ve now resorted to trying to sell the motel in its entirety. Last month they finally had an offer but my colleagues share is only $43K for their unit. They still owe $90K+ (not 100% sure what they actually paid for the unit in the first place) so they are in a very difficult situation. They could cut their losses but have no other security to offer the bank for the shortfall and despite being on a combined income of $130K plus can’t get an unsecured personal loan to pay out the shortfall. Obviously not all hotel/motel/serv’d appt deals are this bad and obviously my colleague made a very poor decision to buy in in the first place but it just highlights the pitfalls of this type of investing.
Another point to consider…I used to work as an accountant in an inner-city hotel where all the rooms were strata-titled and owned by investors. Most seemed happy enough with their investments but the reality is that they have virtually no control over the way the business is managed. Poor management will lead to poor occupancy rates and this will hit your hip-pocket directly and not really a lot you can do about it (certainly not quickly anyway). I for one do not like the idea of not having good control over the performance of my investments.
Just as an aside…To add insult to injury in my colleagues case, they also had an IP in Kambalda and another in Kalgoorlie. As they grew up around there and were living and working there at the time they made the investments they had good knowledge of the area and mining etc. However, they lost money here also with high vacancy rates and in the case of the Kalgoorlie property, a long-time empty house attracted unwanted attention from vandals. In the end they managed to sell one property for what they owed and the other at a loss which they are still having to cover. Currently they have very negative equity and all their servicability is tied up just covering the shortfall and PH IP. Basically they are screwed financially for many years to come.
We hear plenty of success stories on this and other forums, API magazine etc and with the boom it is easy for people to start to think that anybody can make money through property investing but this is not the case. Yes my colleague made some very bad investment decisions and the reason I am relating this story is to serve as a warning to all would-be investors to be very careful and do your due diligence before committing your $$$. And if your gut feeling is telling you not to go ahead, then walk away.
Flatout
Every week I get calls and emails from people who have “discovered” a new type of investment property. Hotel rooms, retirement homes, student rental buildings, strata storage units etc etc
Bottom line is that these properties are hard to finance and can only be geared to 60 or 70%.
They will end up slowing down your portfolio growth.
Standard residential property is a proven performer.
When you have some capital then industrial, retail and commercial are worth exploring.
But please be very very careful taking on the cheap, high yielding but unusual types of property.
Simon Macks
Residential and Commercial Finance Broker
***NODOC @ 7.15% to 70% LVR***
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0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
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