Serviced Apartment – Pacific International Melb

Hi Nordic Skier

Serviced apartments are MASSIVELY DIFFICULT TO FINANCE, yet many of them are really sound investments. I found this out over the last month when trying to finance a serviced apartment in Mandurah WA (I own 16 IP’s, and servicability isn’t a problem). The banks hate serviced apartments because, if you default, they find it a lot harder to force you to a mortagee auction (ie., sue the living daylights out of you) since the Management Company stands between you and the bank.

After many mortgage advisers told me they couldn’t help me, I finally found a broker who found a local WA company who will lend 80% LVR on serviced apartments!!!! This is an awesome deal, considering this property meets the 11 sec formula on NET returns (although not on GROSS returns). $90,000 for a 1 BR wheelchair friendly apartment returning approx $159/week with no outgoings except rates.

If you have any problems with finance, PM me and I may be able to help you with phone numbers/ names etc. I predict you may have problems finding finance, so please let the forum know if/when you seal the deal. Okay?

Cheers
Greg F

Nordic,

I don’t see 70% LVR as an issue in itself- it means I have greater equity to begin with- that’s the way I see it. That extra 10% can assist in another deposit down the line. And many city apartments have 70% LVR.

Re the Serviced Apartment deal… I think rental guarantees are good. As you’d be aware, there’s no guarantee the company will stay in business, and for some of them, you can opt out of the agreement if you wish. But noone says our tenants will continue their tenancy either. I’d check out their Corporate Plan and Annual Reports to see how they’re faring.

I had a bit of a look at PIM- seems they have a large market share. I also had a look at Waldorf Apartments, who have a similar scheme. They have “investor benefits” though, whereby an investor can stay in apartments all over australia for free – like a timeshare thing- for being an owner of an apartment. you might want to check out if PIM has the same benefits, or will match waldorf’s.

kay henry

Lisabellan,

Just to add something here… many serviced apartment firms have a provision for annual rent rises. You might want to check out if your company has that, too.

kay henry

I own a Waldorf serviced apartment with a 5% guarantee. My advice is to check out what unusual “special” levies have been applied as we just got hit for $800 over two payments for “special” levies. Special Levies are not necessarily expempt from the levies and rates that are often included in the management agreement.

I would also suggest that you only take a short term agreement such as 1-2 years and then review it for a further term, 10 years especially is a long time and you don’t know what else you may want to do with it, also with a long term be sure there are rental increases because the agreement can state a 5% return of the purchase price value and therefore over a long term you are short changing yourself.

The other thing is to speak directly to the management company about other options under their management plan such as receiving a higher rental return based on long term rentals ie 3mths at a time.

Hope this helps, don’t be suckered by the gloss of a guarentee. You still need due diligence.

Just thought of one more thing, work out what is your exit strategy, such as how long do you want to keep it and keep 30% of your funds tied up, as these type of apartments are difficult to sell especially in a flat market. We have had ours on the market for 5 months and just yesterday decided that if we are prepared to reduce the price then why not include an incentive such as a new car instead, so now we are off car shopping for some unknown lucky investor.

Cheers
Leigh K[biggrin]

They were legitimate reasons of course, but as an investor or even owner occupier it is a bit rough. The Owners Corporation had incurred $80,000 (electricity plus security system replacement) worth of unbudgeted expenses during the previous financial year. It was hoped that the expenses could be sustained by the current budget, however the expenses had drained the Owners Corporation reserves and were replenished by the special levy.

So that’s not to say that it happens every year, but be sure to check out if it has happened to the investment you are looking at on too many occasions.

Cheers
Leigh K[biggrin]

Hi Kay

Interesting comments, we did discuss that as well as a plasma TV etc, how ever in this case there are 18 units for sale in the building so we felt a car had more appeal, being that it can be sold on etc. Having said that I think it would make an interesting discussion so I will start a new thread.

Cheers
Leigh K[biggrin]

Thanks for your contacts and advice Greg, I thought I’d share my reply to our PM with others…..Since a week ago I have learned so much and I have gone off the idea of buying into serviced apartments (off the plan).
I came to the conclusion by reversing the ‘whats in it for me’ credo, to see why the property developers were offering, what seemed to me at the time, a very good deal. The cost of the apartment was $320,000 net return of 5% (they pay rates)($306 cash per wk). If I decided to sell in 5 years for say $500,000 the rent would still be based on the buying price of $320,000. It would be difficult to convince a new buyer that they were stuck with a leasor paying $306 per week (inflated annually)when 5% net of their buying price would be $481 for the next 5 years plus 2×5 yr options. This is the easiest way for me to understand that down the track when values go up, and here in Rockingham WA, they will still rise alot more than they currently are, I think I will be kicking myself for locking in such a small rental amount. As I am about to purchase my first IP the cost of the apartment was way more than I wanted to pay (prefer to buy two if I can for a little more). I only live two streets from where all of the developments and building is going on and got excited about owning something that sounded like a great deal. I truly believe that the CG on the apartments will be good, however they are expensive now. when I spoke to my bank manager he told me that they wouldn’t loan the money because of the difficulty for them if I defaulted on my loan, and he also said that he wasn’t saying they were a bad investment. He did say that in his experience they are usually above the market value when starting out and it can take 3-5 years before they are worth what you paid for them.
In the long term they would pay your interest, however I don’t want to have to wait 20 years before I could get the going rent for them, or possibly have hassles selling it and because I am using my home equity. I think I could put it to better use with other options.
you can view the apartments on http://www.proproperty.com.au they are run by Quest apartments. I’m still trying to convince myself that I am doing the right thing, and that this won’t be the one I will regret forever. I went to see the agent at proproperty, Mark, who is handling the sales and he said that the ‘loans café’ across the road from him has been able to find finance for people, so those looking for finance may want to contact them (they may be a franchise, but have the same contacts Oz wide)

I am hoping that someone will reply to me saying ‘you’ve made the right decision’. [confused2] I’m dying to get my first IP so that I can get some confidence and experience behind me. I’m looking into the Geraldton area at the moment, then again, that’s only since this morning so could change my mind again [blush2]

Go Lisa,

You’ve definitely begun looking at the decision from the right perspective. Understanding how the other person wins out of the deal is crucial to working out your own negotiating position.

I reckon you made the right decision.

In reality rents & property values can be expected to rise over the mid-long term provided there remains a similar supply balance in the economy in the areas where people wish to live. Even if a population is declining or there is deflation you can rely on these values rising if more people want to live in the same area & there are less properties being built in those areas versus the increase in the number of people who want (and will pay) to live there.

If supply is higher than than demand however prices can and do decline.

Cheers,

Aceyducey

– Jan L.A. van de Snepscheut