Hi, I'm a first time investor and have some questions around serviced apartments. I've already read many threads here and most of them have been strongly advising against investing with serviced apartments, in particular those that are unable to become owner occupied, essentially locking yourself into a management lease agreement.
Now the question is what if after 5 years the lease agreement ends, and you can do whatever you want with it...eg live in it yourself, lease it out independently, or even re-sign with the same management.
So with this listing I'm looking at, you get a guaranteed net rental income that is reviewed annually, and when the lease expires in 2019 you have full option with what you want to do with it.
One of the arguments against these type of investments are the non-existent CG, but since this IP becomes OO after 5 years, it shouldnt make any difference and the CG should jump immediately after 5yrs where it should be revalued the same as other normal residential IPs with similar specifications.
So this should be a fairly low risk investment, with "normal" CG after lease period expires? Am I missing something here?
From a investor point of view; def a few more con than pro...personally i think this sort of investment is only worthwhile if the property is priced really well and your ok to sacrifice potential CG for some ok yields...i see this all the time with the Quest service apartments in haymarket.
Pro
- Guaranteed rental ( might as well go for Defence housing to be honest...)
- Discounted sales most of the time, normally have a very high number of days on the market ( this can be a con too lol)
Con
here goes..
1. Finance is not hard, but just not your standard 90-95% LVR type of investment....so automatically your limiting who your "future buyer will be - a cash rich investor - rare" ...not a cash rich owners occupier but investor as well...who won't be able to leverage+ Restriction on choice of lender..
2. Economical factors- This place is a service apartment/hotel so the success of the operate is based on the tourism industry and how well "business is going" so your property is not just influenced by the property market but it's also influenced by the "tourism and business market" - Say the tourism business is doing really bad and rental is not as good as expected ---you might have a set guaranteed return but NOT everyone in that same complex is in the same deal/contract as you...if a few units starts to sell at a lost or below the expected price than guess what happens to your property?
3. Renovation cost- Once every 5 or x numebr of years the "hotel" or management will ask you to pay for the renovations of the property....remember the operator is running a business to operate in this environment they need to make sure their "stock" is up to date.
4. Limitation of future buyers- only investors can buy.
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Now to answer your question regarding if after 10 years it's no longer a service apartment an open to owners occupied as well...
1. Reason why the management release this "service apartment" leave back to the general public is because the properties are now to old to run their business due to maintenance and strata going up + the rate of return VS maintenance on a old service apartment quicklys fades.
Ie How much would you pay per night to rent a old worn 40 years old apartment VS a newer design 20 year old apartment.
2. Say there's over 50-100 service apartment in this complex...how many will convert to owners occupied? Prices may slowly go up but may not catch up to the market as there will still be property within that building that still has a service apartment lease and will be priced well below the market -forcing the average price of a unit in that "building" down.
3. Normally under the service apartment lease they cover the strata fee...now if your not under this lease YOU cover the strata fee and i can bet you the strata is NOT cheap! Your sharing strata with a hotel/service apartment. An ageing service apartment.
4. When you renew to a new term with a service apartment provider, i can bet ya the new terms are def worst ( lower rental return + more frequent renovations clauses)
^ the above is just a "general" personal view on how i look at service apartments..I have seen service apartment work for some, if you know what your getting into and you have done the numbers + it's priced well.
I could be wrong, happy to be corrected as i personally don't invest in service apartments ...i just finance them
Regards
