Investing in apartments that are rented to Quest / Mantra other serviced apartments

[asryan]

Hi,

New to the forum and not sure if a thread already exists on this topic. Has anyone had good, bad indifferent experiences with investing in apartments that promise highish yields that are securely let to serviced apartment businesses like Quest or Mantra etc? What are the pros and cons please?

Cheers

 

[Rolf Latham]

Finance can be problematic Really much so

Most of my clients with these things don't like them after a few years

They look like a better thing for an smsf with low or no gearing than a growth asset per se

Ta

Rolf

 

[chilliblue]

As Rolf stated can be difficult to buy in so that normally means difficult to sell out of the investment.

 

[Shahin_Afarin]

Many lenders lend to serviced apartments however the problem mainly lies with a couple of things. One of those things is whether the lease allows for owner occupied residence.

Lenders like say Westpac and CBA want the ability for owner occupied residence. Whereas generally the Mantra leases do not allow for this. Therefore you are then limited in the lenders that will lend you the money (i.e. St George, Citibank, etc). Then you have the problem where lenders like St George will not finance more than 25% of the block so you can really find yourself snookered.

 

[asryan]

Thanks for the feedback. I had no idea about the limitations.

 

[Peter_Tersteeg]

As already mentioned, banks have problems with serviced appartments. Sometimes you can get around it, but the best case is you'll probably get 80% LVR against them.

It can also create problems when financing other properties down the investment road. It's difficult to be definitive about how much rent they receive which will affect future serviceability.

Then there's the actual performance when compared to what they sold to you. I've dealt with a few of these over the years. Each time the client has looked at the books and declared it to be high yield. They take into account the management costs they were given and it's still pretty good. In 4 out of 5 cases, the client has come back within a few years and says that after the real holding costs kicked in, it wasn't even remotely cash-flow positive.

 

[gach2]

I did have a look into it a while ago
After looking further (few around Parramatta, NSW)
As mentioned above they were mostly neutral cash flow and many of these apartments had not had any capital gain (though most other property in this area have had a massive gain)

Did not look like a good option at all to me at the time

 

[DaveM]

Run to catch a bus to get to the train to get to the airport to catch a plane to get away from a serviced apartment deal

 

[asryan]

Thank you, thank you, thank you... so glad I stumbled across this forum where I can learn from other peoples mistakes as I really have been considering them as they appear to be good deals, high yields and in good areas.

 

[datto]

Run to catch a bus to get to the train to get to the airport to catch a plane to get away from a serviced apartment deal

^^^ Do this even if you havnt had time to put your trousers on lol.(or skirt..Yeeha!)

 

[VYBerlinaV8]

I own two serviced apartments leased to Mantra. I got them for a steal (compared with equivalent privately held apartments), and they are strongly cashflow positive. I have own these for 9 and 10 years respectively, and Mantra have never been a day late on the rent. In 10 years they come off long term lease and will be zoned for either commercial or residential.

If Mantra continue to pay as they have been I'll probably just grant them some more lease extensions.

Not all serviced apartments are created equal, but mine are large, desirable, extremely well located and generate plenty of cash.

Do lots of due diligence!

 

[datto]

Are they located north of Sydney?

 

[VYBerlinaV8]

Are they located north of Sydney?

No - very central Canberra. They have already written to me twice asking me to grant additional lease options commencing in 2023. Mantra are making a lot of money from those apartment, I reckon.

 

[datto]

No - very central Canberra. They have already written to me twice asking me to grant additional lease options commencing in 2023. Mantra are making a lot of money from those apartment, I reckon.

Winner

A while back (<2yrs) I enquired about a service apartment at nelson bay. Can't remember who managed it. A dual key apartment for around 250K, <10yrs old. Had a 100 metre (or so) swimming pool that meandered around the complex.

The figures looked great. Very low vacancy. I found out the units in the complex were only selling for about half of their original purchase price - lack of CG caused me to say "no".

 

[VYBerlinaV8]

Winner

A while back (<2yrs) I enquired about a service apartment at nelson bay. Can't remember who managed it. A dual key apartment for around 250K, <10yrs old. Had a 100 metre (or so) swimming pool that meandered around the complex.

The figures looked great. Very low vacancy. I found out the units in the complex were only selling for about half of their original purchase price - lack of CG caused me to say "no".

Fair enough. I have a fairly specific strategy with these properties (I have a couple), which basically involves using the rent to pay the P&I loans over a 20 or so year period. Completion of the loans will occur at the same time as the long term leases finish, and when that happens they will revalue the same as equivalent residential units and voila! I have two inner city properties owned outright that I didn't have to pay for.

If I were looking at other such deals I'd be focussing on long term leases independent of occupancy, minimal management and body corp fees (I pay no management fee and about $1800 a year body corp per unit), a profitable hotel to lease them to, favourable conditions on completion of lease, desirable location and units large enough and featured enough to be directly comparable to desirable residential units.

If you can't tick all those boxes, walk away. If the scheme runs on 'round robin' type leasing based on occupancy run away. If the units are under 50sqm living walk away. Watch our for management and body corp fees.

 

[asryan]

Hi VYBerlinaV8,

I like your strategy and long term vision!

Aside from the annual body corporate fees have you had to incur other costs for wear and tear, general maintenance of the inside of the apartments, painting, etc - areas not covered by the body corporate? Who pays for that as well as other normal leasing expenses incurred by landlords like electrical or plumbing issues?

Cheers
Anne

 

[VYBerlinaV8]

Hi VYBerlinaV8,

I like your strategy and long term vision!

Aside from the annual body corporate fees have you had to incur other costs for wear and tear, general maintenance of the inside of the apartments, painting, etc - areas not covered by the body corporate? Who pays for that as well as other normal leasing expenses incurred by landlords like electrical or plumbing issues?

Cheers
Anne

Hi - on one occasion (last FY) we chipped in about $4k across the two units towards renovation. Mantra still paid us the rent while the workd was being done. Other than that, we get land tax bills periodically (a few hundred a year, although this going up - thanks ACT govt). Other than that, nothing in 10 years.
Best of luck!

 

[TSwizzle]

Anyone know of any other hotel chains that offer the ability to buy/invest in a room?
I can only think of oaks,quest and mantra?

Are there any others anyone can think of? I'm in a unique situation where I'm just after cashflow.

 

[DaveM]

I'm in a unique situation where I'm just after cashflow.

After managment and strata fees, the cashflow is seldom worth the foregone CG

 

[imbi3]

Hi - on one occasion (last FY) we chipped in about $4k across the two units towards renovation. Mantra still paid us the rent while the workd was being done. Other than that, we get land tax bills periodically (a few hundred a year, although this going up - thanks ACT govt). Other than that, nothing in 10 years.
Best of luck!

Who would be responsible for capex/updating the units? I assume Mantra would need to update the units say every 5-7 years such as new carpet, paint etc?