Mortgage Restriction Serviced Apartments

[chrispy]

Can any of the Mortgage Brokers out there please tell me why the restriction on the purchase of Serviced Apartments with guaranteed rents?

For example.....

I am currently looking at a Strata Title 3 bedroom townhouse, water views, close to CBD, being sold as a serviced apartment with guaranteed $320 pw rental with 4.5% rental increase pa.

These units are around 20-30k cheaper than surrounding apartments.

The Real Estate Agent handling the sales told me that they are cheaper because it is only possible to get a loan of 60% on them, hence it keeps the price down and it makes it difficult to resell.

I find it hard to understand why a guaranteed rental would restrict the mortgage.

Thanks

Chris

 

[FelixL]

This article explains why serviced apartment is more risky

http://www.hotspotting.com.au/index.php?act=viewArticle&productId=11

lenders and mortgage insurers don't like to take too many risk, hence the restriction

 

[willy008]

thanks Felixl that was a great link made me think differnt about investing
in that area.......

 

[chrispy]

Thanks FelixL that was a great article and explained the situation well.

However, if these are 3 bedroom strata title townhouses, built as a duplex, so they are only joined to one other unit, as they appear to be, then if the Service company went broke, you would gain, as you would have a strata title townhouse, 3 bedroom, 2 bathroom, with water views approx 20-30k cheaper than surrounding townhouses. Surely they would immediately go up in value? Am I missing something here.....

The units I am looking at are 5 years old so are already into the second 5 year lease with the guarantee rent still going for the next 5 years.

I am going to have a look at them at the weekend so will report back.

Chris

 

[flatout]

I used to work for a management company that ran serviced apartments. Started as the financial contoller and then ended up running one 'hotel'. As an investment, I wouldn't touched serviced apartments with a barge pole. Later I had a colleague who had invested in a serviced apartment with a rental guarantee. As the article suggested, once the rental guarantee expired, their returns dropped dramatically. Same applied to all the other investors in the complex. Because of the very low yields they couldn't sell the apartment (nobody wanted it) but holding it virtually crippled them financially. This went on for two years that I know of and the last I heard was that an offer had been made by some company to buy the entire complex. This deal hinged on all the unit holders agreeing to sell at a big loss. By this stage my colleague just wanted to be rid of the unit even though they would have to take out a personal loan to make up the shrotfall on what they would be left owing on the mortgage. It was a terrible situation that has cost them any chance of getting into their own home. They estimated that if they accepted the offer it would take them around ten years to pay off what was left owing. I saw my colleague reduced to tears on more than one occasion over the stress caused by this whole mess.

Flatout

 

[Rolf Latham]

Hiya

A generalisation would be that serviced apptments do make a gr8 investment................................for a SMSF.

ta
rolf

 

[grossreal]

hi all
there is a new form of service apartment out there.
these groups do not sell made to measure serviced apartments what they do is pay a rental on an exsisting unit for a premium and they get the use of the unit.
the unit stays the same a normal say 2br unit ( and it can be mortgage to any lender) and then they do a second agreement to use the unit as a serviced apartment and the company organises the people that stay there.
there are alot in the market in sydney at the moment.
with this type of structure you can get a normal 80 to 90% lend depending on the lender ( you can even do it a comm loan) and as the service apartment contract is secondary is not a problem.
I am not a lover of service apartments but this model does have alot going for it and the term is negotiated at the start.
the owner has to pay out of the internal fit out and then there is a guarentee of return.
chrispy have a look at setting it up as a comm loan they are upto 85% lvr and at around 8% with annual increases it won't be long until it is posi anyway.
my .002

 

[geoffw]

there is a new form of service apartment out there.

Not that new- I met somebody aboiut 5 years ago doing that in Canberra.

They leased apartments, on a long term lease, at $200pw- which was a good rate. The company fitted out the apartment with all the very best in furnishings, and charged them out at $400pw (which was the governemnts rate for living away from home).

The company was repsonsible for all the upkeep, including weekly linen changes and cleaning, but still did quite well out of it.

 

[chrispy]

Thanks Ross, Gross and Geoff. That all makes sense.

I have the equity available to buy them without worrying about the 60% but it was the re-sell aspect that was worrying me and the lack of capital gains. The returns would almost be positive from the beginning.

Chris

 

[Pushka]

Well, the NAB gave us a full loan for a serviced apartment we bought a few years ago. As long as we didnt want to borrow more than their valuation (which we thought was reasonable) there were no issues at all.

It was a good investment for us, brought in some nice CG when we sold, so for us the investment was very good!