Quasi-Serviced Apt - proposing fixed 3yr lease. Yes or No?

[LONDON]

I currently rent an IP to a short stay agency in Melbourne. So far its worked as a quasi serviced apartment, I say that because the lease is residential but I've been able to put up the rent 6 monthly inline with the mkt with no tie-in. I could terminate current lease and move in myself if I wished. I haven't had to pay for furniture.

I've now been approached by the tennant, they want to enter into a 3yr fixed lease with 2yr option (their option). Yearly rental review with CPI however I have to make an initial outlay for a furniture pack.

What should I be aware of before entering into this?
Is there anything I should make sure I specificy in this new lease?

One of my concerns is that with rental steps out of line with the market as recently rental increases have been greater than CPI.

Thanks

 

[kum yin lau]

Hi, can't comment on lease specifications but can generally point at some interesting aspects.

Furniture package = good opportunity for 'ghost' returns via depreciation.
Say costs $20000 [apply 4% of that on rental return = $500 p.a. increase in rental] Then depreciate on 10 year schedule [LAP low asset pooling] can give you higher 1st few years so let's say $1500 Yr 1 on 30% tax = $450

If you can work the rent increase [due to furniture provided, depends on what tenants want it can be a lot more than 4%] then the CPI increase will be based on the higher rent.

Say $20000 Yr 1 @2% CPI = $400
Yr2 same = 2% x $20400 = $408
Yr3 same = 2%x$20808 = $416

Advantages = stability esp if it's a corporate tenant

Even more advantageous if furniture package is very costly - get a loan and put excess monies in offset. Write in dire damage bills if tenant doen't look after expensive furniture. Take out adequate insurance cover.

The numbers I've done are just for illustration. I'm not qualified to give you advice.

Good luck
KY

 

[kum yin lau]

Hi again, your concern about initial outlay can be addressed by dividing the cost [$20000 by 3] = $7000

Therefore, you're looking at initially increasing the rent by $8000 p.a. maybe more.

Next year's increase [guraranteed by your lease] = CPI x [current rent + $8000]

It really depends on what you can negotiate with your tenant. Interesting, isn't it?
KY

 

[Rolf Latham]

Hiya

Could cause finance issues.

If you have a mortgage backed loan, or are wanting to secure one against that property, they might not like the lease, which quite possible may be registered on the title.

ta
rolf

 

[LONDON]

Thanks for the tip. The furniture package only costs about $8k and they said they will pay towards it, which effectively pays it out in 4 years. But yes depreciation is something I'll need to consider.

I haven't had to worry about vacant periods before whereas if I don't take up their proposal will need to. Have no idea how long it takes to get a tenant in or how long it takes between tenants in this mkt.