Serviced Apartment as an Income Stream

[HomePage]

I've read many threads on this site and others that advise people to steer clear of Serviced Apartments (SA), primarily due to the difficulty in securing finance but also due to the risk on the ongoing viability of the management structure. An SA is desirable to me as it provides a relatively high yield, indexed, retirement income stream. Although CG is generally poor, this is not really a factor for something that is acting like an annuity (or is it?).

If I have enough cash to buy one outright and I choose one from an established, and therefore hopefully management stable, SA provider (eg. Quest), what other risks should I be mindful of before proceeding?

 

[BMan]

dont, hence the warnings on steering clear

what if you need to sell?

 

[HomePage]

dont, hence the warnings on steering clear

what if you need to sell?

Can you be a bit more specific on the why of "don't"?

Re selling, I'd be treating it as an annuity, albeit with a residual value for my estate. If I only want it for an income stream, and I have other money to cover emergencies and terminal illnesses, why would I want to sell it?

 

[TPI]

If you are going to buy one outright with cash there are far better options than this for annuity-like income streams.

 

[datto]

I've heard bad stories about SA eg one up near Central Coast bought new about 5 years ago for 500K now trying to sell for less than half,

 

[BMan]

Can you be a bit more specific on the why of "don't"?

Re selling, I'd be treating it as an annuity, albeit with a residual value for my estate. If I only want it for an income stream, and I have other money to cover emergencies and terminal illnesses, why would I want to sell it?

the simple fact everyone is telling you to steer clear is not enough?

if you have to sell
-the banks dont lend well on them,
that rules out any smart investors buying them, no owner occupied either hence limits your market considerably, really only leaves unexperienced mums and dads thinking there doing the right thing.
-cant sell fast if you need to
-cant sell for a decent amount as it wont be a popular item (the lack of CG and fact the banks dont like lending on them shows that)
i know of 3 people who have bought serviced apartments and 1 is still for sale under the price they paid, the other person sold his for half the price he paid. not sure on the other, they all realize now it was a bad choice

-what happens if the company goes bust?

not knowing much about shares but id rather put my money into CBA shares where you get some dividends and a possible CG

 

[Ace in the Hole]

So what exactly are the net yields expected here?
Unless they are really outstanding, no point in locking your money away with poor appreciation, even depreciation expectations of the asset.

 

[TPI]

So what exactly are the net yields expected here?
Unless they are really outstanding, no point in locking your money away with poor appreciation, even depreciation expectations of the asset.

The net yields in many cases are not even that great.

I've seen some advertised as "excellent 5% yields".

And even if the yield is higher, it doesn't tell the full story.

You have to read the detailed commercial leases on each property (not all Quest leases are exactly the same) to see what you are really up for.

And many who look to invest in this type of property may have never read a commercial lease of any sort.

 

[Ace in the Hole]

The net yields in many cases are not even that great.

I've seen some advertised as "excellent 5% yields".

And even if the yield is higher, it doesn't tell the full story.

You have to read the detailed commercial leases on each property (not all Quest leases are exactly the same) to see what you are really up for.

And many who look to invest in this type of property may have never read a commercial lease of any sort.

Yeah, maybe they try to impress and stun you with the high gross returns, and hope you simply overlook or don't notice the absolutely massively cash flow draining service and maintenance costs.

 

[HomePage]

the simple fact everyone is telling you to steer clear is not enough?

No. As I said in my initial post, most of this negative bias comes from the difficulty of securing finance. Finance is not a factor, so I'm trying to keep an open mind about them, that's all.

Re selling, I acknowledge your points but I don't intend selling. Low sell prices equals good buy prices for me right?

Just to add, re company going bust, everything I have read shows that the property reverts to a standard strata title which you can conventionally rent out or live in. Since the purchase price was lower due to it being an SA, you've probably got some CG coming your way too.

 

[HomePage]

Thanks for the other comments.

All the ones I was looking at with Quest are in the 6.5 - 7.2% yield range, with all maintenance, letting fees, vacancies, body corporate paid for by Quest. You pay rates and water, which is $1.5-2K per year, any capital expenses and that's it.

I'm pretty comfortable reading commercial contracts from my work over the last 20 years, so I will definitely check the fine print.

Re shares as an alternative, I have all my other money, apart from some ready cash, in shares and was thinking of diversifying into property. I was looking for something as hands off as shares are and serviced apartments seem to fit the bill.

 

[Ace in the Hole]

Wouldn't a commercial property be better in this situation?

 

[HomePage]

If you are going to buy one outright with cash there are far better options than this for annuity-like income streams.

Options such as?

 

[HomePage]

Wouldn't a commercial property be better in this situation?

I don't know but if it is similarly hands off to manage that's something for me to research. Thanks.

 

[HomePage]

I've heard bad stories about SA eg one up near Central Coast bought new about 5 years ago for 500K now trying to sell for less than half,

For a buyer now, isn't that a good thing?

 

[imbi3]

Just my 2 cents
- SA should be treated as commercial property, yield should be > 9-10%. Anything lower than that would not be worthwhile considering the risk

- Quest is based on franchise model as you may have been aware of. Therefore, it really depends on the operator, rather than the brand, and the business could be sold to another inexperienced operator tomorrow

- If you must buy SA, would recommend to have a chat with people who actually have owned or currently owns an SA. Also look at the management agreement carefully and discuss with your solicitor. Some agreements will need owners to pay body corporate, fees etc hence your net yield would be a lot lower

Thanks for the other comments.

All the ones I was looking at with Quest are in the 6.5 - 7.2% yield range, with all maintenance, letting fees, vacancies, body corporate paid for by Quest. You pay rates and water, which is $1.5-2K per year, any capital expenses and that's it.

I'm pretty comfortable reading commercial contracts from my work over the last 20 years, so I will definitely check the fine print.

Re shares as an alternative, I have all my other money, apart from some ready cash, in shares and was thinking of diversifying into property. I was looking for something as hands off as shares are and serviced apartments seem to fit the bill.

 

[HomePage]

Just my 2 cents
- SA should be treated as commercial property, yield should be > 9-10%. Anything lower than that would not be worthwhile considering the risk

- Quest is based on franchise model as you may have been aware of. Therefore, it really depends on the operator, rather than the brand, and the business could be sold to another inexperienced operator tomorrow

- If you must buy SA, would recommend to have a chat with people who actually have owned or currently owns an SA. Also look at the management agreement carefully and discuss with your solicitor. Some agreements will need owners to pay body corporate, fees etc hence your net yield would be a lot lower

This is helpful for me to consider. Thanks.

 

[TPI]

Options such as?

Commercial property is the obvious one.

If you are not keen on listed investments (ie. A-REITs) due to your existing exposure to shares then I would suggest unlisted commercial property trusts or private property syndicates.

Investing directly by yourself of course would be better, but it depends how much cash we are talking about, eg. 200-300k wouldn't generally speaking get you a worthwhile commercial property in my view.

 

[Rolf Latham]

Just to add, re company going bust, everything I have read shows that the property reverts to a standard strata title which you can conventionally rent out or live in. Since the purchase price was lower due to it being an SA, you've probably got some CG coming your way too.

for others reading this thread

Many of these have specific restrictions and are zoned tourist/residential or the like which means they may not be owner occupiable.


ta

rolf

 

[Aaron_C]

Bad idea....why bother?