Serviced Apartment as an Income Stream

[Shahin_Afarin]

Serviced Apartments is a beast when it comes to policy, lots of restrictions and lots of barriers.

How about I put you in touch with half a dozen clients that all regretted buying a SA?

Different story though if you create a serviced apartment residence.

 

[Piston Broke]

This is the fun part of the market.
Here's the real story.

Many people believe all the BS that the real estate media and marketers spout out, and all the commission industry built around it.
They all make a cut, so they never give you a straight answer.

On the other side, like this thread, all these "experts" chime in with really no clue or experience in the matter.
How many of the responders own/bought/sold? They heard "stories".... aka more BS.

Result: lots of people get suckered and pay way over price for these places.
So if you're patent like a tiger stalking it's prey as many will eventually cut their losses and run for the hills. And then go round telling "stories".

If you're smart enough to read fine print and keep an open mind, I suggest keep looking and researching.
But you do need considerably higher than average returns and a keen eye for research & analysis.

Good Luck.

 

[TPI]

How many of the responders own/bought/sold?

Hi Piston Broke,

Are you able to share an example from your investing experience of one that you bought and thought was a good investment?

Thanks heaps.

 

[Peter_Tersteeg]

Lets ignore that fact that you may need a 40% deposit to purchase and there's a good chance that you'll loose money if you sell...

Practically speaking the ongoing cash flow is rarely as good as advertised. The management fees are high, they also charge for other incidentals and costs. Almost everyone I've known who bought a serviced apartment sold it because is simply wasn't producing the cash flow that they expected.

Furthermore, if you've got an extended investment strategy which incorporates the ability to borrow more money, don't expect the income from the serviced apartment to be very helpful. Even if it is heavily cash flow positive, the managers will usually only provide you with periodic summaries of income simply printed on a piece of paper. Whilst the net figure will correspond with what's in your bank account, lenders won't recognise the summary and thus only rely on the net figure in your account.

This means that the paperwork for the next loan will increase, and the next lender will only use a percentage of the net income. For a normal rental they go with a percentage of the gross income. Your personal cash flow may be fine, but your ability to borrow more will likely reduce as a result of having this type of property in your portfolio.

Almost everyone I know who bought a serviced apartment has regretted the decision, despite being initially adamant that it was a good deal due to the high cash flow.

The people who I've seen make this work successfully tend to be the ones who purchase a property next door to some serviced apartments, then lease their property under a normal residential lease to the apartment managers. The apartment manager then takes on the risks of vacancies, repairs, etc. All the owner sees is a regular monthly amount hitting their account like every other regular IP.

 

[HomePage]

Thanks for all the replies. The general consensus seems to be still to steer clear or get a much better return, even with a pocket full of cash to buy one. I only know of two people who've had SAs and they tell tales similar to what PT Bear speaks of.

I will still consider one but, as Piston Broke suggests, only if I can get one for one of those firesale prices (which, amusingly I am having difficulty sourcing such bargains - where the heck are they?) and the fine print passes my close scrutiny.

 

[Piston Broke]

Almost everyone I know who bought a serviced apartment has regretted the decision, despite being initially adamant that it was a good deal due to the high cash flow.

Everyone is going to justify their decision no matter how bad.
They do the same for whatever stock they buy too. Just as they did buying RIO at over $120.
Even the so called experts had plenty of justifications, not to mention Mac Bank and the famous but not mentionable dollar cost averaging firm discussed on this forum.
So I disregard it because real "high cash flow" is hard to come across.
We even had experts touting on API that 6% on CIP was "high cash flow".

The people who I've seen make this work successfully tend to be the ones who purchase a property next door to some serviced apartments, then lease their property under a normal residential lease to the apartment managers. The apartment manager then takes on the risks of vacancies, repairs, etc. All the owner sees is a regular monthly amount hitting their account like every other regular IP.

If it's the same type of property then what's the difference?
They will require a long lease and actually pay less as a resi rental. the process is the same.
And when boom time comes both will rise in value. When recession hits, both will fall.


But yeah 40% deposit, and I made 5% return on buy price, after interest and 2.5->3% net after holding costs. And RE went up so I also made some CG.
The management fees were about 45% of gross earnings.
One of them I bought sold and never even walked on the premises.
It's no different to any other investment, no need to be emotional about it, it's just a numbers game and knowing about body corps and buildings.
I bought one only because the price was so low, i just figured that my worse case scenario would be a loss of 30-40K and I'd learn my lesson, as all those who I told were absolutely sure i would.
Truth was i didn't check my statement for 6-7 mths and realised that account had 30k sitting there.

But all I can say is that its dredging for gold...lots of mud, tons of mud for a lil nugget.

 

[Deltaberry]

Serviced apartments are great when you build them and draw the body corp fees.

 

[VYBerlinaV8]

I own two serviced apartments, and I am quite happy with them, and they have several characteristics that make them desirable:
1) They are reasonably large, and I have no problems with lending for 'small' apartments
2) I get paid a fixed monthly rent, regardless of occupancy or rates received
3) They have a defined end date at which point they become standard residential units
4) The rent is assessed and increased every 3 years (just had another increase)
5) They are superbly located
6) They are fully managed with no agents fees, and the parent company has never, in over 9 years, been a day late on the rent
7) Body corp is cheap, and you never get a maintenance call

Downsides:
1) Capital growth very limited, until end of lease (currently 2023) at which point the gain 'catches up', so not much good for short term growth strategies
2) Harder to borrow for

These properties are comfortably cashflow positive for me, and in 10 years I'll own one of them outright an the other almost so, and I'll have the option of either selling them as residentials, renting them as residentials, or re-leasing them back to the serviced apartment provider.

My opinion is that these are a good investment for me. Whether a serviced apartment is a good investment for someone else is another matter. As always, do your due diligence, understand the contract, work the numbers. If you can get over the downsides, property like this can be very cheap with excellent cashflow, but you MUST understand what you are getting yourself into and what that means for your overall position.

FWIW, I would not be planning on building a portfolio with only this type of property.

 

[HomePage]

Thanks for providing your experience VYBerlinaV8. Would you mind letting us know what management company your SAs are with and what city, thanks? PM me if you want to keep it private.

 

[VYBerlinaV8]

Thanks for providing your experience VYBerlinaV8. Would you mind letting us know what management company your SAs are with and what city, thanks? PM me if you want to keep it private.

No probs. My serviced apartments are badged as Mantra, owned by Stockland, and they're based in central Canberra. When I bought them they were badegd as Saville.

 

[Ausprop]

a mate took a big hit to get rid of one - had plenty of cash and didn't care, just used the loss to offset other gains. when he resold it it was a good deal for the buyer, over 10% yield net

 

[Piston Broke]

Love vendors willing to give away lots of money.
I hear that excuse of "offsetting losses" so often that it's the same as a chick saying "it was on sale".