Serviced apartments - again (sorry)

From: John B


I have read the posts before on serviced apartments but I'd like some more info.

We inspected a very nice 2br S.A. in Melbourne CBD for $255,000 with a rental guarantee (from the Stockland group - whoever they are) of around 7% for at least 5 years or option for another 5 years. That means it is cash flow positive from day one. The price is relatively cheap for inner Melbourne. We already 3 other IP's - one "normal" unit and two houses.

The figures look really good on my spreadsheet (similar to PIA software) and capital growth in Melbourne has been good and seems to be continuing. The only outgoings are rates. All property management fees are covered including all insurances.

What are the risks here compared to normal IPs? What's the worst case scenario here?

The way I see it if that Stockland goes under then the unit reverts back to a normal unit needing property management, but you would still have a growing asset which would remain basically cash flow positive.

I kind of like the idea of having my 4th IP cash flow positive which makes it easier to service my other IP's

What do you gurus think of serviced apartments in general? Assuming their in a good area.
 
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Reply: 1
From: Anthony C


Think its harder to get a loan for, moost banks will only lend up to 65%, which means you will have to come up with 90k equity/deposit.
cheers
Ant.

 
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Serviced Apartments

Reply: 1.1
From: Ricky Harriss


Anthony I bought a serviced apartment and borrowed the full amount plus
legales.
I went through a broker and the loan was through the Colonial Bank.
All they needed was a copy of the lease.
If your in Sydney I can let you know the brokers name.

Harry


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Serviced Apartments

Reply: 1.1.1
From: Rolf Latham


Hi Ricky

As a broker I would be veeeeeery interested in how that deal was structered. (might be able to get in on that myself :eek:)

100 % + loan without additional security ?


Rolf
 
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Finance deals

Reply: 1.1.1.1
From: Dave :)


Hi guys

I have now come to realise there are different rules for different
borrowers.

I have Macquarie now approving me 100% finance on a $340K sale with no
security because I fit their 'corporate/executive' type of market they
are after at present. All they considered before approving finance was
my income ($100K +) and the valuation of the off-the-plan apartment.
The apartment I'm buying is $340K...three others have sold for over
$370K. They use the higher figure for Val purposes. Don't ask me how
they do it...they just told me they can if they want to.

Mind you..this is just three weeks after I financed another IP at 100%
through another lender. If you like, I could give you the Macquarie
guy's contact details. They are hot to do business at present.

Cheers,

Dave

p.s. If you ask, they will waive all set-up fees. monthly acc. keeping
fees - everything.
 
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Finance deals

Reply: 1.1.1.1.1
From: Franky Psuedo


Could you please provide more details on the Macquarie loans, i.e. rates, etc.
 
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Reply: 2
From: Lewis Hopentra


I know the original post is now nearly a year old, but I am also now in a similar boat ready to purchase a serviced apartment in Melb.

Is there anyone out there with views to how these types of arrangements work out over time. Or is it worth forgetting the short term capital growth prospect of such apartments and think more about the income that it can produce?

lewis.
 
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Reply: 2.1
From: Kristine .


Hi, Lewis

I love serviced apartments. In John B's post of last year, he queries the identity of the Stockland Group. If you go to www.stockland.com.au everything you could possibly need to know is detailed there. They are the third biggest property developer in Australia, and in the top 50 ASX companies. When they sell serviced apartments the leases are usually held by one of their companies, so the tenant is also the Group. If the s/apt you are considering is leased to Stockland, its like leasing to BHP!

The subject of s/apts was discussed at some length recently. If you 'search' (via the blue button just under your URL window) these posts will come up. There was some fairly positive feedback which you may be interested in reading.

Regarding finance, this will vary from lender to lender. Because the tenant is trading, the banks will regard this as a commercial transaction, just as if you were buying any other commercial property eg shop or office, and will generally only take 60% as first security on the apartment itself. However, if you are using a line of credit or securing against another property, then lending ratios won't come into it.

Generally speaking, it is the depreciation and pre-paid expense which will make the deal stack up, especially in the first bracket of the lease. If you are already offsetting other properties against your PAYG, the return to you will be slightly lower. But as, unlike straight residential, most of the leases require the tenant to pay various outgoings, these hidden jewels are a real bonanza. eg if the tenant pays $3,000 body corporate fees before they pay you the rent, then apart from the fact that the value of the rent is actually higher than as presented, the paid fees do not come into your tax equation, but if you had a residential tenant in the same apartment, you would have to pay the BC fees out of the rent received.

Don't forget to take all the dollars into account. It's not just about the rent, but about the pre-paid, post-paid, cash and non-cash deductions as well, and then you can factor in the guesswork of capital growth.

Hope that's of some help

Cheers

Kristine

PS You are welcome to email me if you would like the phone number of an independent Melbourne broker who is very familiar with finance for serviced apartments. He has arranged plenty of 105% deals for customers of mine, and I've had good feedback about him.
 
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Reply: 2.1.1
From: Lewis Hopentra


Thank you Kristine for a most informative message. I am actually a first time IP investor, and I am just searching around whether this is right for me. It will be cash flow positive for me right from the start.

Only other thing I have to make sure that after year 5 (when the 6%-6.45% guarantee is over), it goes back to a pooled 35% of room revenue and evenly distributed figure. So after this time, if that figure doesn't look appealing, I want to be able to get rid of this property with hopefully some gain.

lewis.
 
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Reply: 2.1.1.1
From: Paul Zagoridis


Hi Lewis

Good luck on that deal, I have a question for you to consider...

If the 35% pool represents LESS revenue than the guarantee, why do you think you would be able to sell for MORE money?

Secondly, why are you talking a risk on room revenue? You are then exposed to both property and tourism market fluctuations.

If the manager is no good, you miss out.

Many serviced apartments offer a flat rental per unit. This rent is greater than normal residential lettings. The manager should make their profits from running the Serviced Apartments NOT by reducing their real estate costs.

I don't want to talk you out of this deal. I don't like it, but I don't invest in serviced apartments (yet).

Paul Zag
Dreamspinner
The Oz Film Biz site is archived at...
http://wealthesteem.dyndns.org/
 
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Reply: 2.1.1.1.1
From: Lewis Hopentra


Well, my reasoning is, the first 5 years can be a good period of estimating how the revenue pooling would work out rather than straight 6% (during years 3,4 and 5, if the apartment revenue is greater than the 6% guarantee, then they pay that amount). So along those lines, one could see whether it is a good property to hold on to or not.

But I guess you have a good point, because if it wasn't going to work out well, then the potential buyer would easily work out the same maths that I'd be working to.

btw. the property management group is Ascott Group, and they do seem very good. oh well, we will see.
 
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Reply: 2.1.1.1.1.1
From: Kristine .


Hi, Lewis

One of my favourite web tools is www.anzwers.com.au. There are no secrets in cyberspace!

I don't know if these links will activate via this posting, but if not, cut and paste to your URL. The Ascott Group, as you will see, are Australand's Singapore cousin, and they have just bought Oakford's managements in Australia.

Industry News
... Industry News ===== Singaporean
based The Ascott Group has bought Oakford's management contracts and ...
http://www.hospitalitylink.com.au/news/20011031.php

The Age: Gen X marks the spot
... be taken up by 135 all-suite apartments to be managed by the Ascott Group, another
subsidiary of Australand's parent company CapitoLand. The upper two-thirds ...
http://www.theage.com.au/lifestyle/2001/09/10/FFXBKGO5FRC.html


So, if you do decide to buy the apartment which has sparked your enquiry, you can read up on other Ascott Group activities!


Best of luck - hope the investment goes very well for you!

Kristine
 
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Reply: 2.1.1.1.1.1.1
From: Lewis Hopentra


Hello everyone

Thanks for all those who have given advice on this matter. After having signed a contract, 2 days later, it is now cancelled. The more I thought about this matter, the more it didn't look right. No matter you have a guarantee or not, there was no way that I could have got good capital growth in this property. Would anyone here buy such a property (after a mark up), that would only realistically return lets say 4%? I know I wouldn't.

My advice. Find a good independent all-round investment advisor. A property advisor really has only one thing to recommend!

ps. it's the worst feeling cancelling contracts. :)

Lewis
 
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