Serviced Apartments???

[Bradsdad]

hi all
this is not an advertisement but I will explain another type of service apartment that is on the market and was designed to get over the issue of loan amount and sellability
the units are built as stock standard units and sold as stock standard units and then an after market agreement is made with each unit holder for the rental of the units.
the units cash flow is then divided across the block so it does not matter which unit is leased as the ones in the pool split the income.
the strat is set up that its investor only and no ppor and each buyer agrees that they will not have any issue with regards the units being service appartments.
the contracts are for 10 years and the returns are around the 7% mark
all of the major service appartment chains are looking at these and alot of the higher level chains already have these as one off agreements the difference here is that these are being dveloped as this form of property.
the advantages are
the unit can be sold into the normal unit market as they are standard 1br 50sq and 2br 85 sq units
they have a 6.5% return
they have the growth of the standard unit
and the lender looks at the units as a standard unit with tennant so 80% 95% loans or what ever.
and yes even no docs if setup correct at the start.
there are a couple of groups that just do this type of service apartments.
but they are sold as units first and then when all sold the after market service apartment contract is put on the units.
they are not advertised as service apartments for sale as technically until the contract is signed they arn't and you can't sign until they are built and the loans are in place.
this is just food for thought.
and I will come back and but a few figures on the difference for a standard two br under this system as opposed to a 2br normal unit from say a mertiton of this world.
and for a developer the numbers give you full debt coverage very quickly

In my opinion this wouldn't work. Reasons as follows...

There would have to be a clause in the COS stating the fact the purchasers had no issues so why would any potential lender no be aware?
I'm assuming that valuers in the area would soon get wind of this.
Even if they manage a way around this, the issues would again raise their head when it comes time to sell the property. You again would be looking at a limited market as you wouldn't have a hope in hell as selling it as a PPOR or to someone requiring say a >60%LVR.

If they sell it as standard with no clauses in the contract a purchaser could tell them to "stick" any agreements they want in place.

I personally see this as being very difficult and a little to risky for my liking. there are plenty of other opportunities out there.

 

[grossreal]

hi Bradsdad
they are already being done
I am going to an opening of one site not mine in potts point
there is a couple in camperdown and stanmore.
they are basically the same as service apartments but have a external lease agreement on the property and as GoAnna! correctly said they have a onsite managerment group that manage the building
all out going are paid by the group and they give the owner a fixed rate of return plus a percentage of the profit of the management company.
the properties are sold as a normal unit with a normal rams, nab whoever loan they are designed as a normal residence and sold that way.
if they sold the property most likely it would be to the others in the group but it would be sold with lease in place as you would with a commercial sale
and these are residential properties sold into a commercial market.
the same as if you bought a unit in the benelong for 2mil
most of those are resi with leases in place( and they have no problem selling those)
and the lvr is not 60%, the lvr is 80% or higher if your lender will lend you.
the contract would be the same as any contract and it would say that the property is for sale with a lease
unlike a quest the managing agent is working for you and leases all the units
they can go down to 6 in a building to make it profitable but as a norm they usually do the whole building
the leases are for normally 5 x 5 x 5 and as long as people buying in at the start understand what they are buying no problem.
The properties are developed, sold and then when all are sold or sold down to cover debt
then the management agreement is put in place and they are usually sold to long term investors.
the contract is usually 5 x 5 x 5 fixed 7% return
with between 30 and 50% of the profit for the year of the company managing back to the owners.
so you get 7% as income and what ever profit they make you get a percentage of that.
and its not for everyone.
but the last one that one of the groups I deal with
they sold all 20 units within 3 months and no advertising costs investors only.
as for valuers there is no difference.
as the properties are standard units but with a external lease just the same as if you bought a property and leased it to bhp.
or bought in the benelong and leased to a doctor for 5 years.
yes it is a different type of service apartment and the good or bad is for people to do there due diligences.

 

[Ahmad Azimi]

These days there are usually 2 types of serviced apartments on the market.

1 - You buy the apartment and you will get a rental guarantee of X years, depending on the agreement. Most of them you cant live in it but some allow you to live for free for X amount of time such as 21 days. Apart from that there isnt much you can do with the apartments. These apartments have very minimal capital growth and getting finance is abit harder as well.

2 - This is the new trend in serviced apartments these days. When you buy the apartment, you have the choice of giving it to the onsite management to rent it out for you as a short term holidays apartment (they might give you a rental guarantee), rent it out yourself as short term or longterm whatever you like or you can choose to live in it as your own PPOR.

The second one is by far the better choice in serviced apartments as you will get a better capital growth and you have the freedom to do what you want with the apartment.

 

[WashingtonBrown]

Depreciation is higher at 4%. Usually rent rises of around 4% per annum and reviewed to market at end of lease. Most outgoings covered by tenant.

Hi GoAnna

There is certain criteria one needs to meet before claiming the 4% building allowance on Serviced Apartments. One in particular is owning ten of them.

See option 2 in the attached article.

http://www.washingtonbrown.com.au/news/building-allowance.htm

Regards

 

[GoAnna!]

Hi GoAnna

There is certain criteria one needs to meet before claiming the 4% building allowance on Serviced Apartments. One in particular is owning ten of them.

See option 2 in the attached article.

http://www.washingtonbrown.com.au/news/building-allowance.htm

Regards

HI WB

I was speaking from my own expereince and it is more complex than I understood. However option two on your link is misleading as it suggests that you mst own 10 when on the ATO site it says, and I quote.

2. is one of 10 apartments, units or flats in the building that is owned, leased or held by the same entity (or is certain facilities associated with apartments etc.); or

 

[WashingtonBrown]

Hi

I thought you answered the question yourself...?

It must be held be the same entity.

The taxpayer was declined the 4% building allowance in 1d 2003/77 and this was the final par.

"Because the taxpayer's area is an apartment and the taxpayer does not satisfy the additional test of owning, leasing or holding nine other apartments in the same building, the taxpayer's area is not being used in the 4% manner as prescribed in section 43-145 of the ITAA 1997 (refer to ATO ID 2003/77). "

Regards

 

[landlubber]

ID 2003/77 says it's been withdrawn.

ATO ID 2003/77 'says' it has been withdrawn. Is that relevant?

If I google on "section 43-145 of the ITAA 1997" it takes me to some strange XL spreadsheet.

Why would the ATO specify "must own 10" ? Makes no sense.
The use ( short term traveller accom. etc) is still the same no matter how many you own.

Confused.

LL

 

[GoAnna!]

From a thorough reading of the ATO website (well the relevant sections) Washington Brown is correct and more importantly I am wrong It has not been withdrawn as in no longer valid. It just forms part of the information relating to investment properties and what claims are permitable.

 

[landlubber]

Why 10 ?

Does anybody know why the "10" rule exists ? I'd bet there's a right shed-load of people claiming 4% who don't own 10.

WB ..have you ever asked for 'clarification' from the ATO. (I accept using that word relating to the ATO is a complete oxymoron but I'm a sucker for worthy lost causes !)

LL

 

[GoAnna!]

Does anybody know why the "10" rule exists ? I'd bet there's a right shed-load of people claiming 4% who don't own 10.

WB ..have you ever asked for 'clarification' from the ATO. (I accept using that word relating to the ATO is a complete oxymoron but I'm a sucker for worthy lost causes !)

LL

I presume 10 is seen as running a business versus just having a passive investment? Does 10 ensure that people don't claim 4% on their holiday home?

 

[WashingtonBrown]

Hi

In answer to some of these queries

I am imagine there are lots and lots of people incorrectly claiming the 4% building allowance.

In fact over the many years i have seenmany qs reports incorrectly claiming the 4% allowance.

I cant remember why the originally 4% building allowance came into play, it was probably to encourage development of hotels. Never designed for the holiday home - with furniture rented on weekends type acommodation.

Sorry to be right in this case Goanna.

Regards

 

[GoAnna!]

No need to apologise. Always happy to be corrected with the facts. Will now have to check that my accountant has a better idea than I do

 

[atti]

is rental pool "system" is garantee rent or returns ???

i found an apartment for 300k and they say garantee rental pool system

its got pretty good return on it at 400 p/w.

rent is 1733 P/M

say borrow 300k 80% lvr 240k loan 6.9 % 1500 PER MONTH

that means its posible cashflow +233 $ per month ,

is this true good to be true ?

 

[Rob Williams]

Atti, you ain't gonna get 80% LVR on one of these deals. Not even close.
Some lenders won't even touch them at all due to the commercial contract in place.
That's one of the reasons they sit on the market for so long - folks have trouble getting a loan that really works for them. Due to the amount of cash that has to be thrown into the deal, the words "opportunity cost" start creeping into the equation.

 

[atti]

do you own one of these or having experience dealing with a property group that service these appartments ?

can you explain more on "opportunity cost" ?

it makes sense investment wise on the ink and paper to add it to your portfolio

 

[Rob Williams]

I've been looking into buying such an apartment in the Melbourne CBD with no more than about 5 years remaining on the contract so I can live in it if I choose to.
Depending on the financier, I've been looking at between 50%-60% LVR. You might get a little better if you shop around, but don't count on 80%. 80% plus is for Owner Occupied residential.
So, I'd be looking at putting in around $100k cash. That's where the opportunity cost comes in. What other opportunities could I buy into with that amount of cash? Maybe a couple of units with good CG potential on an 90% LVR?
I'm still likely to go ahead with such a purchase in the future, purely for the short term cashflow with potential to move into it if I make a move across the border.

 

[atti]

yeah definately good cashflow, i need to find out if its one that you can move in as PPOR but it doesnt seem that way.

maybe 80% lvr was abit ambicious and banks dont like apartments do they.

just doing the research i guess, i am expecting alot of apartments going to be on market this year as investors looking to reduce their debt maybe

 

[Property Meister]

banks are fine with apartments in general, the problem with service apartments, is that they are usually very small, which the banks see as more risky, its just how they see it, maybe someone here could explain the technical details of why they think its more/too risky

 

[Rolf Latham]

Hi PM

Serviced apptmts for most lenders are a commercial proposition because usually the fuel that gives them the good cashflow ( the ongoing lease to the commercial operator) is also the achilles heel.

The lender sees that if the borrower defaults, under the terms of most of these leases the property can only be onsold to another investor ...............and that means a limited supply of buyers if things get tough.

There is also the chicken and the egg scenario. The reason the lender wont go to a decent lvr is because they cant resell the property quickly because they wont provide a decent lvr

ta
rolf

 

[Rob Williams]

There is also the chicken and the egg scenario. The reason the lender wont go to a decent lvr is because they cant resell the property quickly because they wont provide a decent lvr

So what do you think about the strategy of buying one with only a short time (say, 5 years) left on the commercial contract?
My thinking is that a well chosen apartment in a great location and nice building will show decent CG once it's released from the contract and becomes available to owner occupiers.
This assumes you're prepared for the lower LVR going and you're wanting positive cash flow during the contract term.
I'd be interested in your thoughts on this ..
Thanks,
Rob