What due diligence needed for serviced apartment?

[danwatto]

I've found a serviced apartment I'm interested in, and it's community title but is acceptable for owner occupiers or long term leases (so is acceptable to the banks).

There is an option to lease back to the hotel/serviced apartment chain for good monthly income.

In the past for normal properties I had just gotten building+pest inspection plus the solicitor searches.

Since this is a bit different - what research should I do before making the offer?
What information do I ask the agent for?

I already have the rental details and the costs, but would be helpful if someone having done these before could point me in the right direction?

For community title what paperwork do I ask for, is it like strata where I can get all the meeting minutes?

 

[Peter_Tersteeg]

Assume the rental ledger and costs you've got aren't showing the full story. I've seen this on many occasions where people had this information, were adamant it's a good cash flow deal and then sold a few years later because they were loosing money.

The vendor will never agree, but you could ask for a copy of the owners tax returns for the last 3 years.

Also get a copy of the lease agreement. Read it very carefully. Get legal and finance advice on it.

If it's currently under a lease it won't be acceptable to the banks. Depending on the building, they may take it if there's no current lease over the apartment.

A serviced apartment will likely have a very negative affect on your future serviceability, even if it is cash flow positive.

I've seen a couple of instances where a serviced apartment worked out well. I've seen a lot of cases where it did more harm than good. On balance I'd walk away from this type of deal.

 

[danwatto]

Thanks Peter.

I was thinking since it is allowed to be rented on a normal lease, anytime I want to refinance I can just pop in a normal tenant on a 6 month lease and it should be treated as a normal apartment by the banks?

It's not restrictive like the Mantra apartments or anything, anyone can live there.

RE Agent will give a normal rental appraisal for normal lease.

But good point on the current lease, though. Not sure how the banks would see it, have to look into it - the problem is it IS currently on a lease back agreement to the operator.

But - there is a termination clause with 90 days. So it's possible the bank would accept it if either:
* They are ok with my intention to end the lease agreement and go on normal lease
* Convince vendor for 90 day settlement to get it off lease

What triggers the bank to be worried about it being a serviced apartment though, is it the current lease, the valuers comments, or the community title information?

ps regarding the rental ledger - it's not based on occupancy. It's a fixed monthly amount regardless of how much they make on the apartment. But you're right I should review the details in full.

 

[westminster]

Also don't believe what the REA says it will rent privately for. Do you own due diligence and get independant appraisal

 

[antistar]

Yup do a lot of independent due diligence as the difference between a serviced apartment with a lease and one without a lease is huge.

I purchased one a while ago that was near the end of the lease and put a condition on the contract that it must be vacant and not tied to a lease. So my solicitor organised a 90 day settlement and arranged with the vendor's solicitor to give 90 days notice from the day of the signed contract so it all dove tails as soon as settlement happens. The process cost me a bit more than normal in legal fees but was definitely worth it at the end.

There are some beautiful serviced properties that I would love to get my hands on but some of the leases are very tight and sometimes there is nothing you can do about it for 15-20 years. So just make sure the lease 100% allows for it to be broken permanently - best to check with a good solicitor first even if it costs a bit more.