Every property investment carries a risk. In the case of speciality properties, the property investment basics won’t cut it. These are the pros and cons of investing in serviced apartments.
If you’re a regular traveller, you may have stayed in a serviced apartment before. They occupy a strange middle ground between hotel and holiday home. Generally, you enjoy more comfort than you would in a hotel while still benefiting from things like room service.
In recent years, serviced apartments have gained in popularity among travellers. As a result, they’ve become a route into investing in property for beginners. However, you’ll have to look beyond the property investment basics to get the most out of them. Here’s what you need to know.
Your Agreement
You’ll create an agreement with a property operator to keep your serviced apartment up and running. This involves an additional cost on top of those usually associated with investing in property. For beginners, getting this agreement right leads to higher yields. Here are your options:
- Long-term agreements. These agreements essentially lead to your service apartment acting like a hotel room. You commit to only using it as an investment property, and won’t spend any time living in it yourself. However, this also means you can advertise it to tenants throughout the year.
- Short-term agreements. This type of agreement offers you some personal use of the apartment. The property operator will only let it out when you’re not living in it. However, this means you can’t take on long-term tenants. Still, it’s ideal if you intend to use the apartment as a holiday home yourself.
The Pros
When managed well, serviced apartments are one of the best ways of investing in property for beginners. These are the pros.
Pro #1 – Strong Rental Returns
Your agreement usually contains a fixed price, which has several advantages. For one, it helps you to manage your cash flow, as you don’t have to account for unexpected maintenance issues. You may enjoy more substantial rental returns compared to residential type investments.
In some cases, these returns are double those of residential investment.
Pro #2 – Guaranteed Rental Income
The prospect of vacancies is one of the key barriers to investing in property. A few months without tenants could spell disaster for beginners for their finances.
This isn’t an issue with serviced apartments because the burden of attracting tenants lies on the operator’s shoulders. Operators lease the apartment from you by way of a lease agreement. As a result, the fixed price in your agreement gets paid, regardless of whether there’s anybody in the apartment.
Pro #3 – No Maintenance and Repair Work
Ongoing maintenance creates one of the highest costs to a property investor. Budgeting for maintenance is one of the property investment basics.
Except when investing in serviced apartments. Again, the operator takes on the responsibility of keeping the apartment in good condition. This means you spend no time dealing with the issues that tenants’ issues or trying to find contractors.
The Cons
Those pros sound great, but serviced apartments aren’t without their issues. These are the cons you must consider.
Con #1 – Wary Lenders
Lenders see speciality properties, such as serviced apartments, as high risk. You may find it more challenging to secure a home loan than you would for a regular property. Many lenders have criteria for you to meet regarding size and usage. Furthermore, you’ll usually need a larger deposit.
Con #2 – Difficult Resale
Serviced apartments only appeal to a small segment of the investor market. This raises difficulties when you try to sell the property. You may have to wait longer to find an appropriate buyer.
Beyond that, this limited resale market also affects capital growth. Less demand leads to lower prices, so you can’t buy a serviced apartment with the aim of selling it for a profit later. Your investment strategy must focus on generating yields instead.
Con #3 – The Management Issue
While having a property operator takes a lot of burdens off your shoulders, there are potential problems. For one, your operator’s financial stability is an issue. Having a fixed income means little if the operator can’t pay what they agreed. Research every operator you consider to see if you can trace any issues.
Furthermore, poor management makes the property less attractive to tenants. If demand dries up, your operator may experience cash flow issues. This could lead to missed payments.
The Final Word
Serviced apartments offer less hassle but come with some risks. Lenders don’t like them, and resale values aren’t as high as some investors may want them to be.
However, they can make you a lot of money with the right property operator. You’ll enjoy a high, guaranteed income, while avoiding many of the hassles of property management.
If you invest in a serviced apartment type of property – make sure you get a tax depreciation schedule.
About Tyron Hyde
Tyron Hyde is the CEO of Washington Brown Quantity Surveyors. He is regarded as one of the industry's leading experts in property tax depreciation, is regularly quoted in the media & asked to speak at conferences.
Learn why more Property Investors Choose Washington Brown to prepare their depreciation reports.