Serviced Apartment after 12 months (real example with numbers)

Hi Everyone,

Used to use the old forum but haven't posted on here yet.

We purchased a serviced apartment a year ago, and given all the bad press they get I thought I'd post an example of one that is going well (so far) and everyone can make their judgements with the full picture in hand.

I do note, however, that most serviced apartments are not good investments, and this one happens to be a bit of a diamond in the rough.

Anyway, the numbers:

Purchase price: $375,000 (was advertised at first for $425,000 but laid unsold for several months like most of these do)
It's a 2 bedroom, 1 bath, no car space apartment in St Kilda, Melbourne
Size: 62 sqm internal + 12sqm balcony
Was able to obtain a 70% loan for it, through IMB @ a decent rate (after a couple movements currently sitting at 4.37%). LMI applied but was only about a grand from memory.

Rental return is fixed, increased by CPI each year - currently $2,391 per month

The apartment is nearing the end of a 7-year first term, which can then be renewed by the management company 3 further times for 5 years each (additional 15 years max) - then it converts to a normal apartment, or beforehand if they choose not to extend after one of the 5 year terms. There is no right of refusal on our end - i.e. we cannot opt out at any point from the serviced apartment agreement during those renewable terms.

Fixed expenses are:
Interest: $11,521
Rates: $1,269
Body Corp: $3,764
Water: $650

Only other expenses that come up are repairs to the aircon, dishwasher, carpet etc. that are caused by normal use (i.e. if a guest directly causes damage they are liable). So far there have been no other expenses.

The 'rent' hits our account every month no questions asked, and the rent rise scheduled for June last year was automatically applied at the rate of the CPI.

Any questions happy to answer.

Cheers,
Andy

 

I bought an apartment in Brisbane a while back off plan (around 2004 I think) which a few years after completion was taken over by a serviced apartment operator (owners could decide whether to opt in). Great guaranteed returns and regular stable income. Very happy with how it all turned out.

 

7.6% Gross/5.4% nett - (on purchase), can't complain too loudly.

 

What would the apartment be worth if the managers decided not to renew or you opted out? Would it increase in value? Could you increase your LVR?

 

Value would rise by around 15-25% as a rough guess.
Yes you could then increase the LVR as per normal bank guidelines and refi to a low cost lender (loans.com.au, uBank etc.).

 

Great to see someone else with a good experience.

I'll be honest, after seeing this one run for a little while, I told the building manager to let me know if he hears anyone else wants to sell and to pass my details on to them. One came through so far, but they overpaid originally, so to get the same yield as the one we already have, they would have had to sell for around 30% below what they paid... Didn't get a response after I emailed our offer.

 

If you sold now what do you think you would get for it?

Blacky

 

CF is fine but less cash flow and more growth would compensate in fact would be far more than what you are seeing now.

The call is: whether you want the income in hand or growth in property which you are going to get in hand eventually.

Regards

 

Those figures look good Andy. You got money in the bank ever month.

Personally, I don't go for serviced apartments because I fear low capital growth and knowing my luck every appliance in the place will walk out.

 

Nice figures. How often will you be required to refurbish the apartment and have you considered the cost of replacing bedding and kitchen equipment regularly?

 

I agree - this is definitely a cash-flow play over CG and it was a conscious decision at purchase. Our other 2 IPs are standard.

Would only ever recommend someone look into this as a section of an overall balanced portfolio.

 

Only about $20-30k more than we paid max. Not worth selling and now that we went through the ringer to get the loan approved originally we don't plan on selling for a long time, at least not while it's still on the serviced apartment lease with the $2400 in rent coming in each month.

 

All furniture/kitchenware etc. is owned by and the responsibility of the Apartment management company - i.e. they would have to replace/renew these items.

Only the air-con, dishwasher and carpets/cabinets are our responsibility and only in the case of normal wear-and-tear as mentioned.

Since the original lease started 8 years ago only an air-con has had to be replaced so far, so that would be the only additional cost so far in those 8 years above the fixed expenses mentioned earlier.

 

Nice figures. Do you depreciate it?

 

Sorry yes forgot to mention - the depreciation is ridiculous which is fantastic now while I have a relatively high PAYG income.

Depreciation as per the BMT Depreciation Schedule is as follows:
Year 1: $8,376
Year 2: $10,876
Year 3: $9,202
Year 4: $8,410
Year 5: $7,814

 

Good to see some real figures, thanks for sharing.

The cashflow on something like this can help pay off other non deductible debt.

 

Out of curiosity, what was it that made it a diamond in the rough? Nothing in your figures seems particularly out of the ordinary (other than maybe the 62m2 being larger than most of this type which probably allowed the high LVR?) so would love to know.

This product is something I've actually looked at a few times because on face value the yield/cash flow stacks up nicely with what I'd like out of a property but they do have a terrible reputation around here.

Cheers for posting!

 

Sounds like a good investment. If you hold until renew, then sell without management agreement you get the CG as well as the CF during the hold period.

 

Good point. The number are pretty good, congrats to the OP on that. But this type of numbers are achievable with dual occupancy houses as well which with all there short comings are better than serviced apartments at least.

 

not really