When you are considering investing in property and using some of your money to try to make a decent return, serviced accommodation or serviced apartments might not be your first thought. More and more people are choosing to invest in serviced accommodation instead of buy-to-let properties, and the profit you can receive makes for an attractive proposal.
Although serviced accommodation properties are still not the norm in many locations, and might be few and far between, there are investment opportunities cropping up regularly. Before you sign your cash over in a hope to make some big money, be sure to properly research the serviced accommodation market and understand everything it involves. This guide covers how serviced accommodation works, how you can invest in it, and why it can make a good investment.
How does serviced accommodation work?
Serviced accommodation properties are often referred to as serviced apartments, and they are luxurious units with 1,2 or 3 bedrooms, kitchens and living areas. They offer many similar amenities to a hotel room, including a cleaning service, room service and furnishings, and are usually available for long term or short term lettings.
The majority of serviced accommodation is owned privately by individuals and then leased back to an operator who uses them to rent out to guests. As an owner of a serviced apartment, you could have either a long term lease or short term lease agreement with an operator:
1. Long term lease: If you have a long term lease agreement, then the operator can offer the apartment to guests for either short or long term accommodation. This would operate in a very similar way to a hotel room, and as the owner, you would never use the home as a residence but only as a rental property. This is a popular option for those that are buying serviced accommodation solely for the investment opportunities.
2. Short term lease: If you have a short term lease then you as the owner can have intermittent use of the property. The operator will be able to rent it out on a short term basis when you do not want to use it. This is a popular option in resort properties, where you may want to use the home for holidays throughout the year and then let the operator rent it the rest of the year.
When you are considering buying serviced accommodation, it is important to remember that your income will be based on the tourism industry which is impacted by many factors. If the tourism industry is not performing well in your area, then your rental returns are likely to suffer.
How to finance the purchase of serviced accommodation?
When you want to invest in a serviced apartment, you will need to decide on how you will fund the purchase. Unless you have the funds available to buy the property outright, you will likely have to get a mortgage to cover the cost. The amount of finance you will be able to get will vary depending on the nature of the property.
If you will have the freedom to release the apartment from the management agreement within six months, so that it can be used for permanent residence, then lenders could lend up to 80% of the value of the property. If the management agreement is strict and the property cannot be used for permanent residence within six months of buying it, then lenders are likely to only finance up to 70% of the loan-to-value (LTV) ratio. If the apartment is within a resort, then you might only be able to borrow 50% to 60% LTV.
Obtaining finance for serviced accommodation can be more difficult than other investment mortgages, and you might not be able to borrow as much. However, you should bear in mind that serviced apartments are usually cheaper than other investment property types.
Why invest in serviced accommodation?
There are a number of benefits to investing in service apartments:
- Guaranteed income: Serviced apartment operators will lease the property for a fixed price for a set amount of time and will then rent the apartment out themselves. Even if the apartment is vacant, the operator has to pay you.
- Decent returns: As most serviced accommodation works on a fixed price, the rate of returns is often higher than with other types of residential investment properties.
- No repairs or maintenance: All of the ongoing maintenance and repairs needed to the property will be completed by the operator.
While buying serviced accommodation can seem like an excellent investment opportunity, it is important to consider the resale market. You might struggle to find a buyer when you come to selling the property on.