Property investors are always looking for the next big thing, and right now, more and more of them are turning to serviced apartments as their next opportunity.
It’s no wonder either. Serviced apartments have already been seen to deliver great returns on investment, so what’s not to love? Well, as you can probably guess, serviced apartments aren’t right for every investor, so it’s important to know exactly what you’re getting yourself into.
With that in mind, we’ve explored both the good and bad side of serviced apartments. Let’s get one of the negatives out of way first, shall we?
Every landlord dreams of finding a great tenant that never wants to move out. That financial security is extremely comforting, so it can be a step into the unknown to take on a serviced apartment.
While serviced apartments do occasionally attract longer term lets, their bread and butter are short-term rentals from tourist and business people. For that reason, investors should expect to need to attract a large number of tenants.
This makes the location of your serviced apartment crucial. Since you’ll need to attract tourists and professionals, city centre apartments are often a good bet. Of course, buying in a premium location can come with a premium price tag.
How can we start with any pro other than the fantastic yields you can receive from a serviced apartment.
While long-term residential tenancies normally result in a yield of around 3-4%, serviced apartments regularly achieve 6.5-9%, according to research from JLL.
This is because serviced apartments target a type of tenant that is willing to pay more for a slice of luxury, some home comforts and to avoid staying in a hotel.
This more than makes up for the additional void periods and could mean that you make as much by only renting your apartments on the weekend as you would if you let it out traditionally.
While those high rental yields may be tempting you have to consider just how hard you’re willing to work for them. The nice thing about regular buy-to-let tenants is that you don’t have to spend much time communicating with them.
When it comes to serviced apartments, the increased number of tenants makes managing the property far more time-consuming. There are far more people to meet and greet and you’ll find that you have to work some unsociable hours, with tenants flying in at all times of day and night.
This makes managing a serviced apartment particularly difficult if you have a regular day job. Of course, you can hire a company to manage your property on your apartment, which will cut into profits but also cut away a lot of the hassle.
No, you’re not seeing double, the increased management that comes with serviced apartments isn’t all bad. In fact, it can solve a long-standing headache for landlords.
One of the frustrations landlords face is only having occasional access to their property every six months or so. The result is that unless a tenant reports it (which they often don’t) small issues such as a blocked gutter can turn into serious problems, like an entire wall of damp.
In short, traditional long-term lets often result in landlords finding out about maintenance items long after they needed to, which results in higher repair costs.
In contrast, the short-term nature of serviced apartments allows you regular access to your property, so you can spot maintenance items before they turn into full-blown problems.
If you already have a buy-to-let property and are sold on the benefits of serviced accommodation, it may be tempting to stick it on Airbnb and sit back to let the money roll in. Hold your horses, though, because it’s not quite that simple.
Restrictions on your mortgage and/or lease may stop you from providing short-term lets and the result of breaching these restrictions could be as severe as your bank pulling your mortgage out from under you.
So before you do anything, you’ll need to review your existing mortgage and lease documentation for restrictions with an expert.
If you have restrictions in your mortgage, you’ll need to speak to a broker with experience in serviced apartments. If you want to get a mortgage to buy a serviced apartment, you may find that you need a larger than normal deposit.
There are no two words as sweet as these: “tax-free”.
Yes, one of the major advantages of serviced accommodation is the potential to benefit from tax-free income, should your property qualify as a furnished holiday let (FHL).
FHLs are typically taxed in a more advantageous way than normal buy-to-lets, more akin to a commercial property. One of the main advantages is the ability to claim capital allowances on loose items of the plant (such as furniture) and the fixtures of the property.
All this is a long way of saying that a successful claim for capital allowances can mean that FHLs can spend years not having to pay tax on rental profits. In fact, the average capital allowances fixtures claim on an FHL makes rental profits tax-free for the first 2.25 years.
There’s no doubt that serviced apartments can provide an exceptional return for investors, but there are a couple of roadblocks to contend with, including having to put down a large deposit for a mortgage and more time-intensive management.
However, even if you can’t overcome those roadblocks right now, you may be able to benefit in the future. For that reason, it’s important not to close the serviced apartment door entirely.
To keep it open, ensure you invest in property that doesn’t come with leasehold restrictions preventing you from using it as a serviced apartment in the future.
To find out more about serviced apartments and learn about our current investment opportunities, get in touch today.
Want to learn more about investing in serviced accommodation? Download our free Guide to Investing in Serviced Accommodation.