Pros & Cons Of Investing In 🍽 Serviced Buildings (Hotels/Apartments)
There might be several instances in last many years that you have seen the advertisements from builders / developers / hotel chain operators about investing in serviced apartments – we are going to have a look on this investment option today in this writeup ✍️.
What are serviced apartments?
‘Serviced Apartment’ is the umbrella term for a type of furnished apartment available for short-term or long-term stays, which provides amenities, housekeeping and a range of services for guests and where most taxes and utilities are included within the rental price.
First of all, we need to understand the concept behind serviced apartments – basically, the term has been coined since long now, but the investment options have popped up in last decade only. In early days either one of the big investors come up with the idea and develop a building from scratch OR convert an existing building into serviced apartment which is almost a stripped down version of a hotel (most of the time). In some instances, multiple investors pool the fund to realize the project.
However, in last decade or so, builders and developers have marketed this investment option to retail investors to raise the funding and now anyone can invest in such projects – lets see some pros and cons of this investment avenue here.
Benefits of investing in a serviced apartment
As with any investment – following are the main advantages of investing in such properties:
1 – Higher yields 📈
Most serviced apartments or hotels have the USP of providing very good rental yield – So next time you see a promotion with 8-10% yield in dollar terms, then dont be surprised. However it comes with some caveats which we shall be discussing in the later part of this article.
2 – Low entry points 🔻
The price entry point of these properties is lower than their regular counterparts due to the nature of contract you sign up for. This makes it easier to own a property in case you are low on budget.
3 – Flexible payment options 🧮
While booking a serviced apartment, it usually comes with a payment plan which is flexible and adjustable. In some cases, there is an option to payoff the installment even post handover. This makes it attractive for investors with cash flow but not having full amount upfront.
4 – Personal usage allowance 🎉
The investor or any family member can enjoy free stay (sometimes upto 2 weeks in a year) based on the initial contract and terms. As these properties are usually rented out on terms closer to a hotel rental – the owner can enjoy free stay in their own property with all the services.
5 – Fully managed property 🛠
These properties are fully managed, and being landlord you dont have to worry about day to day issues with the property. A professional property management team or company is hired to oversee the management of tenants, day to day issues & other related works so that the investor dont have to bother on such tasks.
Speaking of managed properties, do have a look at this video here as I discuss how a crowd funding platform in UAE is enabling you to become a property owner with as little as AED 500/-. Some explanation on this here too.
In case you are interested to invest in a crowd funded property in the UAE, you can signup using the referral link and earn 250 AED bonus once you fund your account: https://my.smartcrowd.ae/?signup=true&r=wkhan Drawbacks of investing in a serviced apartment
Now that we know most of the pros of investing in serviced apartments, lets talk of some main disadvantages or challenges that you might face while investing in such properties.
1 – Unpredictable occupancy rate 🎢
We have seen how COVID has hit the tourism industry and as these properties are all related to hospitality industry if anything of COVID sort happens again, these properties will get directly impacted. Besides, the hotel industry is also dependent on general economy and if the economy is not doing well – your serviced apartment / hotel will also not do well and guest occupancy can drop significantly impacting the rental yield.
2 – Generally no mortgage option 🏚
While it was explained earlier, you can get the property on installments while booking – but once you take the ownership there is no way a new buyer can get these properties on mortgage as these are usually not preferred by the banks to be financed. Hence buying an existing property is only possible with cash.
3 – Resale issues 🧾
For the reason mentioned above (mortgage issues), the resale is also not easy for such properties as only cash buyers who understand such investment model can think of investing. For such properties, whenever you invest, keep a long term horizon so at least the rental yield covers your major cost of acquisition and you dont have to worry about your locked funds in such investment.
In general – a property has better resale value if banks are willing to mortgage as then you have better buyers for such a property.
4 – Little capital growth 🪙
Although such properties have very good rental returns, it has been seen in the past that the price appreciation is very little at best which is due to multiple factors compared to properties like villa or apartments in similar locations. ROI should be solely calculated on the rental yield and any price appreciation after all the transaction costs should be considered a bonus.
5 – High management fees (even if the unit if unoccupied) ✍️
As with any other property, the maintenance and management fees are part and parcel of real estate investment. However, with serviced apartments, the fees are generally higher due to the high level of upkeep and rental yield should incorporate the management fees while calculating the ROI. Moreover, considerations should be made for times when the property is unoccupied for any reason whatsoever which will directly impact the rental yield.
6 – No control over the property 🔐
For the investment model explained above, you must have realized by now that your control over the property is minimal unlike if you have invested in a villa or apartment. You cannot modify anything here as the management company responsible for carrying day to day tasks along with keeping the unit rented will make sure the uniformity of all the rooms in order to keep a brand image. So forget about renovation or modification completely for your own unit.
7 – You will never be an actual owner 👨💼
With all this explanation and paper work involved – you will realize that you are never an actual owner and have a role of just a small partner in a big project with little stake and say. One should make sure to read the terms and condition while signing up and investing as it is a big ticket investment and not something like smartcrowd investment where the ticket size is not that big.
Should you invest?
Whether you should invest in such a project will remain up the priorities you have – However, in Pakistan, the regulation are not that clear so I would advice against entering such setup. For the case in the UAE or across the globe elsewhere too, if you are opting for such projects – you should be wary of the drawbacks mentioned above before committing to such investments.
In case you are interested to invest in a crowd funded property in the UAE, you can signup using the referral link and earn 250 AED bonus once you fund your account: https://my.smartcrowd.ae/?signup=true&r=wkhan I will be making a detailed video on the same topic soon – please comment below or on my YouTube channel’s community section or tweet me back (below is the link) if you have seen a recent project announced so that I can have a review either in Pakistan or in the UAE.
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