Investing in serviced apartments

Buying an investment property can let you benefit from both rental yields and capital growth, though there’s always a risk that there could be periods where your property fails to attract tenants. Investing in serviced apartments could potentially help to offset this risk, as someone else will be managing the tenants for you, though there are other complications to consider.

What are serviced apartments?

While traditional apartments can only be used as a home for owner occupiers or as an investment for long or short-term tenants, serviced apartments operate similarly to a hotel. A management company not only looks after taking bookings from travellers, but cleaning and maintaining the apartments between bookings as well.

Benefits of investing in serviced apartments

Serviced apartments can potentially provide an investor with more reliable rental income than a traditional apartment investment. This is because serviced apartments are leased by their operator, so even when they’re unoccupied, the rent is still being paid. Operators may also pay higher than average rents than individual tenants.

Additionally, you shouldn’t have to budget for building maintenance on a serviced apartment like you would with other investment properties. As the operator manages the building and looks after its occupants, it often also takes care of repairs and maintenance itself, saving you time and money.  

Serviced apartments can also be less expensive to purchase than some traditional apartments, as they’re often part of sizable apartment complexes that ensure a healthy supply.

Risks of investing in serviced apartments

Serviced apartments are typically only sold to investors. This means that if you choose to sell your investment in the future, you could miss out on owner occupiers as potential buyers. This lower demand could make it more difficult to benefit from capital growth.

Not all serviced apartment operators are created equal. While some are well-known chains, others are smaller and less established. There’s a risk that these smaller operators could go out of business and leave you without an income, while larger companies could choose to withdraw their business from a building that isn’t working out for them.

It can be harder to successfully apply for a mortgage to buy a serviced apartment, as banks and mortgage lenders may consider them to be relatively risky investments compared to more traditional properties. This is partly due to the previously mentioned lower demand from potential buyers, but also because serviced apartments are more likely to be located in tourist areas. With these areas having fewer permanent residents, governments and businesses are less likely to invest in the kind of infrastructure that can really help to grow property values in the area.

How to buy a serviced apartment

New serviced apartments may be offered for sale by their developer, such as when you’re buying property off the plan. Otherwise, they may come on the market when their previous owner sells.

Because not all lenders will offer a home loan to buy a serviced apartment, it may be worth comparing mortgage deals and contacting the lenders to make sure their loan products can be used for this purpose before you apply. You may need to pay a much higher upfront deposit to get a loan for a serviced apartment to help offset the potential risk to the lender.

You could also consider contacting a mortgage broker, whose expertise in the property and mortgage market can help you navigate the sometimes complex process of getting a mortgage for a serviced apartment. As well as helping you avoid any pitfalls, a broker can negotiate with the lender on your behalf and even manage the loan application for you.

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