The darker side of serviced apartments| Damian Collins

Imagine an affordable, hassle-free investment in one of our major cities that offered a guaranteed rental return of over 6% and a long term lease with fixed annual rent increases.

In cash-strapped times, this would seem an opportunity too good to miss. But, as always, there is a darker side.apartment hotel

Welcome to the world of serviced apartments.

Serviced apartments are basically strata-titled units within a hotel development. Traditionally, a hotel would be owned by a single investor or a small group of investors.

As the hotel business is generally high-risk in nature, it can be difficult for a hotel operator to raise funds to construct a hotel project at a reasonable rate of interest.

Hotel developers came up with a strategy to reduce their funding cost and free up equity by strata-titling the apartments and selling them individually to mum and dad investors.

Some hotel operators offer fixed leases to the purchasers of the properties, while some offer a share of the income generated by that unit (or pool of income) from the operation as a hotel / serviced apartment.

So why do some investors buy serviced apartments?

Well, for anyone who is used to investing in houses, a 6% or 7% guaranteed rental return with no vacancies would appear very attractive indeed.

Serviced apartments promise security as they usually involve a leaseback agreement with the hotel operator, who may have a five or ten year lease to manage the property as a serviced apartment hotel.

Sometimes, the operator may even pay the body corporate fees.

But let’s examine why investors should be wary.

What happened to my rental returns?

Given that serviced apartments are sold on the promise of their strong rental returns and short-term rental guarantees, it’s worrying that many of the claims simply do not stand up to scrutiny.

In reality, many rental guarantees simply do not deliver or even if they do the returns following the guarantee period are often far less.

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The occupants of serviced apartments are typically tourists and business travellers.

As we know, the accommodation industry is typically a very cyclical business and impacted by a number of external events ranging from terrorist attacks to airline strikes.

That is why rental returns are often lower than expected.

Plus, in the case of rental guarantees, it’s important to know who exactly is underpinning the guarantee.

If the company or person guaranteeing the rent goes out of business, then the guarantee could be worthless.

Generally speaking, rental guarantees should be a warning sign to investors.

They offer comfort but it’s what they hide that is a real danger.

A good question to ask yourself is ‘how good an investment can this really be if the seller needs to offer a rental guarantee?’

Another question to ask is “how long is the guarantee for?” – if it is only for 1-2 years, then really the market rent is more important.

Why isn’t my bank excited about my investment?

Another major problem with serviced apartments is getting finance for them.

Many lenders have a negative attitude towards them and will lend a lower percentage of the purchase price than a traditional residential investment and in some cases they won’t lend at all.

It’s not uncommon for lenders to have strict criteria regarding the size or location of serviced apartments.

It’s worth how much?

For an investor, there’s nothing worse than finding out that your property has lost value.

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But this is a reality for many owners of serviced apartments.

Because of the long leases, serviced apartments can only be sold to investors – the owner-occupier market is effectively shut out.

This severely affects the level of demand for the product and restricts capital growth.

While there are always exceptions to the rule, generally speaking serviced apartments have poor capital growth.

If they didn’t, why would they need to offer a rental guarantee?


coin house money taxWith more and more serviced apartments available, the problem of oversupply will hinder the capital growth of the category.

Also the high rental returns become less appealing the more you investigate the high risks involved.

There are also many other traps to avoid if you are thinking of investing in a serviced apartment.

For instance, what obligations do you have to renovate the property at the end of the lease?

While there have been some successful service apartment projects where all parties in the transaction have profited, in many cases investors who purchased the units have suffered poor returns.

All in all, it seems that serviced apartments are great for hotel operators, tourists and business travellers, but not necessarily for investors.

Want more of this type of information?

Damian Collins


Damian is managing director of Momentum Wealth, a Perth based property investment consultancy firm. A successful property investor in his own right, Damian formed Momentum Wealth to assist time poor investors in building their portfolios and applies his many years of experience to help clients accelerate their wealth creation. Visit

'The darker side of serviced apartments| Damian Collins' have 9 comments

  1. January 4, 2014 @ 5:36 pm accombrisban

    Thanks for sharing this informative post!


  2. April 13, 2014 @ 10:31 am mason

    As we know, the accommodation industry is typically a very cyclical business and impacted by a number of external events ranging from terrorist attacks to airline strikes.

    LOL, Bacause this happens on am onthly basis.

    Very poor article. i own many serviced apartments as they fit my investment strategy. Each to there own.


    • April 13, 2014 @ 8:27 pm Michael Yardney

      I’m glad serviced apartments have worked well for you. I agree with Damian that in general they make very poor investments.
      The internet is littered with stories of investors who regret buying into this type of property


    • September 27, 2016 @ 2:15 pm M Kat

      I concur with Mason, my experience is the exact opposite of this poorly researched article. I have capital growth over 10 years of ownership (in line with property 7 yr cycles) and have had trouble free, incrementally increasing rental returns averaging
      over $100,000 every 5 years.
      You have not listened carefully to serviced apartment investors, or if you have you have listened to those who chose poorly.


      • September 27, 2016 @ 2:28 pm Michael Yardney

        M Kat, I’m pleased you’ve had a great result with your investments, because like Damian I have seen many investors who have lost out substantially by buying serviced apartments.
        Having said that, clearly not all investors in homes or apartments have done well either, so correct asset selection and sensible timing in the market goes a long way to purchasing a good investment.
        however, in my mind, serviced apartments are not investment-grade properties. This article explains what I mean.


  3. April 3, 2015 @ 11:27 am Gino

    The article is totally negative.
    I have had a serviced apartment in the Paris end of Collins St Melbourne for the last 15 years.
    We started off with a 7% rental With the operator paying ALL outgoings (body corporate fees, council rates, water rates and no rental fees). Factoring in these expenses the return is more like 13-14 percent and increases with CPI each year. My only expense has been 2 lots of “updates” at a total cost which equates to less than $1000 per year. The valuation has gone up 150% in that time. All with NO headaches.
    Please show me a better, easier investment.


    • April 3, 2015 @ 12:21 pm Michael Yardney


      I’m glad you’ve done well. It sounds like you’re an unusually lucky. The internet is littered with stories of investors who’ve lost out investing in this type of property – I’ve spoken to many potential clients who’ve been held back owning secondary properties like this.
      Here’s Shannon Davis’s view on why not to invest in Serviced Apartments


  4. April 3, 2015 @ 6:53 pm Chris

    Mr. Yardney, I am renting out my first investment unit. Could you recommend some good landlord insurance policies or companies? Thank you



    • April 4, 2015 @ 9:17 am Michael Yardney

      Congratulations on becoming a property investor. Ask your property manager -they should be able to recommend someone. Terry Sheer is a company that specialises in Landlord’s Insurance


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