Guaranteed Rent Apartment in Sydney CBD

l0nglive on 24/04/2023 - 21:16

I have come across some property listings that feature a guaranteed rental income clause, which appears quite enticing, boasting a 5-8% ROI annually. One of the listings states, "Option to remove from the hotel and engage in short-term leasing with returns up to $58,000 (8.4% return) net per year." The sales history seems busy, with undisclosed prices or peculiar price patterns.

Take this example:
46/2 Bond Street, Sydney NSW 2000

Oct 2022 SOLD $895k (agency unknown)
Apr 2016 SOLD $165k (agency unknown)
May 2011 SOLD $485k (agency unknown)

Some units in the same building are often held for only a few years before changing hands. The guaranteed return seems dubious, as it appears too good to be true. I wonder what the catch is with this type of 'investment'? It's usually associated with a hotel service. My educated guess is that there may be hidden fees related to the hotel.

The best way to find out is to examine the contract. While waiting for the agent, I would appreciate it if anyone with experience in this kind of property could share their insights.

Financial

Comments

  • bobbified on 24/04/2023 - 21:34
    +3

    I don't know the ins and outs of it all, but those properties that have some sort of guaranteed rental income seems like they'll be harder to sell when you want to dispose of it later. The management fee will probably be much higher than usual too.

    If it was a good deal, they wouldn't need to put a guarantee on it as a selling point.

    • Sinnerator on 25/04/2023 - 09:35

      Guaranteed rental income of $58,000 per year
      ex. "Minus Admin Costs totalling $28,000 per year"

      READ THE FINE PRINT

  • jalalii on 24/04/2023 - 21:44

    Timeshare?

  • Aureus on 24/04/2023 - 22:11
    +4

    up to $58,000 (8.4% return) net per year.

    Key part is "up to".

  • TheMindsetTraveller on 24/04/2023 - 22:30
    +1

    Usually serviced apartments - you own the "unit" but must lease back to the management company i.e you aren't allowed to occupy the unit unless for x weeks per year (note x in the single digit). The ongoing management fee are often out of this world too usually, and rarely do these properties appreciate in value - due to the restrictive use plus significant maintenance/management fees.

    • Trance N Dance on 25/04/2023 - 04:07
      -1

      So a timeshare

      • SimpleLeverage on 25/04/2023 - 08:59

        Not exactly a timeshare program.

        It's sort of like an apartment that has been zoned short stay only instead of residential. They generally come with a 25 year managing agreement with a service apartment provider that pays you rent rather than your usual property agent leasing it out for 1 year (which you cant do given the short stay restriction).

        After the agreement expires or if the serviced provider decides to terminate the agreement, you could lease it to someone else, but are still limited by the "short stay requirement". This was the issue we saw in Covid where some serviced apartment providers terminated their agreements and we saw landlords with a property that they couldn't live in given the short stay restriction and also couldn't rent out given the lack of providers willing to take on the management given the unknowns around tourism.

        The restriction is generally why these properties have a lower price per sqm size of the property compared to a similar sized normal apartment without any restrictions.

  • SBOB on 24/04/2023 - 22:46
    +2

    Apr 2016 SOLD $165k (agency unknown)

    Bet that person has a tiny bit of financial regret :)

    If it was so guaranteed profitable, why would the hotel not keep the rooms for themselves?

    • leigh8904 on 25/04/2023 - 14:26

      If it was so guaranteed profitable, why would the hotel not keep the rooms for themselves?

      Yes, one of the key questions.

  • jace88 on 24/04/2023 - 23:23

    There's quite a few similar concepts around the place whether it be serviced apartments, university lodging, etc… basically you invest in the unit/apartment but are obligated to use their management services and do whatever renovations/maintenance/etc which they mandate. There may also be restrictions on how you buy/sell the property after too.

  • Gelato on 25/04/2023 - 02:03

    Usually can’t borrow 80% for these types of property

    My guesses:

    Due to the nature of short term leases, the maintenance and cleaning fees would be high, and vendor set the price
    Management fee is also expected to be higher compared to typical residential rental

  • deme on 25/04/2023 - 08:47

    If it's too good to be true…

  • leigh8904 on 25/04/2023 - 14:25

    I have come across some property listings that feature a guaranteed rental income clause,

    Usually the only guarantee for those property deals which come with a rental guarantee is that the buyer gets fleeced. Consider the following anatomy of the rental guarantee scam (although not sure how closely this applies to the short-term rental apartments in this case):

    Scenario 1 (genuine market value):
    Say a particular type of property in a given location rents for $300/wk => $15,600/yr.
    Expected gross rental return is 5% => property value $312k.

    Scenario 2 (rental guarantee scam):
    Property developer / seller decides they want to make a bit "extra" for the sale on the same property.
    Seller provides rental guarantee $350/wk => $18,200/yr. But note, the guarantee is usually time limited, eg. 2 or 3 years; let's assume 3 years; and the seller manages the tenant for that time.
    Expected gross rental return is 5% => property sale price $364k.
    Now developer rents out the property at the going market rate ($300/wk) = $15,600/yr, leaving shortfall of $2,600/yr.
    3 years x $2,600/yr = $7,800 the seller must make up the difference for the rental guarantee.
    Therefore seller's "profit" over the market price: $364k - $312k - $7,800 = $44,200.

    I.e. seller has scammed the buyer to the tune of $44,200, and buyer probably won't realise till at least 3 years later, or maybe not at all if market rents have risen over that time.

    Note: can adjust the numbers for a given situation, but the same principle generally applies.

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