Why Profits Are Better When You're Investing In Serviced Residences
Why are the profits so much bigger when you invest in serviced residences than they are when you invest in more traditional, vanilla buy-to-lets? The answer, you have a different tenant profile, a different market, but you're utilising the same asset, the same property, your investment is basically the same.
Rob: Hi, it's Rob from Property Investments UK, and in today's video, we're going to be looking at why the profits and the return on investment are so much higher when it comes to service apartments and accommodation rather than maybe more traditional, vanilla, old-school buy-to-lets.
In where we are today, we're looking at an obviously fantastic backdrop, Manchester city centre, very good apartment base and these are the types of properties obviously that you guys have sold for a number of years in terms of locations and apartments, straightforward buy to let type properties.
But when you attach it to a serviced accommodation model, where you have the structure to manage those as well, they can generate a heck of a lot more income, can't they?
Paul: Yeah, absolutely. How the model works, if we take this apartment, for example, I would estimate on a normal AST it's a one bedroom apartment, obviously great views, I would estimate, I could be wrong or I could be right, I would have thought about £900 - £1,000 a month.
Rob: There are probably rough rules of thumb, about 5-6% rental yields, aren't they?
Rob: In Manchester, let's say.
Paul: In Manchester, after your costs you're probably looking slightly under 5%, so let's say £1,000 a month for this. Then obviously they charge us ground rent management, et cetera, so a month, you might come out with £800 for example. Now, the great thing about the service model is obviously you pay on nightly, weekly, monthly, yearly rates, so this will be marketed in the region of around about £140 a night. If it was a short-term stay, weekend, and you want to take advantage, you're probably looking £400 for two nights.
Rob: Rather than having one tenant in there for a twelve month tenancy, let's say that pays £1,000 a month, you're getting a lot more than that effectively just by doing on a service model to a company, to a corporate, because you're providing other things rather than just the accommodation. You're providing it fully furnished, all bills included, all different kinds of services and stuff that go into it.
Paul: Yeah, and if you look at that, and like I say, we don't look down the short-term route, but just to work it out that means that in theory you could potentially double your rental in eight days over a month if you use it for four weekends. That's the difference now. If someone's on a twelve-month contract we're obviously going to give them a good rate, but even if that's £100 a night you can do the maths for yourself; that's £3,000 a month. You look at the nearest hotel around here, off the top of my head, I'm looking down on one there, there's a Holiday Inn or something like that.
Rob: Yeah, you've got a Company Hill not too far.
Paul: Company Hill, yeah.
Rob: You've got Marriott, you've got a couple of more traditional type hotels.
Paul: Which are pretty basic hotels as well, and if you did your research they're going to be £100 a night. The argument is, and why companies prefer to do this, which would you rather have for £100 a night, would you rather have a one-bed with a penthouse view with your own facilities, et cetera, or in a little studio with a double bed?
Rob: Yeah, and I think the returns from it, certainly from an investor viewpoint, when they're considering it's the same property, it's the same investment to buy it, it's just a different type of tenant profile and just running that different kind of model gives you double, almost.
Paul: Arguably some better tenant profile.
Rob: Yeah, because you've got, I guess to an extent, somebody that's going to be looking after the property, you're going to be in there with cleaners on a regular basis, you're providing quality furnishings and things like that so you know it's going to stand the test of time, effectively.
Paul: Absolutely, and the sort of client we're looking to attract as well for the companies we are dealing with, contractors, high-level management, et cetera, people in good positions, during the weekends if we look for short-term, like I say, it will be people that we will vet and make sure they're looking for the right reasons. Arguably, you're taking all the risk out of any potential losses you would have on an AST, that's how we see it, but you're just getting a significantly higher income.
Rob: The return on investment I suppose increases, it's just that change of saying it's this rent for a month where it's a straightforward tenant profile, not furnished.
They sort of have encountered that and all the other bills that go with it, or the service model where everything is, kind of, they just turn up with a bag effectively, and they pay a premium for that extra service. That's why it works so well, really. You get a different type of tenant profile, a different type of market, but it's utilising the same assets, same investment, the same type of money into those types of deals.
Hopefully, that gives you a bit of context to why it can maybe outperform some of the straightforward buy-to-lets you might be considering at the moment.