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Beware the holiday home temptation: expert warns of serviced apartment investment pitfalls

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As the summer holiday buzz fades and routine sets in, many Australians might be contemplating the allure of investing in a holiday home. However, property expert Anna Porter brings a word of caution to those drawn towards serviced apartments in the wake of their vacation. While holidaymakers may be tempted by the gleaming displays and promises of high yields in serviced apartments, Porter, the principal at Suburbanite, warns about the risks associated with such investments.

According to Porter, “I have personally seen these investments stay vacant for months, if not years.” This sobering insight comes as she urges investors to understand that higher yields often come with higher risks, and serviced apartments are no exception. Highlighting a common post-holiday trend, Porter shares that holidaymakers are often enticed by “a 4D model in the local shopping centre of the next big investment disguised by promises of high returns,” but fail to recognize the unique ownership structure of serviced apartments.

Unlike standard property purchases, serviced apartments must be part of a letting pool and can’t be privately rented out. Instead, they fall under either an overarching lease to a company like QUEST or ADINA, or more controversially, through the Development Application (DA), a method Porter notes is often frowned upon by local councils.

Discussing the mechanics of such investments, Porter explains that in cases where an overarching lease is in place, though offering higher yields, owners are bound to use company services to stay in their apartments. Alternatively, when the letting pool structure is embedded within the DA, this restricts the investor’s control, leading to frustrations in association with small companies that may mismanage or even go bankrupt, leaving units empty and investors helpless.

As a professional valuer, Porter has witnessed the grim consequences when owners fail to meet financial obligations, resulting in foreclosure and a plummet in property values. Offering stern advice, Porter states, “There really isn’t an easy way out when it goes bad. I have seen many properties foreclosed on by the lender and sold mortgagee in possession when the management company walks away, leaving the investors with the mess.”

For those still considering this venture, Porter advises choosing serviced apartments with letting pool structures in the managing agreement, not in the original DA, allowing for alternative renting options should the managing company fold. But she does not mince words when conveying her ultimate guidance: “My best advice is to stay well away from them in the first place.”

The current financial climate might see an uptick in ‘lifestyle properties’ hitting the market, as Porter acknowledges the economic strain on Australians this holiday season. Yet, this serves as yet another reminder that while serviced apartments and holiday homes may appear as tempting purchases, they can quickly become burdensome assets for the unwary investor.

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