Opinions on Hotel Investments & What are depriciation allowances?

Ok, this is a 2 parter...

1. What are your opinions on these hotel investments, where you buy the property, and they basically lease it off you, paying all outgoings etc, and giving you about 5-6% net per annum.

2. What are 'depriciation allowances' in terms of property? I was always under the impression that property always increases in value.

Heres an example of what im talking about;
http://www.domain.com.au/Public/PropertyDetails.aspx?adid=2006327302

Its an apartment in the city, I don't understand how it would 'depriciate' in value...

 

Depreciation allowance refers to the cost of your plant and equipment.

IE, the carpet in your property might cost you say 2,000 and have an expected life of 5 years.. so you can claim a depreciation cost over the course of that 5 years.
You also claim depreciation on things like the actual building, any electrical goods, hws, stuff like that.

You can depreciate with most property - it's one way of getting some cash back from the tax man.

The property will (should) increase in value.
It's like a car depreciating in value... your oven, when new, was worth say 600.00.
After 1 year, it's worth say 540.
after a second year, it's worth say 485
and a 3rd year might be 436

A depreciation company like Depro (deppro?) might be able to explain it more, or better, than I can.

Another example is say the laptop that I have for work purposes, if you've had any experience writing things like that off for tax ?it works the same..

 

Ahhh I get you perfectly, I didn't think of the things within the property.

Would anyone happen to know how to calculate depriciation? If I re-call right theres some sort of formula that applies to things like laptops etc.

 

cheers sim.

So what are peoples opinions on these sort of investments?

 

your potential for profit is reduced on these things. You're buying a solution, then theres management costs on top of that. Search the forums both here and somersoft and propertyinvesting.com. The yeild isnt too good on these units.

 

Not only is potential for profit limited (little scope to add value through differentiation of your product from the other 20-100+ in the block) but the lack of control over the management can really prove to be an issue further down the track, especially when you have little or no say when it comes to management rights and fees, and other costs (cleaning can be a large and often overlooked cost when considering this type of investment).

Another issue to be aware is that lenders may consider these types of apartments as non-traditional security and therefore more risky ie: borrowing may not be as high as 90% for example.

Not all property necessarily increases in value over time, either. Sometimes it goes backwards- or stagnates, like parts of Sydney have done for some 3-4yrs now. It's all about careful property selection

 

Personaly I don't like them, limited market for resale, not favoured by lenders and if the management company goes belly up it's a long time getting sorted out.

If you feel the need to own hotels there are listed property trusts and some stocks that cover all or part of that need. Tabcorp cover me partly for hotels as does Woolworths, ALE is another option for hotels.

 

This is an important issue to consider amongst the others mentioned. I've heard stories from owners who have 'invested' (i use that word VERY loosely) in these types of complexes where the management was basically ripping them off.

They did this by not honestly telling them when their unit was rented out and paying them less rent than they were entitled to. Apparently some of these managers were always ensuring their own and their 'friends' units were occupied 100% before leasing any others in the complex. The lesson here is to make sure you are on very friendly terms with the management or you might find they will screw you with a smile on their face.

 

Transit - The hotels offer a garunteed monthly income, regardless of whether or not your individual unit is rented out. (i.e. You will always recieve the same monthly income, regardless). Mind you, the monthly income you recieve tends to be quit generous.

Bundy - Whats a property trust? And WOW invests in hotels? :s

Jacque - So you wouldn't think Sydney would be a good place to buy an investment property?

Voig - I think the income is actually better than that off a typical investment property. For example there was 1 place I was lookin at that would give about $9,037.56 net return pa, this place would of been about $194k.

 

So sim my brudda... A very basic way of looking at LPT's... Would be that they're kind of like Property MF's that are listed on the asx?

Also, hypotheticially if I were to merely invest in CGJ or WOW, would I be investing in their hotel chains as well..?

 

So basically what your saying is...

Managed funds dont rely on what the market thinks. Their value depends on what assets they hold, where as with LPT's, the value depends souly on what the market thinks they're worth.

Correctamundo?

 

Property investment is all about:

1) leverage (i.e. borrowing more than you can borrow for shares)
2) capital growth
3) ability to value add/change use.

Looking at those:

1) leverage - you'll get maybe 60-70% max.
2) I've noticed medina apartments for sale in crows nest nsw for around 240k - 280k for the last 6 years...what does that tell you? These are yield plays, as you've noted it's 5-6% net. For the risk involved you'd be much better just stowing your cash in a high yielding bank account in my view. You can do so much better in property than this.
3) nil.

Beware also of traps in the long term lease/management agreement. They may be very poor managers of the hotel business but you may be stuck with them for a decade or more...

I'd avoid them like the plague if I were you...

Cheers
N.

 

Thanks nigel, however I don't think theres much risk involved, infact less risk then your typical investment property, because your garuntee'd the same monthly income, regardless of whether or not you have tenants. There is very little risk, and if the hotel were to go bust, you'd still have your property.

And my main reason for looking at one of these, is to just get the ball rolling to to speak. I'm very new to the whole thing, and wanna try ease into things. Properties like this have a few advantages that appeal to me;

1. I dont need to worry about tenants, at all, I'll always recieve the same income.
2. I dont need to worry about outgoings, they are all paid by the hotel, they even clean and pay insurance.
3. You tend to recieve quite a high net return pa, more than than if you were to rent out a place yourself.

To start off, I want something with a good steady income, that will allow me to turn it into a positive cash flow investment, to the point where the income covers the repayments, because as with most things, the hardest step is always the first.

And im sure as most of you property investors would know, the hardest property is usually always the first one.

 

Sim - What are some LPT's, and is that graph from an MF or LPT?

Also, where'd you get that graph from?