Serviced Apartments – An emerging arena in Real Estate

Not all but some of our readers will agree with this post. We recently got a chance to study the functioning and business model of Serviced Apartments in Hyderabad (India) and felt the need to share the same with our readers. Let’s see how effectively we can communicate our views on this topic.

Serviced Apartments – What are they?

For those who are not aware of the term Serviced Apartments; they are no different from normal residential apartments, but with an exception that they provide complete services to the tenants.

Serviced Apartments are fully furnished houses including all the white goods that are provided to the tenants for use. The tenants residing in these apartments can make use of all the “free services” provided by the owners – house-keeping, food, electricity, laundry etc.

In short, a Serviced Apartment can be thought of as a variant of a PG (Paying Guest) accommodation, with some exceptions.

Business Model

This is one of the most exciting and profitable business models that can exist as recurring income source in real estate. Here instead of charging for apartment as a whole, tenants are charged on per bed basis. This will become more clear from the following example:

Shown below is a residential apartment in Hyderabad having 25 apartments of 3 bedrooms each –

Now consider these 2 scenarios –

Scenario 1: Rent as an apartment

Earnings

Rent per apartment/month	No. of apartments	Total/month
Rs. 25000	25	Rs. 625000

Costs

	Cost per apartment/month	No. of apartments	Total/month
Misc	Rs. 2000	25	Rs. 50000

Net Profits

Profit

Rs. 575000

Scenario 2: Rent as Serviced Apartment

Earnings

Rent per bed/month	Total beds per apartment	No. of apartments	Total/month
Rs. 10000	6	25	Rs. 1500000

Costs

	Cost per apartment/month	No. of apartments	Total/month
Housekeeping	Rs. 2000
Electricity	Rs. 2500
Wifi	Rs. 1500
Food	Rs. 6000
Misc	Rs. 3000
Total	Rs. 15000	25	Rs. 375000

Net Profits

Profit

Rs. 1125000

So after looking at the figures of both the scenarios, we have very less to explain anything. You can cultivate money in the second scenario and at least we are considering jumping in this arena as soon as possible!

Disclaimer: The figures quoted above are exact figures of a Serviced Apartment in Hyderabad, but we are not sure whether this will hold true in other cities as well.

------ Thanks for reading RealT Horizon J ------

Should I invest in Flats or Villas?

More often than not, this is a very BIG question in front of an investor who is willing to invest a fortune in Real Estate. What is the correct option, we really don’t know; but we can have an analysis based on few parameters that we think are important in this regard.

Where do I want to invest?

The motive behind asking this question is to know about the development level of the intended investment area. The choice of investment will differ based on whether it a Tier 1 area or Tier 2/3 area. This is because the scenario of development and mentality differs in the above mentioned areas.

Go for flats	Villas may be considered over flats
Reasons	Reasons
·         Trend of apartments (flats) is more likely to be matured in Tier 1 cities	·         More and more new apartments are being constructed as this trend is emerging in smaller cities
·         Only a selected few prefer Villas	·         Villas still are looked upon as primary option for residence
·         Resale of flats in Tier 1 cities is not a very big issue; one can find several buyers easily	·         Resale of flats becomes a headache in these towns as buyers are few and have many new options to choose from
·         Flats’ value appreciate in these cities	·         It depreciates here
·         Rental prospects are good	·         Rental prospects are meager
·         Villas’ prices touches sky	·         Villas are still available at affordable prices

Closing thoughts:  Considering these above points and many others, we feel that flats have still a long way to go in smaller towns and villas have lived their life in the Tier 1 cities.

                                               

                                                      ------ Thanks for reading RealT Horizon J ------

Rent by Price Ratio: Real Estate Valuation by Rent

Continuing our RealT valuation series, we now bring to you – Rent by Price ratio. In our post – “Valuation by Rental Prospects - Real Estate Valuations” we discussed how an individual should take into consideration the rental prospects while valuing a property. Today let’s discuss whether or not a prospective rent enough?

Facing dilemma: Which property to select?

Many a times, we get confused making choices between different assets. It becomes tough to select one from a choice of 2-3 properties. In such confusions, the decision is generally made based on only apparent features (aesthetics, size, location, ease of transaction etc.). To provide a rationale to this dilemma, we bring to you the concept of Rent by Price ratio (RP ratio).

Rent by Price Ratio (RP)

As is self-explanatory from its name, RP ratio means:

This gives you a fraction which can be used very effectively for evaluating more than one property together. To state in simple words, this ratio gives you the percentage of initial price that you can recover per annum by rental income.

How to make the choice?

Let’s take a scenario that you have a choice to make from among the following options:

Property	Prospective Rent	Price	RP Ratio
Prop1	INR 25,000 pm	INR 7.5 million	4.00%
Prop2	INR 20,000 pm	INR 5.5 million	4.36%

                                                         Source: Real Scenario of 2 properties in Hyderabad, India

As both the properties provide awesome investment opportunities and are located opposite to each other, it becomes increasingly difficult to make a choice among the 2.

But looking at the last column (RP ratio) in the above table, it becomes very clear that Prop2 provides a return of 4.36% against 4.00% of Prop1.

Hence it makes more sense to go for Prop2, than for Prop1.

Dilemma Solved, Decision Simplified B-)

Closing Thoughts: We formulated the above concept and analysis while facing a dilemma on making the choice on the above 2 properties only. This RP ratio provided us a yardstick to go for Prop2 & we followed it; you may not. It’s just indicative, not a sure shot approach to making decision.

------ Thanks for reading RealT Horizon J ------