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 ------

Valuation by Rental Prospects - Real Estate Valuations

In our post - Valuation of Real Estate: How can you value your RealT?, we discussed about various parameters one should consider while valuing a RealT property. Today let’s discuss about one of the technical tools of valuation which forms a vital component of this process.

Today we will discuss about a monetary parameter of valuation. We will take a simple real-life case study and show how ‘Rental Income’ played its role in constituting the value of that asset.

Before we begin, let’s make some validated assumptions. We are saying ‘validated’ because the case we are discussing here is a real life case.

Case Study: Rental income from an asset in Civil Lines, Kota (India) [Places’ names have been changed deliberately]

An asset was bought by a person, 10 years back, in a posh locality in Kota, Rajasthan (India). Following are the assumptions:

Purchase Price	INR 2 million
Upfront Investment in Maintenance	INR 400,000 (20% of purchase price)
Yearly Maintenance Cost	INR 100,000 (5% of purchase price)
Initial Rental Income	INR 7,000 (Validated from Case Study)
Appreciation in Rental Income per annum	8% (General practice, as well as validated)

We are not taking into account the time-value-of-money & the appreciation in the asset’s value over the time. This is just to keep the things simple and calculate the impact of only Rental Income as compared to the investments in the asset.

Following are some basic calculations of total Investments and Returns in the form of Rentals:

All figures in INR '000. Click to enlarge.

 =>  Returns from only Rental Component as compared to the overall investments:

This figure shows that this person has recovered his 41% investment in the property, just by rental incomes! He didn't have to do anything in earning this revenue.

Beauty of Rental Income

The above discussed case study clearly shows that Rental Income indeed forms a vital component in the overall valuation of any asset. It is just like dividend investing: you keep on getting recurring returns on your invested money, leave aside the appreciation in the asset.

So next time you think of investing somewhere, just evaluate whether or not that asset is capable of generating recurring returns in the form of rental income!

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