Investment that bounces

QUESTION:  I’m looking at buying a one-bedder in a hotel conversion as an investment property. The asking price is about $550K and the average rent is $650 per week.

That seems like a good return, especially since this building has a reputation for poor noise insulation.  Is it too good to be true? – Brunhilde, Potts Point.

ANSWER: Sounds like you might be looking at a classic ‘trampoline’ apartment block where tenants bounce in and out while they get the lie of the land on their way to something better.  As a former hotel, it may also have a lot of short-term lets.

This means that the $650 a week income could be eroded by periods of vacancy and associated letting fees. For instance three different tenants in a year with, say, two weeks of vacancy before each one, is going to cost you 12 weeks rent (the usual letting fee is two weeks rent).

Suddenly your $650 a week is more like $500.  So ask how often the flat lies vacant and for how long, and check the turnover of other properties in the building.  It could be a bargain but don’t get bounced on the trampoline.

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