Renting out a serviced apartment? You may need to incur high expenditures, despite good earnings

Posted On: 2015-06-23 05:58:10


If you own more than one residential property in a city, you can live in one, while the other becomes a source of income. However, how much you earn would depend on how you choose to let the property out. You could give it on lease, or run it as a paying guest accommodation or operate it as a serviced apartment. It is the last category that is catching the fancy of home owners. The returns are good, but is the effort worth the money?

Getting started

The biggest problem is getting permission for commercial activity in a residential building. "You need a good rapport with your society members. Very few residential societies allow serviced apartments," says Sajan Abraham, who runs six serviced apartments in a single complex in Mumbai.

Other than a NOC from the society, a police nod is required. Permission from the municipal authorities is a must. For a cluster of apartments, more approvals are required, like fire safety. A restaurant licence to run a common kitchen is also needed.

Once permits are in place, the process of kitting out the premises start. Anuj Kumar (name changed), who let out his 1,000 sq ft apartment in Powai area of Mumbai in 2014, spent Rs.8 lakh doing it up. Though he wanted to let out his house as a paying guest accommodation, the thought of dealing with individual tenants proved a turn-off.

"Serviced apartments are treated at par with three-star hotels and should boast similar amenities. Cots with mattresses, wardrobes, fitted kitchen, air conditioners, refrigerator, washing machine and television with cable connection are a given. A wi-fi connection is also important," says Sanjay Chugh, Head, Residential Services (Chennai), JLL India. A cook, laundry facilities, pick up and drop, round-the-clock chauffeur, car parking, swimming pool, gym and club house can be provided at extra cost. If an intermediary (serviced apartment operator) is involved, then extra facilities are easier to provide. The operators prefer a cluster of houses in a society or area, which helps offer common amenities to all.

Chugh prefers the operator route. A third party operator or an aggregator, who is not involved with doing up the apartment, maintaining it, promotion and securing clients, usually charge 15-20% of the card rate as fee. If the operator offers some more premium services like flight booking, then he can charge higher (20-30%).   However, the wear and tear of such properties is substantial. As a result, maintenance cost is high. About 15 to 20% of the annual income can go towards upkeep.

Steady income

Shveta Jain, Executive Director (Residential Services) at Cushman & Wakefield says a serviced apartment earns 10-15% more than properties rented out to regular tenants. "However, this needs to be set off against the maintenance and other costs, the taxes one has to pay," she says.

After spending Rs 8 lakh, Kumar earns Rs 1 lakh a month from his Powai apartment. He charges Rs 3,000 per guest, per day.

Industry experts say three years is usually what it takes to break even. Dev Anand, a serviced apartment operator from Chennai, pegs monthly expenses at Rs 5,000-7,000 per apartment. "A typical contract says a maximum of eight occupants can stay in a 3-BHK flat. The rent can be increased by 10% from the third year. Maintenance charges has to be taken care of by operators," he says.

Where operators are not involved, the average earnings of a house owner is anything between Rs 55,000 and Rs 75,000 in major cities, depending on the area and facilities. For instance, a 2-BHK apartment in Andheri area of Mumbai can earn between Rs 3,000-3,500 per day. The same apartment in Peddar Road can earn Rs 4,000-4,500 a day.

Keeping the cash register ringing

A regular stream of clients is imperative for running a serviced apartment successfully, says Chugh. "Owners can enter into contracts with operators or companies or travel agents to ensure this," he says. 

Source : Renting Out A Serviced Apartment? You May Need To Incur High Expenditures, Despite Good Earnings