Letting out your apartment as hostel or serviced flat?

Last Updated: Mon, Apr 21, 2014 05:39 hrs
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Mumbai resident Gagan Kulkarni decided to rent his flat in Pune to a family friend. As the other person was known to Kulkarni, he rented the flat to him at a rate lower than that prevailing in the market. Also, the rent agreement stated every year, the rent would increase only five per cent, against the market norm of 10 per cent.

Kulkarni says he cannot ask the tenants for higher rent. A colleague suggested he terminate the agreement and rent the flat out as a paying guest-accommodation-cum-hostel, say, to four or five people. In other words, he could let it out as a serviced apartment. "This way, you can earn higher rent. However, you cannot give an unfurnished house on rent in this cases; you will have to have some basic facilities in place and maintain the flat, too," cautioned Kulkarni's colleague.

Though higher rent is a given, letting out a property as a hostel or a serviced apartment comes at a cost, in terms of money and time. While Kulkarni is still doing the math, here's some help.

The best locations for serviced apartments are close to central business district areas, peripheral business districts or information technology hub-centric regions in cities. This is also true for hostel accommodation, which caters to working professionals, too. If hostels are meant for students, proximity to colleges and training institutes is more important.

Currently, the highest demand and rate of development for serviced apartments is in Bangalore, Pune, Mumbai, Delhi, Chennai and Hyderabad, says Santhosh Kumar, chief executive (operations), JLL India.

He says the use of residential flats for most commercial uses, including business, requires owners to obtain the required permissions. "Full-scale commercial use of a residential flat is usually opposed by co-operative housing societies. Before using a residential flat for commercial purposes, it is necessary to get the approval of the housing society at a general body meeting. It is also necessary to obtain permission from the local municipal authorities for legal conversion of the flat into a commercial establishment," he says.

A S Sivaramakrishnan, head (residential services) at CBRE South Asia, says a single residential property furnished and let out as a serviced apartment does not strictly adhere to definition of a serviced apartment. "That will be a normal leased apartment. A serviced apartment is like a block of more than one unit (house) with a common kitchen, cook(s), house keeping and laundry staff; so, it is called a serviced apartment. Simply put, it will be like a hotel, but cheaper," he says. In such cases, more approvals might be required - for fire safety, a restaurant licence to run and serve out of a common kitchen, etc.

Often, hotels and construction companies develop blocks to be used as serviced apartments. Developers sell such blocks (usually to high net worth individuals), or these might be given on management contracts, to be run as serviced apartments.

Take the case of Nagpur-based Dilip Joshi. Six months ago, he received an offer from a leading private financial institution to develop his house for it to be used as a serviced apartment. The property would continue to be owned by Joshi, but be managed by the company. In return, the company would pay a fixed percentage of the rental income to Joshi. The company already owns two houses belonging to Joshi's neighbours. Joshi didn't accept the offer because though he stayed with his wife in Mumbai, the couple travelled to Nagpur often and, therefore, needed the house. Also the house was fully furnished, which the company didn't want.

When you rent an unfurnished house to a family, you, at best, have to ensure the house is freshly painted and the fans, lights, regulators, geysers and taps are working. Experts say the total cost of painting a 1,000 sq ft house (using basic colours) is Rs 70,000-80,000 (typically, it's charged on a per-sq-ft basis). Add to that Rs 5,000-7,000 for checking and repairing the fittings in the house.

The most important aspect while catering to a paying guest/hostel resident is safety, especially if the tenant is a woman. For this, police verification is extremely important. Assuming you have four girls as tenants, you have to provide two double beds (Rs 10,000 x 2 = Rs 20,000), or four single beds; four cupboards (Rs 5,000 x 4 = Rs 20,000), a furnished kitchen, a television and a refrigerator. The latter three aren't always additional expenses, as many have additional sets of utensils, televisions and refrigerators. Or, you could get second-hand ones, in good working condition. A second-hand television could cost Rs 2,000-15,000, a refrigerator Rs 5,000-25,000 and utensils up to Rs 5,000.

Ravi Ahuja, executive director at Cushman & Wakefield, says paying guest accommodation could fetch 30-40 per cent more than renting the place to a family, as for paying guests, the pricing is on a per-person basis.

Kumar of JLL India says the best serviced apartments offer facilities comparable to those offered by three- or four-star hotels, including, but not restricted to, fully-equipped kitchens with self-catering facilities, bedroom choices, reserved parking and centralised security, apart from the cost arbitrage compared to hotels with these services. "The cost of occupying a serviced apartment could be 30-40 per cent lower than a hotel room," he adds.

A serviced apartment should be fully furnished and tidy and should have white goods (television, preferably plasma-screen; refrigerator and air conditioner), a caretaker, house keeping staff, a cook or a butler; Wi-Fi facility (preferably with a printer and scanner); and laundry/ironing services. If a block of flats is converted into a serviced apartment, a swimming pool/library/recreational area is also provided.

"Setting up a good-grade serviced apartment could cost an owner Rs 4,000-6,000 per sq ft on interiors. So, for a 250 sq ft room, one could end up spending Rs 12.5 lakh. A very basic serviced apartment will cost Rs 2,500-3,000 per sq ft, or Rs 7.5 lakh for a 250 sq ft room," says Ahuja of Cushman & Wakefield.

Owners of serviced apartments usually tie up with companies for a fixed occupancy a year. The company pays a discounted and fixed annual fee. However, if there is a separate apartment manager, the owner gets up to 10 per cent of the rent collected by the manager. Accordingly, the tax treatment differs.

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