Personal Finance

Home Truths: Running a service apartment

Meera Siva | Updated on January 24, 2018



Letting out your house as a service apartment can boost rental income, provided it’s fully furnished

If your house is at a plum location, renting it out as a service apartment on a monthly basis or as a corporate guest-house can fetch you higher rent than letting it out on a long-term lease.

Alternatively, if your property is in vacation spots such as Lonavla, Kasauli or Mysore, renting it to guests for weekly or short-term stays can boost your rental income.

What it takes

You may have to begin by furnishing the home. To lease it out as a serviced apartment, you need a fully furnished home with air conditioning, washing machine, refrigerators, televisions and broadband connection. You also need a fully stocked kitchen with a gas connection. “The facilities and services you provide must essentially be at par with an organised three-star hotel player”, says Naveen Nandwani, Executive Director, Cushman & Wakefield, a real estate consultancy.

You also need to employ good housekeeping services. “Guests may also expect additional services such as a helper or house-keeper to run errands or lend a hand in the kitchen chores”, says Raman Narula, Managing Director, Formula Group, a relocation service provider.

Making it work

If you have time, resources and the inclination, you can handle the day-to-day business yourself. This means finding tenants and ensuring the facilities and services are well maintained.

One way to find occupants is to list the property on online sites such as commonfloor, stayzilla, sulekha and airbnb. These sites also allow you to specify the type of tenant you are interested in. “Owners may have apprehensions about the kind of people who may occupy the home. If you want non-smokers or prefer pet-owners, you can indicate these preferences and we will match your guests accordingly”, says Yoganda Vasupal, CEO of Stayzilla, a listing portal.

You can work on business development by connecting with corporates who are looking for stay options for their employees and visitors. There are also agents who can help you find renters as well as handle operational issues by connecting you with travel, food or housekeeping service providers. Some operators may run your homes as a service apartment on your behalf, on a profit share basis or on a fixed rental. The rent you earn with these would be higher than the market rate.

Earning returns

Your profit depends on the rent you earn and, importantly, the occupancy. If the location, quality of furnishings and service levels are premium, you can charge higher rent and yet attract guests. Jayashree Jayaraman, a home owner who uses Stayzilla to list her property, thinks that short stay options fetch higher rent per sq. ft. even at 25-30 per cent occupancy.

Narula says a landlord could recover the cost of furnishings in the first three years; after that, profits are higher as the furnished home earns more rent. You also earn profit margins on services such as housekeeping.

But while rental returns may be higher — 3 per cent for service apartments versus 1-2 per cent for regular rentals — turning profits may not be so simple, cautions Sivaramakrishnan, Head, Residential services, CBRE, South Asia.

“Running a service apartment is a commercial venture. You earn a profit only when you do it on a regular basis”, he says. Additionally, you may have to spend on regular maintenance such as periodic repainting and upgrading appliances as required.

Issues to consider

There are other issues you need to handle as well. For instance, if your property is in a residential complex, you may have to obtain a no-objection certificate from the society for short-term rentals. Even in the case of an independent house, you have to abide by regulatory restrictions.

“A residential building that needs to be used as a service apartment must go through conversions of land use and obtain requisite licensing”, says Nandwani. There are regulations at the state and local levels, besides Central government Acts such as the ones for bed and breakfast and guest houses.

Approvals may only be granted to houses located on main roads or around commercial centres and not for those located within residential areas, notes Narula. Security is another important aspect.

Have a comprehensive insurance against fire, theft and other damages and also register the property with the local police.

Also remember that you are liable to pay service tax on the income from the property that is registered as a guest house.

Published on July 04, 2015

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