More investors are adding apartments to their property portfolios because of their comparative affordability and popularity with tenants, but not all apartments will offer the same returns. If you’re purchasing a strata-titled property, 10 factors will influence your investment returns.
Blogger: Nick Viner, buyer's agent, Buyer's Domain
When considering your next investment purchase, you may want to give serious consideration to buying a strata property. The amount of repairs and maintenance for units is generally less than that required for houses and the rental returns can be higher. Strata properties can be astute investments.
So if you are currently pondering the purchase of a strata apartment, here’s a list of 10 things to consider.
1. Strata levies
Strata ownership means shared expenses – be ready for it. Your strata levy is a compulsory payment made towards the upkeep and maintenance of the common areas of the property.
It’s not uncommon in inner-Sydney areas for levies to exceed $1,000 to $1,500 per quarter for a standard two-bedroom unit. You need to factor these payments into your budget. The landlord, not the tenant, is responsible for the payment of levies, so you might consider purchasing a unit with lower strata levies. But if the levies are too low, it could be because the necessary maintenance is being neglected.
2. Floor space
If you need to borrow to fund your purchase, find out what your lender’s criteria are in relation to size. A one-bedroom apartment might be all you want, but if it’s under 50 square metres you might find it tough to get a loan.
3. Economies of scale
Small is beautiful. Boutique is unique. All things being equal, you should favour smaller apartment blocks (up to 10 to 12 units is ideal). Smaller blocks tend to be more sought-after and this favours capital growth in the long term.
4. Old versus new
Sometimes it’s important to balance age, looks and practicality. Some of the 1960s-1980s red or blonde brick apartment blocks aren’t exactly attractive to look at, but they were built to last.
On the other hand, newer units usually have a better layout and often a second bathroom. You should be aware, however, that many of the newer apartment buildings are more likely to report defects. Off-the-plan or new units may hold more appeal for investors wanting to benefit from tax depreciation advantages.
5. Mix of investors and owner-occupiers
In general, owner-occupiers care for their property while renters are far less inclined to do so. That’s why I’d recommend you find out the ratio of investors to owner-occupiers from the local real estate agent or the strata manager.
The nitty-gritty of daily dos and don’ts, cans and can’ts is contained in the strata by-laws. Whether Jack the ferret or Louie the poodle can take up residence is a matter for the by-laws. Every owners’ corporation adopts its own by-laws and pet exclusion is not uncommon, although some state laws put the onus on the strata committee to define the pet as a nuisance before imposing a ban. So, check before you buy and make sure you provide a copy to your tenant.
Pools, saunas, gyms, spas and even elevators are wonderful inventions, but if they happen to be part of your strata building you will be subsidising their maintenance through your strata levies. Newer strata developments may come with any or all of these wonderful facilities, but be prepared for a hefty strata levy.
8. Some things to look for
Unusually high incidences of water penetration are reported in buildings up to about 10 years old. This is not a cause for panic, but vigilance is recommended. A close inspection by a competent building professional is the best way to settle any doubts.
If the unit looks newly renovated, that’s generally a bonus in the eyes of the new purchaser, but even so it would pay to check that the current (or previous) owners obtained the necessary permission from the owners’ corporation for the changes. If it turns out the work has been carried out without authorisation, the owners’ corporation may hold the new owner liable for any damage caused to the common property. And you really don’t want to discover how expensive that might be.
9. Strata inspection report
To really know what it is you’re buying into, take a good look at the property’s management history. Better still, get an expert to do it on your behalf. Inger Brettle from Premium Strata in Surry Hills, Sydney, says she would always recommend potential buyers study the strata report: “It tells you the precise amount of levies, whether any special levies are envisaged, even whether there is any disharmony in the building and whether the owners’ corporation has adequate insurance in place”.
It’s also advisable to review the balance sheet to ensure the owners’ corporation is a carefully managed entity with a history of fair and responsible dealings.
10. Be informed
Knowledge is power. The more informed you are on the various factors that impact price, the better position you are in to evaluate them. Research can be as simple as speaking to agents in the area or doing a Google search to find out what the market’s doing in relation to equivalent properties in the same or nearby suburbs.