The attraction to buy at lower entry level for good cash-flow (positive net yield) comes with risks. Are you conversant with due diligence and what are the buying rules for cash-flow investment apartments?
Investment Apartment Buyers
Winners and Losers
Do apartments make a good investment?
Like everything, it depends on what you want to achieve. For instance building up an investment portfolio you need capital gain, running a landlord business you would prefer cash-flow, and most successful investors with a reliable income try a combination of both. In other words for obtaining finance you need equity and for paying your bills is positive cash-flow (net yield) essential.
For apartments the portion of appreciating land is very small that limits the capital growth. With this view apartments are typical yield property investments. How good or not so good depends on the performance of the apartment.
When looking for good performing property investments, firstly you would search for properties high in or with growing demand and limited in supply. That is why you have to be wary spending money on areas which high rental vacancy rates, large developments and limited infrastructure (roads, car parks, public transport, shops, etc). Secondly, the specific of a multi-unit block (see buying rules) in terms of quality of the building, strata management and strata fees differ enormously.
Unit title properties (strata properties) such as apartments are managed by a body corporate. That is why apartment investors need to be cannier than people buying stand-alone houses. But when following demographic shifts (smaller and single households), apartments are good cash-flow investment if chosen wisely.
Buying Rules for apartments
Apartment buildings have been identified as leaky and earthquake-prone buildings. Recent changes to the building compliance code and Unit Titles Act reflect those risks. Well, the consequences do impact strata fees and expected yields. So, always do your due diligence very carefully on multi-storey buildings and multi-unit blocks.
Compared with stand-alone properties apartments are the better cash-flow investment if you follow three simple buying rules:
· Must not be leaky or have any outstanding remedial weather tightness work,
· Size must be 50 sqm or more
· Must be managed by a functional body corporate (accessible chairperson, committee and documentation)
Market and cash-flow consideration
Compare market rents in your chosen area, price per square meter of the apartment and find out the vacancy rate in the building. Identify your target renter before buying an apartment. Students, professionals, singles and couples have different needs and behaviors.
Look at the social culture in the building. Often underestimated are communities that impact the re-sale value. The climate in a building with small rental apartments differs from apartment blocks with residential two and three bedroom units occupied by couples or families. Issues with safety, security and vandalism are huge cost factors to be identified.
Due diligence on apartments
The due diligence process for apartments is more complex. You have to deal with the seller’s agent, the body corporate and the building manager for making an informed decision.
The recurring expenses like insurance, council rates, body corporate levies (strata fees) and extra costs for services such as hot water, internal gym, pool, etc can be provided by the vendor’s disclosure statements. For the running costs of the building and long-term funds (sinking fund, maintenance, etc) you have to check the body corporate meeting minutes, AGM protocols and building manager’s reports.
It can become a quite costly experience whether the building has a current "building warrant of fitness", outstanding remedial work or not. This information inclusive the weather tightness history can be obtained from the City Council.
Winners and losers
If you don’t create a buffer zone between the current expenses and the possible increases of council and body corporate levies, also rising inflation, interest rates and changes to your income - you may end up with a negative cash-flow. That is a risk especially in brand-new apartments. Why? The first budget, especially when purchased off the plan, is made up for marketing reasons to attract unworried buyers.
Compensating loss made with apartments is difficult as the capital growth may swing to negative and when trying to sell, who is willing to pay for a distressed property the market price?
The winners in investing in apartments are those who buy at the right price well established apartments in inner cities where the demand is high and the supply on building ground is constrained. Understand the specific of apartments. Good luck.
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