Buying a brand new apartment by trusting the selling agent, tolerating a passive body corporate or running an investment on auto-pilot, where losing apartment investors mostly money?
Losing money on Apartments
Where go Apartment Owners wrong?
Not only apartment ownership is attractive because of smaller budgets but also trends towards apartments are driven by demographic and lifestyle changes. The way people want to live and smaller households are shaping the future of the property market.
Singles and couples who are focused on career are looking for something modern, comfortable and low maintenance. Busy investors are likely to invest in apartments suitable for running them on auto-pilot. In contrast apartment investments can be very risky for the inexperienced buyer. That is why due diligence on apartments is the key to success as here illustrated. Now, let us look at the common reasons why people lose control and money.
Purchase decision based on trust
For instance brand new apartments do not have any historical data as reference. Buyers have to trust well presented marketing information and promotional leaflets. It is not unusual that reality kicks in within the first 12 months with frustrations to fix faults, operational issues with the Body Corporate (BC) and insufficient budget issues.
I have seen BC levies which have doubled in the second year to remedy shortfalls in the budget. Be aware the first budget might be underestimated by the developer (seller) for maketing reasons to sweeten the deal and persuade buyers.
An underestimated budget hits twice - the unit owners have to pay the shortfall and higher levies for the coming year. That can easily put your investment into a negative cash-flow situation. When purchasing a second-hand apartment, historical data of previous years help to make informed decisions (see through due diligence).
Running an investment on auto-pilot
Apartment investors tend for simplicity reasons to engage a letting agent. That works when the rental income covers all expenses. However, consider this - if the property manager under-rents your investment to get easy tenants, you will miss out top Dollars. You pay management fees (around 8%+ and additional 15% GST). On weekly $500 rent that reduces your rental income (approx. by 10%) around $2500 annually. One thousand Dollars more rent is for the investor good cash-flow, but for the agent just $100 annually. The agent charges anyway for services like inspection, vacancy promotion etc to earn easily on top of the management fee.
In contrast, if you are lucky by working with a good agent, you might forget all about, as people do—leaving the investment running on its own. That is not good for an investment on long term. However, running an investment on auto-pilot involves another risks. Think about favorable occasions of dishonesty or being disconnected from the Body Corporate’s operation, for example:
Passive or reactive Body Corporate (BC)
If you followed the due diligence process for apartments, you will agree that it makes sense to have a watching eye on Body Corporate’s operation including committee’s meeting minutes, building manager’s reports, etc. Disconnected from the building you would not be aware of issues where apartment owners lose money.
Mismanagement symptoms are a common illness. If you don’t ask questions, you will never know. To illustrate, in one case the developer avoided repairs under warranty while the BC management passed on the expenses paid by the Body Corporate. In another example a huge bill for replacements had to be paid because the Body Corporate failed in accordance with the technical product specifications (operational manuals) to maintain the hot-water system.
True, discovering hidden operational failures is difficult. Obtaining at the AGM the financial report or monitoring BC accounts is something not for everyone. The figures at such papers hide the stories behind. That is why owner’s involvement is the key for success.
A reactive BC is facing a lot of unplanned costs due to breaching body corporate rules. Think about dumping rubbish such as broken furniture onto the common areas, triggering false fire alarms, vandalism and so on—all such events are apartment owner’s expenses. A passive Body Corp is a risk for unwary or “disconnected” apartment owners.
Recent changes to the Unit Titles Act emphasized the chairperson’s duties and the role of the Body Corporate committee. But unfortunately the law is designed to strengthen BC’s position to enforce BC rules. But if the BC fails doing its job the unit title owner is in a weak position (to be illustrated separately).
New regulations for multi-storey buildings
Since the earthquake disasters in Canterbury a number of policies have changed and the Earthquake-prone Buildings Amendment Bill introduced to identify earthquake-prone buildings with focus to prioritise buildings for earthquake strengthening. For owners of earthquake-prone multi-storey blocks and apartment buildings take this legislation effect. At the end the seismic strengthening work is a huge cost paid by the apartment owners as contributions to LTMP (long-term maintenance plan) and levies.
Important for investors, if seismic strengthening is required, that is going to have a negative effect on the capital value and the yield (proportion rental income to expenses for repairs). The consequences for bodies corporates go in two different directions; budget planning for seismic strength testing, compliance works and ongoing expenses (inspections, insurance premiums, repairs). Anyway— those are unit owner’s expense.
To Sum Up
Losing money on apartments impacts high risk more than low risk areas as to see below. That type of risk with higher insurance premiums and body corporate levies to feed LTMP funds might result in declining apartment values, as well as the leaky buildings suffer. Well, time will tell.
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Klauster Blogs lead to a real person who worked as computer network architect for many years in different countries until retiring from IT and mastering a life as property investor and landlord.
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