Buying a brand new apartment, tolerating a passive body corporate and running an investment apartment on auto-pilot – what else can you do for losing money?
Losing money on Apartments
Where go Apartment Owners wrong?
Trends towards apartments supported by demographic changes
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. Let us look at the common reasons why people lose control and money.
Purchase of brand new apartments
Brand new apartments do not have a history as reference. Buyers often do trust well presented information on promotional papers and glossy 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.
I have seen BC levies which have doubled in the second year to resolve shortfalls in the budget because the first budget has been underestimated by the developer (seller) for making the deal more attractive and to persuade buyers.
An underestimated budget hits twice - the unit owners have to pay for the deficit 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 such critical situation can be avoided by working through the due diligence process.
Running an investment on auto-pilot
Apartment investors tend for simplicity reasons to engage a property manager. That works when the rental income covers all expenses.
Consider this - if the property manager under-rents your investment to get easy tenants, you will miss out top Dollars. You pay additional management fees (currently around 8%) and on top 15% GST. That reduces your rental income at minimum by 10% and possibly you get lower rents, too.
If you are a lucky one who found a trusted property manager—you will forget about, leaving the investment running on its own, rather than pushing the property manager for making your investment profitable. And not to forget the biggest risk when using a property manager is the disconnection from the Body Corporate—here is why.
Passive or reactive Body Corporate
Investors who leave everything to their property manager and those who can’t deal with the Body Corporate directly (remote location) are not aware of problems in the apartment building.
For instance when common areas suffer lack of maintenance by the building manager or damage by occupants in the building, related costs are straightly passed on to the unit owners. Breaching body corporate rules like dumping rubbish such as furniture, triggering false fire alarms and vandalism are huge (unplanned) costs. A passive Body Corp is a risk for unwary or “disconnected” apartment investors.
Unit owners have to realize that the building manager and the body corporate management (Body Corp Secretary) are engaged services. They do just a (good or bad) job, but the Body Corporate (the owner of the complex) is liable and responsible for maintenance and repair. The related costs are part of the levies. Recent changes to the Unit Titles Act emphasized the chairperson’s duties and the role of the Body Corporate committee.
Earthquake-prone and 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.
Understanding the financial risk the willing apartment investors must investigate whether or not the building in question is listed as earthquake-prone building and seek confirmation from the body corporate.
If seismic strengthening is required that is going to have a negative effect on the property value but also of the rental returns as renters would carefully choose taking risks by lower rents.
The consequences for bodies corporate go in two different directions; budget planning for seismic strength testing and works and dealing with risks or higher insurance premiums. Both-way is unit owner’s expense.
To Sum Up
Losing money on apartments impacts high risk more than low risk areas. That type of suffering combined with higher insurance premiums and body corporate levies to feed LTMP funds might result in declining apartment values—time will tell.
Property Investor’s Blog
Investor’s & Landlord’s Luck and Failure
Klauster Blogs lead to a real person, IT professional, investor, landlord and business owner with interests in technologies, properties and trading.
His passion, making experiences available and helping people like you, comes from extensive travelling and the principles of life—how to avoid pitfalls in unfamiliar territory when investing or forming relationships.
The philosophy to treat life, partnerships and hobbies as an investment has helped people in his circle. Life is a dream with a deadline, happiness comes from making the right choices and having realistic expectations.
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