Investing in a strata titled property can be a smart move, because it’s often an affordable way to enter the property market. Occasionally, we get asked about the pros and cons of doing this, so here’s a list for your consideration:
Reasons why you would buy a strata titled property:
- The cost of a strata titled property is often cheaper than buying a freestanding house
- Maintenance of the building is taken care of automatically via the strata levies, which are usually paid every three months
- The strata manager takes care of much of the property maintenance, so you don’t have to get as involved with this side of things
- Because the price of strata titled properties is usually cheaper than free-standing houses, demand for them can sometimes be higher, which in turn could push up their price in the future
- Good depreciation benefits apply if the property is brand new
- It’s easier to get finance if the property is in a lower price bracket
Reasons why you wouldn’t buy a strata titled property:
- Strata levies can be expensive and cost blowouts can occur, particularly in larger blocks with lifts, gyms and pools. This will often cancel any benefits of a higher rental yield.
- Most newly built strata titled properties have defects. Getting the builders to rectify these defects can be very difficult.
- You generally can’t decide when structural repairs or repairs to the common areas will be done, for example to fit in with your budget. Strata levies are relentless. They are subject to change and can increase unexpectedly.
- It can be very noisy to live in a strata titled apartment, since your tenants could have neighbours living above and below. The growing popularity of short-term rentals can make this issue even worse.
- Your strata titled property may have no point of difference and could lose significant value, particularly in large blocks, if a neighbour needs to sell quickly (and cheaply) because of financial difficulties.
- It’s usually difficult to add value to a strata titled property in terms of an extra bedroom. Due to the lack of land component, a second dwelling is out of the question (eg a granny flat).
- Changes to your property (even minor ones) will often require permission from the owner’s corporation.
- Lifestyle restrictions are an issue. Pets, having barbecues, parking etc may be disallowed by the body corporate, potentially reducing your tenant pool.
- Dealing with dysfunctional body corporate committees and incompetent strata managers will complicate your life.
- Some areas with high density strata titled properties have been perceived as risky by lenders, so they can have LVR restrictions. These restrictions can also apply if the floor-space of the unit is less than 40 sqm.
- A lender can completely blacklist an apartment block if they feel they have financed too many properties in that particular complex.
As an investor, one of the best ways to manage the cashflow on your investment property is to limit your outgoings. This can be more difficult with strata titled properties, as these decisions can be taken out of your hands.
How could this happen?
Well, owner occupiers tend to be more active in body corporate committees and usually have a different agenda to investors. Some of these people can be expert lobbyists when they want votes to go their way on tasks that suit their needs.
While ongoing maintenance is essential to preserve the standard of your investment, many of the requested jobs in your strata titled building by owner occupiers can be of a cosmetic (and sometimes frivolous) nature. This can add to your outgoings, but do nothing to increase your rental income.
If you have the time and inclination, you can challenge these decisions, however most people will agree that life is busy enough. No one wants to get dragged into owners’ disputes about repairs and maintenance to your strata titled property.
So, looking at the previous list of reasons why not to buy a strata titled property, should you eliminate strata properties from your search completely?
For one thing, investing in a strata titled property may be your only choice due to affordability.
Strata titled properties are not all the same. Some of them have a unique point of difference or some scarcity factor which make them appealing.
An example of this would be a strata titled property in a smaller art deco or character block with high ceilings, well maintained original features and eight or less apartments.
This style of property is less likely to have high strata levies because of the lower density, lack of elevators, modern features etc.
So, if you’re going to buy a strata titled property, aiming for a lower density block can be a good idea.
Townhouses can also be good investments if there isn’t an oversupply, and there is not an abundance of land nearby that can be developed.
Here are a couple of other tips that we highly recommend if you are considering buying a strata titled property:
- Make sure you do a strata search, prior to purchase. This should highlight any existing legal issues, building defects and body corporate disputes.
- While building insurance is covered by your strata levies, you will need landlord’s insurance. This will be needed for claims on damage to fixtures and fittings, public liability and loss of rent.