New apartment in Melbourne CBD - thoughts?

[x452]

Hi,

Just wondering what people think of inner city apartments as investments? The following ad caught my eye in the domain a few weekends ago:

Carlton - Brand New One Bedroom Apartments with Balconies
PRICE: from $183,500

* City edge - minutes walk to Lygon Street and city, cafes, restaurants, shops, Melbourne University and RMIT.
* Providing a sophisticated design with contemporary finishes.
* Rental Guarantee up to $316 per week.
* Only $350 Stamp Duty payable.
* Low Body Corporate cost.
* Full security video phone access.

"Rental Guarantee up to $316 per week"

I read the catch with these rental guarantees is you're left high and dry after the guarantee period ends (normally 1-2 years) trying to rent out the property well above what the market says it's worth.

Suburban units were my first option. I looked at a couple in a low-end suburb such as Broadmeadows (close to everything) and they sell for around $210,000 and only return about $215 a week, that's only 5.3% rental return. Whereas the city apartment would return around 8% and it's $25K cheaper. I'm not sure about capital growth though, I don't know how much city apartments increase in value compared to a unit in a low-end suburb over a long term.

Thanks,
Andrew

 

[The Y-man]

My bits in italics....

Carlton - Brand New One Bedroom Apartments with Balconies
PRICE: from $183,500

* City edge - minutes walk to Lygon Street and city, cafes, restaurants, shops, Melbourne University and RMIT.

Fair enough......

* Providing a sophisticated design with contemporary finishes.

i.e. dates quickly and will have a high cringe factor within 6 months.

* Rental Guarantee up to $316 per week.

"up to"....... so it could be a lot lower.....

* Only $350 Stamp Duty payable.

i.e. the vendor has jacked up the price accordingly....

* Low Body Corporate cost.

"Low" - compared to a purchase price of a Lamborghini

* Full security video phone access.

i.e. more things for you and the body corp to maintain every 3 days when the residents play around with it and break it....

Hmmm....do I sound a bit cynical about this?

Cheers,

The Y-man

 

[Dis]

I read the catch with these rental guarantees is you're left high and dry after the guarantee period ends (normally 1-2 years) trying to rent out the property well above what the market says it's worth.

Danger Will Robinson, Danger!

Not only could you be having a hard time renting it out down the track, but the cost of the guarantee will be incorporated into the purchase price. Ie you may be paying an inflated price to fund the guarantee. Not only will this mean you dont see capital growth for some time, but your lender may not give you a 80% lend due to a poor valuation. See what a similar second hand apartment sells for and rents for.

Dis

PS stamp duty of $350 means you are getting jack all land. Land is what is giving you growth.

 

[The Y-man]

"Rental Guarantee up to $316 per week"

I read the catch with these rental guarantees is you're left high and dry after the guarantee period ends (normally 1-2 years) trying to rent out the property well above what the market says it's worth.

Suburban units were my first option. I looked at a couple in a low-end suburb such as Broadmeadows (close to everything) and they sell for around $210,000 and only return about $215 a week, that's only 5.3% rental return. Whereas the city apartment would return around 8% and it's $25K cheaper. I'm not sure about capital growth though, I don't know how much city apartments increase in value compared to a unit in a low-end suburb over a long term.

Thanks,
Andrew

Andrew,

A few more things to (seriously) consider:

Is the rent net of all costs, or prior to management fees, etc.

You need to also consider the level of gearing you are after (eg what the banks are willing to lend to you)

Liquidity - when you need money in a hurry, will it sell for a "reasonable" price?

Cheers,

The Y-man

 

[our obsession]

...and for what it's worth I have Median House Prices for 1994-2005:

Carlton (House Price-not your apartment): 1994 MHP: $215,625.........2004: MHP $460,500.........so it had a change of: 114%

While Broadmeadows historical growth pattern was:

1994: MHP $75,750............2004: MHP $200,000.................164%

These are statistics from the Victorian Valuer-General and represent Victorian gains in house prices for past 10 years. I am unsure how that would apply to your apartment? but interesting info anyway..

 

[Twitch]

Melbourne unit prices had 2.9% p.a. growth from 1996-2006. Hard to know what to make of that figure, but if it's a true representation of value growth, then it's about the worst performing sector of the market anywhere in Melbourne.

Edit: seems Southbank is even worse, 0.4% pa over the same period.

 

[x452]

See what a similar second hand apartment sells for and rents for.

A quick check on realestate.com.au shows similar apartments for sale ranging from $175,000 to $250,000, and being rented for around $290.

So based on everyone's advice the apartment sounds like a suspect investment so I will steer clear. Seems like city apartments don't increase well in value.

The main reason I was looking at such an apartment was it should be easy to rent (ie. to students) due to it's proximity to things, and the price is low in relation to some units. I don't imagine it's easy to get a decent unit for under $200K. Plus I could potentially have the apartment paid off within a few years and collect income from it.

Is the rent net of all costs, or prior to management fees, etc.

What costs are associated with apartments/units that are different to a house?

- body corporate
- management fees

Do they have rates?

 

[alexlee]

Plus I could potentially have the apartment paid off within a few years and collect income from it.

And then what? Is rent from one apartment enough to find your retirement?
Alex

 

[The Y-man]

The main reason I was looking at such an apartment was it should be easy to rent (ie. to students) due to it's proximity to things, and the price is low in relation to some units. I don't imagine it's easy to get a decent unit for under $200K.
?

How about.....

http://www.realestate.com.au/cgi-bi...=&fmt=&header=&c=14520186&s=vic&tm=1187161594

http://www.realestate.com.au/cgi-bi...=&fmt=&header=&c=14520186&s=vic&tm=1187161594

http://www.realestate.com.au/cgi-bi...=&fmt=&header=&c=14520186&s=vic&tm=1187161594

7km from CBD, and our 1Br in the area hasn't had much issue with vacancies...

Plus I could potentially have the apartment paid off within a few years and collect income from it.

If you are looking for income as the main target, perhaps Melbourne residential property may not be the most efficient way of going about it? Perhaps a tiny piece of a big shopping centre (on a big block of land) might get both better income and more growth.

What costs are associated with apartments/units that are different to a house?

- body corporate
- management fees

Do they have rates?

Yes, you get rates, and if the unit is not separately metered, you'll cop water and gas usage as well

Cheers,

The Y-man

 

[x452]

And then what? Is rent from one apartment enough to find your retirement?
Alex

No. Just thought it would be nice to actually own an IP and then play the "virtual ownership" game.

7km from CBD, and our 1Br in the area hasn't had much issue with vacancies...

Thanks for the Fairfield tip. This one looks good: http://www.realestate.com.au/cgi-bin/rsearch?id=104196370&a=qfp&cu=fn-rea&t=res

Zone 1, walking distance to the station plus all the other nice-to-have's.

 

[alexlee]

No. Just thought it would be nice to actually own an IP and then play the "virtual ownership" game.

Do things with a goal in mind. Owning an IP free and clear doesn't help you with retirement. Controlling a number of IPs, now...... What are your goals? When do you want to achieve them by? Those are the questions you have to ask first.
Alex

 

[x452]

Do things with a goal in mind. Owning an IP free and clear doesn't help you with retirement. Controlling a number of IPs, now...... What are your goals? When do you want to achieve them by? Those are the questions you have to ask first.
Alex

Very sensible advice, are you an adviser by any chance?

 

[alexlee]

Very sensible advice, are you an adviser by any chance?

No, I'm just an investor who wants to have the money to choose what I want to do.
Alex

 

[x452]

Can anyone suggest some good IP advisers for a first time investor? If I supply them the following information I'd like them to provide me with a list of properties that fit the criteria and why they believe it's a good investment.

- <$225,000
- Unit/Apartment/Townhouse: 1-2 BR, 1 Bathroom, 0-1 Car Space
- Walking distance to train station or bus (zone 1), shops, cafes/restaurants etc

Roughly how much do they charge and how (commission/fee upon sale or retainer)?

 

[Twitch]

Can anyone suggest some good IP advisers for a first time investor? If I supply them the following information I'd like them to provide me with a list of properties that fit the criteria and why they believe it's a good investment.

- <$225,000
- Unit/Apartment/Townhouse: 1-2 BR, 1 Bathroom, 0-1 Car Space
- Walking distance to train station or bus (zone 1), shops, cafes/restaurants etc

Roughly how much do they charge and how (commission/fee upon sale or retainer)?

Sounds like you are after a Buyers Advocate, not necessarily an "IP Advisor" which don't really exist as a category. BA fees vary, but full service fees are typically a $1k retainer + 2.5%+GST of purchase price. For a purchase price that low the fee may be a higer percentage.

 

[x452]

Sounds like you are after a Buyers Advocate, not necessarily an "IP Advisor" which don't really exist as a category. BA fees vary, but full service fees are typically a $1k retainer + 2.5%+GST of purchase price. For a purchase price that low the fee may be a higer percentage.

Thanks. Anyone used www.buyersadvocate.com.au (or similar) before? They charge 2.2% (inc GST) for IP's. Seems a bit high but saves me the time and they have the expertise which could end up making up for the $5K cost if they find a good buy. Something to consider I guess ...

 

[The Y-man]

Thanks for the Fairfield tip. This one looks good: http://www.realestate.com.au/cgi-bin/rsearch?id=104196370&a=qfp&cu=fn-rea&t=res

Zone 1, walking distance to the station plus all the other nice-to-have's.

They even managed to fit a bathtub in it!
Been all done up, so "ready to go" (on the down side, no opportunity for you to "value add", but you might get depreciation for that flooring)

Cheers,

The Y-man

 

[dave99]

Hi,

Just wondering what people think of inner city apartments as investments? The following ad caught my eye in the domain a few weekends ago:

Carlton - Brand New One Bedroom Apartments with Balconies
PRICE: from $183,500

I live nearby the site - these are student apartments - approx 20sqm each. The yield is good but because it will be limited to student occupancy, and the floor area is under 50sqm, you will find them very hard to sell.

If you are interested in a student apartment, why not buy one from an existing building? You will find the going price is around $130-150k, and in Carlton alone there are typically 40-50 for sale at any one time - just have a look on realestate.com.

PS - Looks like they have raised their prices. The billboard outside still says "From $178,500"

Cheers - Dave

 

[DavidMc]

My thoughts:

Positive
- Good depreciation
- Low entry point
- Good yield

Negative
- Lots of supply (40-50 for sale at any one time)
- No scarcity value - knock down another factory and built another 100 of them. Not much separating the individual units.
- Low demand (only a subset of investors would be interested in buying)
- Low demand + high supply + no scarcity value = poor growth
- Inconsistent rental (will the students still want the place when they fly back home to Asia during the holidays?)
- Rental guarantees are almost always built into the price. Take a $150k asset, sell it for $180k with a guarantee that might cost $50pw for 3 years (or $7.8k).
- Hard to finance due to size
- Developer profit built into 'new' price. Look to the established 2nd hand market for real prices.

Neutral
- 'Student' tenants. Could be good, good be bad. Property conditions? Turnover?

 

[Big Aussie]

I have also been looking at CBD apartments in Melbourne

I have also been looking at CBD apartments in Melbourne, some of which come with a “Rental Guarantee.” I’ll say upfront that I have no experience with the Melbourne market, but am looking to diversify away from Perth.
I would normally focus on land component for capital growth, however for a variety of reasons I definitely want to purchase an apartment close to the CBD. I’m also happy for this IP to be managed in a relatively hassle free manner, so I’m not opposed to leasebacks, etc. I’m also not looking at this IP to be stupendously wealth creating. If it can be cashflow positive (after Tax effects) and hold it’s value, I’ll be happy.
Regardless of how it is managed in the short-term, I’m more attracted to something that will appeal to “urban professionals” rather than students or short-stay tourists.
So here are my questions:
1. Perth has seen sustained growth in the value of apartments close to the CBD, is that likely to happen in Melbourne?
2. The apartments in Melbourne seem very small. ~52sqm for a 2x2?
3. There seems to be a massive variance in price for similar apartments within the CBD?
4. Are the rental guarantees as worthless as many suggest? Naturally I’ll read the fineprint carefully and do my research on who is actually guaranteeing the income, but if that checks out then they seem a reasonable proposition. Whilst I understand that the purchaser in effect pays (by way of a premium) for their own guarantee, it may be a worthwhile trade-off for a stable return?
5. Apart from “Southbank” which seems grossly overpriced, are there some areas that are preferable to others?