The influx of Student Apartments.......

[Property Meister]

hey everyone,

I have noticed that every week in the newspapers, I see ads for dirt cheap apartments in great areas in VIC, eg city, carlton, kew, hawthorn, preston, richmond etc. etc. starting from $135k!!

I went to see one (well the plans for it) a few years ago and found that they were tiny tiny tiny.... they even....

these are my comments/questions about these properties, actually my opinions, so if people could comment about it, then i would be very grateful...

1. they have these rental guarnatees, I find them silly as if you can't rent something out after the guarnatee period, you are stuffed anyway
2. renting to students would mean alot of them overseas which would mean they would go overseas end of the year which means no rent for approx 1-2 months
3. why are they so bloody cheap, I mean $135k, and I know that this is for the chepaest crappiest one
4. as your first IP, how would they go, I mean they are cheap, so capital growth may be good, but I am real real real skeptical
5. if they are advertsiing the things week after week, it obivously means that htey are struggling to sell
6. Are these cheapish apartments in boutiqe areas, a BIG AVOID AND SHOULD BE AVOIDED??

thanks again everyone!!

akumaslair

 

[Bandita]

hey everyone,

I have noticed that every week in the newspapers, I see ads for dirt cheap apartments in great areas in VIC, eg city, carlton, kew, hawthorn, preston, richmond etc. etc. starting from $135k!!

I went to see one (well the plans for it) a few years ago and found that they were tiny tiny tiny.... they even....

That's their biggest downfall - they only really suit student accomodation (which is certainly in strong demand in Melbourne) - however for valuation purposes - you won't see as much CG - it's not suited for owner occupiers

1. they have these rental guarnatees, I find them silly as if you can't rent something out after the guarnatee period, you are stuffed anyway

Spot on - avoid rental guarantees - as that all that they are (maybe - read clauses) - a guarantee for a certain time period - no guarantee of future rent - compare similar properties in the area to find "true" market rent

3. why are they so bloody cheap, I mean $135k, and I know that this is for the chepaest crappiest one

4. as your first IP, how would they go, I mean they are cheap, so capital growth may be good, but I am real real real skeptical

They are so cheap because of what you said earlier. Capital growth is actually really poor for these types of units - their value is generally dependent on rental yield as they are more of a commercial type property (your not going to get owner occupiers bidding for them - who form over 70% of the market) - limited buyers, very small "land component" make these a riskier residential investment - if you're purely after yield, you'll want something that's around 8-10%+ to cover the costs of holding

5. if they are advertsiing the things week after week, it obivously means that htey are struggling to sell

6. Are these cheapish apartments in boutiqe areas, a BIG AVOID AND SHOULD BE AVOIDED??

Yep, seen the exact same properties for years in Melbourne - and their prices only seem to get cheaper! (But they may just be getting smaller). I would stay away. Not necessarily (depending on the property!!) a bad investment if you're looking for a commercial property and it has an excellent yield, as there will always be a high student demand in Melbourne at least - but as a residential property investment - bad idea in my opinion. If you're really keen on student accomodation - you may be able to do it better through a house close to the uni - will still appeal to owner occupiers in the long term making it much more likely to experience higher CG.

Cheers,
Jen

 

[dcarr]

adelaide too

Got exactly the same thing in Adelaide, Uni House on Rundle is the worst offender... apartments for around $150k, 35sqm, 57% (yes 57%) of the rent goes towards maintenance and renovations.

I imagine the only way these would be close to a good buy is if you are or have a uni student in the family - even more so if they have a partner or even a sibling to shack up with. Brilliantly located accomodation for about $220 a week in interest repayments on a 100% loan, at the end of which you can onsell it for enough to cover the purchase costs and maybe some of the repayments. *shrug*

 

[steveadl]

Got exactly the same thing in Adelaide, Uni House on Rundle is the worst offender... apartments for around $150k, 35sqm, 57% (yes 57%) of the rent goes towards maintenance and renovations.

I imagine the only way these would be close to a good buy is if you are or have a uni student in the family - even more so if they have a partner or even a sibling to shack up with. Brilliantly located accomodation for about $220 a week in interest repayments on a 100% loan, at the end of which you can onsell it for enough to cover the purchase costs and maybe some of the repayments. *shrug*

Wow! I've seen those UniSA listing for years now and have never thought they'd be a good investment. Now you tell me that on top of all that, they take 57% of the rent!!!!!

You must be right, the only reason you'd want one is if someone in the family actually need to live in it themselves.

Yuck!

PS Even then, I'd rather rent one and put the $150k loan to better use elsewhere!

 

[VYBerlinaV8]

You need also to consider the financing of such properties. Unless semi-commercial (which is what these are, I think) have an escape clause and are over a minimum size (50sqm?), most lenders won't help you. This massively reduces the buyer market, meaning demand for such property is low.

If you could purchase the majority of a building (either by yourself of with partners) then perhaps once the rent runs out you could join several of the units to form decent sized residential properties.

I have 2 IPs that are semi-commercial, but both will be rentable as quality inner city units when the long term leases run out.

 

[steveadl]

VY, you'd need quite a few of these ones to make a decent size apartment, I'd say 8 or 9 of 'em :

http://www.realestate.com.au/cgi-bi...=&header=&c=614300&s=sa&snf=rbs&tm=1190173161

 

[HiredGoon]

3. why are they so bloody cheap, I mean $135k, and I know that this is for the chepaest crappiest one

$135k only seems cheap to you because you've gotten used to the prices in our current housing mania.

If you could get $260/wk then $135k is going to give you a 10% yield, which is above the cost of interest plus a bit of a buffer.

Is your brain exploding just because a landlord could actually make money from putting their capital at risk? Is it some kind of cast-iron law that you should pay other people to stay in your house?

 

[timmyboy]

If you could get $260/wk then $135k is going to give you a 10% yield, which is above the cost of interest plus a bit of a buffer.

not if 57% of your rental income is spent on maintenance and costs...

Tim

 

[VYBerlinaV8]

$135k only seems cheap to you because you've gotten used to the prices in our current housing mania.

If you could get $260/wk then $135k is going to give you a 10% yield, which is above the cost of interest plus a bit of a buffer.

Is your brain exploding just because a landlord could actually make money from putting their capital at risk? Is it some kind of cast-iron law that you should pay other people to stay in your house?

It's nice in theory, but in practice you run into problems involving the draw down of equity, as well as initial financing and longer term value.

 

[x452]

Thought I might give this dead horse one last flogging, so here goes.

Consider my two investment property options:

1. Brand New 1BR Student Apartment in North Melbourne

Pros:

- Cheap @ $160,000
- Good rental yield @ $260-$280 per week (8% yield)
- Easy to rent to students
- Low Maintenance? (Due to being brand new)
- Potential to pay off within 5 years and securing $13,500 per annum rental income which I could put towards my next IP. Owning it outright also means I could hold on to the property for potentially decades.
- After 5 years it's worth approximately $200,000

Cons:

- Can only rent to students
- Low capital growth (can you expect 5% per annum?)
- Difficult to resell (I read 60%-70% of property buyers are owner-occupiers)
- Students take off during the holidays for 3 months from Dec-Feb (Can you offer the apartments at 1 year leases?)
- Unknown maintenance costs. I've read these can be upto 50% of my return. Can anyone tell me what expenses I could expect other than body corp and problem fixing which hopefully will be minimal due to it being brand new.

2. 2BR Townhouse/Unit/Villa in a good suburb within 20km of the city

Pros:

- Easy to rent
- Close to amenities (public transport, shops, zone 1)
- Potential for good capital growth upto 10% per annum in a strong market
- Easy to resell
- Low Maintenance? (Due to being less than 10 years old or renovated)
- Potential to pay off within 10 years and securing $16,640 per annum rental income which I could put towards my next IP. Owning it outright also means I could hold on to the property for potentially decades.
- After 5 years it's potentially worth $465,000

Cons:

- Cost @ $310,000
- Average rental yield @ $320 per week (5% yield)


Other than capital growth, why should I not go for a student apartment in your opinion if I can own it outright within 5 years, not resell for a long time and maintenance costs were not ridiculous?

 

[Francesco]

Thought I might give this dead horse one last flogging, so here goes.

Consider my two investment property options:

1. Brand New 1BR Student Apartment in North Melbourne

Pros:

- Cheap @ $160,000
- Good rental yield @ $260-$280 per week (8% yield)
- Easy to rent to students
- Low Maintenance? (Due to being brand new)
- Potential to pay off within 5 years and securing $13,500 per annum rental income which I could put towards my next IP. Owning it outright also means I could hold on to the property for potentially decades.
- After 5 years it's worth approximately $200,000

Cons:

- Can only rent to students
- Low capital growth (can you expect 5% per annum?)
- Difficult to resell (I read 60%-70% of property buyers are owner-occupiers)
- Students take off during the holidays for 3 months from Dec-Feb (Can you offer the apartments at 1 year leases?)
- Unknown maintenance costs. I've read these can be upto 50% of my return. Can anyone tell me what expenses I could expect other than body corp and problem fixing which hopefully will be minimal due to it being brand new.

2. 2BR Townhouse/Unit/Villa in a good suburb within 20km of the city

Pros:

- Easy to rent
- Close to amenities (public transport, shops, zone 1)
- Potential for good capital growth upto 10% per annum in a strong market
- Easy to resell
- Low Maintenance? (Due to being less than 10 years old or renovated)
- Potential to pay off within 10 years and securing $16,640 per annum rental income which I could put towards my next IP. Owning it outright also means I could hold on to the property for potentially decades.
- After 5 years it's potentially worth $465,000

Cons:

- Cost @ $310,000
- Average rental yield @ $320 per week (5% yield)


Other than capital growth, why should I not go for a student apartment in your opinion if I can own it outright within 5 years, not resell for a long time and maintenance costs were not ridiculous?

Cons of owning student apartments:

1 Often the student apartments in a block are locked into long management contract with the property manager. Costs such as property management and sinking costs can then be skewed to rise faster than annual rent by the property manager.

2 Lenders do not like small student apartments as they can be too small for normal residential housing and lack facilities eg internal laundry, ensuite and living areas. It can be a nightmare looking for a loan other than as a commercial loan and at LVR of 70% or less.

3 Often student apartments are clustered many in a block and therefore lack scarcity demand. There are too many on offer in the market and prices can be low with initial overseas owner selling up in a hurry and at a discount after graduation of child, but still doing alright because of the strong Aussie dollar converting back to the overseas currency. Capital gain will not be seen for a long time.

Pro:

Often student apartment provides good yield (>8%) with indexed annual rent and efficient and scrupulous property manager. Can be little hassle to earn a steady cash stream.

If the property manager were to leave the student accommodation market and return the apartment to the owner, there will be great opportunity for the owner to reno the apartment for normal residential use. Example: 2 bdrm student apartment becomes a more roomy 1 bdrm city apartment.

May appeal to urban retiree as they are located near to many public support facilities, internal facilities (concierge, cardkey, sauna, eatery, gym and swimming pool) and surrounded by workplaces requiring part time workers, with little need for travel or car.

 

[Peter Parker]

Other than capital growth, why should I not go for a student apartment in your opinion if I can own it outright within 5 years, not resell for a long time and maintenance costs were not ridiculous?

Based on an 8% yield there's no way you'd be owning it within 5 years unless the deposit was very large. Otherwise to achieve this you need a yield of around 20%. Or tipping lots more money in.

After that 5 years you'd have a secondhand apartment that would be providing some income, but to take steveadl's example that would be less than half of the rent the tenant is paying. The 8% gross yield looks great but if you take off half you're down to 4% or less. It would be a very special student apartment that would have lower costs (as a % of rental income) than a mainstream house or unit.

There will be building depreciation claimable but there's little scope to increase value or rents since other units in the same complex will be available for rent the same time yours is.

In contrast, a $300k townhouse/villa 20km out (in a suburb like Thomastown or Ringwood) is nothing special but is basically sound.

There should be little difficulty getting tenants and there could well be value-add potential (presentation, painting, carpets) that will lift its worth more than you spend.

Assuming it's in a small block without common facilities its body corporate, management and maintenance costs will be low. So out of your 5%+ rental yield you'll have close to 4% after everything except interest.

If you want to pay it off quicker you still can (though it will take a bit longer than the student unit as it costs more to buy). Doesn't matter too much since your equity should be growing faster with a better quality asset. And because interest is the only cost that doesn't rise with inflation having high interest costs is better than body corporate costs (which go up with inflation).

Although the gross yield is lower with the suburban villa the net yield is much the same. And after a few years it will be higher. And I'm not even considering rental growth which may be higher with the suburban unit look even better.

Your example is an instance where an ultra-conservative/cheapskate approach to buying absolute basement and paying off fast will result in having a poor quality asset, foregoing tens of thousands of dollars of dollars capital growth and even possibly rental income (after costs).

Whereas a student apartment type budget in an outer suburb or good regional area should be able to buy an asset of more enduring value and income potential.

 

[Ocean Architect]

I've been considering building one, and I can say this outright - it depends on who runs them as to whether or not they're viable.

They're dogboxes bigtime - 17m, which means you walk into a tiny area where you can simultaneously urinate into the toilet and touch your school books on the study table whilst looking at the bolt in single bed. Horrible places, entirely dependant upon asian confucian thinking in order to tolerate. Worth nothing in terms of real building costs ie steel concrete tiles, with a piddling living area.

Imo be wary of them unless you're the developer/management company. The fundamentals are way out of line with profits, which sets you up for massive losses in the case of mismanagement or a change in education tourism.

Way too risky imo. As a developer, yeah sure, as a buyer, yeah nah. 17m costs about 30 grand plus land area to make. No way would I pay hundreds of thousands for that, regardless of income (which imo is fickle).

To give you astory, one of my best friends just moved into the rundle street one. Locked into a 250pw contract for 11 months. tiny little room as said above. Big common area, brand new, big screen etc. Anyway he wanted to get out of the contract and had to pay 11 grand to do so.

Instead he did something else. He invested 2 cases of booze and bought 16 big macs, and had a food fight int he common area. The next day, management called him in for a meeting. They said "So, mr x, we hear you would like to move out and not pay your $11 000?" "yes." "How does 2pm this afternoon sound to you?"

You really want to set yourself up for that stuff? For something worth nothing? cmon.

 

[x452]

Thanks for the advice Francesco, Spiderman & Ocean Architect, makes sense. I will put the student apartment realestate pages down and walk away

 

[shim]

I have purchased student apartments in the Melbourne CBD as my first IP, personally think they are great given not restricted to students only. For a low price and high rental yield, it allows me to invest in other IP.

I do however admit though having students as tenants has a lot of negatives. i.e property gets significant wear and tear after each set of tenants moves out, being fully furnished, items and furniture get damaged because the students (esp the international students) do not appreciate the place. To resolve this problem, I have priced every item in the properties and have them sign and agree to replacement or deduction of bond if items are lost or damaged due to above normal wear and tear.

For anyone considering buying student accommodation, I would only recommend buying ones right next to Universities or Tafe so competition is cut out. If I was a student willing to pay $260 per week, it better be within walking distance so I don't have to pay for transport...otherwise I'd rather live in a share house...

Another con of these apartments is bank won't lend more than 70% (some banks will only lend up to 50%) If someone had 100k saved for a deposit, buying a house with it will lead to higher capital growth.
Pro - good rental yield (good for positive cash flow)

 

[Rolf Latham]

hard to get finance for, and therefore hard to leapfrog from

Probably better for SMSF style investments where cashflow may be more highly regarded than equity growth.

ta
rolf

 

[Deltaberry]

Influx of student apartment + dying student numbers = bye bye investors