Unit basics

[Craig-G]

Hi Guys,

As a newbie - I have a couple of probably very simple questions.

We currently own an IP in QLD however have yet to purchase our 1st PPOR. With rising rents over here in the West I have started to have a look at the unit market as an option for a short term (3yr) PPOR with a view to this becoming our 2nd IP after this. I haven't had much to do with strata’s before but I was wondering:

# What level of control we have over the inside of the unit, i.e. can we add walls to create an extra bedroom/study or are there limitations over this, and

# What are the limitations that lenders put on units - i.e. size vs LVR.

Really new to this market so all advice welcome.

Cheers -Craig

 

[Rixter]

You shouldnt have a BC problem with the inside changes, providing any structural modifications still meet council/building approvals.

LVR issues usually occur on units less than 50m2. Anything above this falls into normal borrowing criteria.

Hope this helps.

 

[Craig-G]

Cheers for the reply Rick,

One other quick question that I am keen to get some feedback on is the effective life of units. I appreciate that sinking funds are in place for upkeep and external renovations, however surely you can only rejuvenate a block of units so many times. When there comes a time that the units need to be knocked over and the land developed how does this process work when there are so many owners?

I am sure that there is a simple answer but this has me stumped.

Cheers - Craig

 

[Francesca C]

Craig-G

I just want to make a point following Rixter's comments. If there are LVR limitations on units under 50sqm, what does that say to you? bank are not silly and know that properties under 50sqm are not good investments.

I have been told many times by very successful property investors that IF you have to buy a unit, make sure it fits into the following criteria.

1. Complex of less than 10
2. 50 sqm plus
3. 2 bedrooms. Even though many people live alone they still like space for a space bedroom of an office.
4. Do not buy the newer units from developers, find older ones in a small complex near the city, transport, schools ect

 

[The Y-man]

I am sure that there is a simple answer but this has me stumped.

Cheers - Craig

I don't think there is a simple answer. We are asking ourselves the same question at the moment, as one of the blocks we have an apartment in seems to be breaking up.... we are planning to patch it up (lots of filler!) and offload.... anyone interested in a 2BR apartment in a fantastic suburb?

Cheers,

The Y-man

 

[Rixter]

When there comes a time that the units need to be knocked over and the land developed how does this process work when there are so many owners?

The same way its done with a single house on land except the cost is divided & shared amongst the lot owners as per unit entitlement.

Hope this helps.

 

[steveadl]

Cheers for the reply Rick,

One other quick question that I am keen to get some feedback on is the effective life of units. I appreciate that sinking funds are in place for upkeep and external renovations, however surely you can only rejuvenate a block of units so many times. When there comes a time that the units need to be knocked over and the land developed how does this process work when there are so many owners?

I am sure that there is a simple answer but this has me stumped.

Cheers - Craig

There are a lot of variables, but the basic answer is when the end value (& profit) of building something new on the land is higher than the value (& profit) of refurbishing the existing building.

ie. If the building still needs a relatively small amount of $ spent on it and the apartments inside - it will remain. Once it becomes too old and dated and requires extensive structural work and inside gutting (and it has moved relatively closer to the CBD/water etc), it starts to become more attractive to just rip it down and start again.

 

[jingo]

Cheers for the reply Rick,

One other quick question that I am keen to get some feedback on is the effective life of units. I appreciate that sinking funds are in place for upkeep and external renovations, however surely you can only rejuvenate a block of units so many times. When there comes a time that the units need to be knocked over and the land developed how does this process work when there are so many owners?

I am sure that there is a simple answer but this has me stumped.

Cheers - Craig

Hi Craig,

I own a flat in a complex that was built in the 1960's. In many cases, buildings of that era were built very well. I looked through the flat with a fine tooth comb. Most of the walls are made of solid concrete. There were no cracks. I guess the thing to look for is rising damp and or concrete cancer. But I couldn't find any evidence of this in this particular flat/complex.

The block will be refurbished externally this year.


So, I guess if it has been standing for 40 years or so, it should stand for a while longer yet! I personally love buying houses or units built between the 1960's through to the 1980's. They are very solid structures!

Regards Jason.

 

[Francesca C]

Hey

I agree with jingo, I also prefer buying older style properties too. They have been built to last and have so much character.

 

[Rixter]

I've been purchasing new or near new property over older style property for several reasons, the main ones being (in no particular order)

1/ To maximise my Non-Cash depreciation deductions - thereby increasing cash flow

2/ To minimise my maintenance & repair costs

3/ More modern & Attractive to tenants - thereby minimising potential vacancy rates

4/ Ask a higher rent - thereby Maximising yields

 

[timmyboy]

I've been purchasing new or near new property over older style property for several reasons, the main ones being (in no particular order)

1/ To maximise my Non-Cash depreciation deductions - thereby increasing cash flow

2/ To minimise my maintenance & repair costs

3/ More modern & Attractive to tenants - thereby minimising potential vacancy rates

4/ Ask a higher rent - thereby Maximising yields

A train of thought I myself subscribe too.

I did, however, undertake a reno last year of a unit built in 1970-71.
My idea at the time was to do the bare minimum, on sell and make a quick, but tidy, profit.
Problem was, as I got more into it, the more needed to be done. This was purely on my part as the backup plan was to rent it if it didn't sell.
I was caught, in my mind, between doing enough to on-sell but not doing enough to ensure a trouble free tenancy if the need arose.
In the end more was spent than probably needed to be spent, however we have a completely brand new (inside) and by far the best unit in the building, which rented straight away for above the area average at the time and is likely to increase by about 7% at this year's review.
The outside of the building, along with the common areas simply let us down, along with the general condition of the rest of the units - we over spent / over capitalised whatever way you want to term it.
If the strata company does as promised and refurbs the outside of the building and lift, we'll be on a winner.
Jason and Francesca made a good point in their posts that the older buildings show character and are built to last. There were no dramas with my place in that regard.
But with units/apartments/stratas you really are at the mercy of the masses -the majority voters at a meeting. If there a majority of differing opinions to your own then.....you have to live with it.
Regarding the "effective life" - I saw in The West a week or so ago a unit in Crawley - multi story block built in very early 1970's - completely refurbed from top to toe - $1.4 million or thereabouts.
As long as the building is sound then it's what's behind the door that really counts isn't it?

Tim

 

[jingo]

I've been purchasing new or near new property over older style property for several reasons, the main ones being (in no particular order)

1/ To maximise my Non-Cash depreciation deductions - thereby increasing cash flow

2/ To minimise my maintenance & repair costs

3/ More modern & Attractive to tenants - thereby minimising potential vacancy rates

4/ Ask a higher rent - thereby Maximising yields

This is a very good strategy.

In my case, I buy older places with the potential to value add later down the track. This will increase my yields, (not to mention value of the property) and I can also depreciate the amount I spend on renovations. I must say though that the amount I can claim on the depreciation of the building at the moment is very low compared with say a new building.

The great thing about property is there are so many ways of doing things, and this forum is amazing as we can all take ideas from each other!

 

[bernly]

Craig-G

I just want to make a point following Rixter's comments. If there are LVR limitations on units under 50sqm, what does that say to you? bank are not silly and know that properties under 50sqm are not good investments.

I have been told many times by very successful property investors that IF you have to buy a unit, make sure it fits into the following criteria.

1. Complex of less than 10
2. 50 sqm plus
3. 2 bedrooms. Even though many people live alone they still like space for a space bedroom of an office.
4. Do not buy the newer units from developers, find older ones in a small complex near the city, transport, schools ect

Hello Francesca

There are exceptiions to every rule. Last year we bought a 1 br unit, less than 50sqm. I went to the open inspection out of interest because the asking price was low and the position good but with no real intention of buying because it didn't fit the ideal criteria. It was shabby and in need of refurbishment but it "felt" special. No body else seemed interested and we bought it for $90K, $20K less than the asking price. We spent $10K on it and now have a tenant paying $190 pw. Several months later I saw another unit in the same block advertised on the Net for $110K and we bought it that day for the asking price. We inherited a tenant who pays $160 pw. I would not sell either of these units today for less than $170K and I'm sure that if I put them on the market they would a) sell for the asking price and b) sell quickly.

I guess I'm suggesting that it doesn't always pay to be too rigid when it comes to what you want in an IP and that each property should be judged on its merits. I've always bought by "feel" and would be uncomfortable buying sight unseen. It works for me.

Cheers

 

[jingo]

I guess I'm suggesting that it doesn't always pay to be too rigid when it comes to what you want in an IP and that each property should be judged on its merits. I've always bought by "feel" and would be uncomfortable buying sight unseen. It works for me.

Cheers

I would agree bernly. It is necessary to have 'guide lines', but they are there to be broken!

For instance, one of my rules is never to buy on a main road. However, in some of the areas I have invested in, properties on main roads have become highly sought after. They are achieving very high prices (substantially more than properties in side streets) due to their higher land content and subdivision potential.

I also prefer to buy flats in small blocks. (Less than 20). However, I bought one in a block of 28 last year, and it has risen in value due to the demand for this type of property in the area.

Furthermore, I bought a terrace house last year without off street parking. My usual criteria is to only buy inner city properties with off street parking. Thankfully, due to my wife's instance, I disregarded my usual 'rule' and just bought. The terrace has now increased in value by $150,000 in a matter of months!

You make an excellent point bernly. If one becomes too rigid with their selection critieria then excellent opportunities pass by. Naturally, this doesn't mean to just buy anything. There must be an underlying reason to buy the property in the first place. (Eg, the right time personally to buy the property, or because the area is moving, or because the property fits into your long term strategy, or a combination of each of these things).

Regards Jason.