Are the risks of buying strata properties worth it?

Owners corporations usually exist in strata schemes, where multiple investors or owner-occupiers own portions of a large complex. They are governed by legislation which may vary in every state and territory.

For one, every member of the corporation has to appeal to a board of owners from the same block in order to get items and projects approved—from the installation of satellite dishes to small alterations such as colour schemes and garden plants. They may also dislike management service providers who “clip the ticket” and fail to add significant value to their property.

Moreover, while the cost of the property relative to the land may be cheaper than traditional freestanding houses, investors are usually taken aback by strata surcharges or strata levies associated with the purchase of the asset.

These charges, paid periodically, are generally used for the upkeep of the complex. Therefore, a larger block with more amenities such as pools and gyms will require higher regular payments.

Strata’s worth

Despite the high costs associated with owning strata properties, property professional Cate Bakos believes that they hold great potential for wealth creation if only investors take on a more pragmatic approach.

After all, strata fees are in place for different reasons, most of which are for the benefit of all members of the corporation.

She explained: “I prefer to look at BC fees and apply a pragmatic approach. They have shared costs between residents for mandatory fees.

“These fees would typically include building insurance, public liability insurance and any legislation-based payments. These fees are payable no matter what, and even if the management of the BC or OC is via a volunteering owner, the insurances and fees cannot be dodged.”

However, Ms Bakos strongly encouraged investors to be wary of extra features, which explains why owners corporations set their contributions at varying levels.

While some fees cover only the insurance surcharge, other owners corporations may charge for high-rise building overheads such as concierge services, swimming pools, gyms, lifts and ongoing maintenance services.

For Ms Bakos, the ideal investment would be the one falling in between the two ends of the spectrum — not too cheap and not too expensive. She also highlighted the importance of taking the purpose of their property purchase into account.

The property expert said: “A body corporate or owners corporation which merely glosses over the legislative requirements such as insurances and nothing else is likely to be a block which shuns maintenance, upgrades and proactivity when it comes to improvement. Those which initiate owners’ contributions for sinking funds, maintenance levies, gardening and improvements are more likely to result in a well-maintained block.”

The property professional backs body corporates or owners corporations with the ability to finance specific issues such as roof restoration, asbestos clearing, repainting, guttering/spouting repairs, garden maintenance, security gate maintenance and exterior upgrades.

Being comfortable about financing such issues is usually a sign of a collective that prioritises capital growth, owner-occupier appeal, target tenants and high rental yields, Ms Bakos said.

Finding good assets

Before ultimately deciding that a strata property is worth a spot in your portfolio, Ms Bakos advised investors to consider the pros and cons of strata properties over freestanding properties in relation to potential expenses and earnings.

Some questions to ask include: Would I get better capital growth in this inner-ring suburb, or am I better off avoiding strata titles and heading further out to buy a property on its own title without shared areas?

Avoiding strata titles, which are usually nearer the central business districts and other growth areas, can lead you to invest in areas with lower yields, lower capital growth prospects and higher maintenance requirement.

Ms Bakos said: “By moving further from the CBD, the investor is less likely to purchase in an area where higher incomes are driving the current median purchase prices. They are also less likely to buy into an area where the target tenants are higher-than-median-income earners.”

On the other hand, an expensive strata property can negatively impact your rental returns. Then again, going for cheap ones can magnify issues and lead to stagnant capital growth, high vacancy rate and other issues.

At the end of the day, the right decision comes down to the implication of land value, capital growth, tenant prospects, rental yield and out-of-pocket shortfalls, according to the property professional.

“It seems like a tough choice for some, but as I say to everyone: If it seems too good to be true, it probably is,” Ms Bakos said.