For the strategic property investor, buying into an apartment block or a strip of townhouses will generally mean a more affordable entry-point into the market and a higher rental yield in certain locations.
However, unlike a stand-alone home, a unit will usually be bundled with a specific strata scheme, which will see the underlining asset shared by a group of owners; some of which constitute the committee and have the collective power to call the shots.
In saying this, how can you ensure that your investment will be appropriately covered?
Sharon Fox-Slater, managing director of EBM RentCover, says different properties are sold under different titles and these “each come with slightly different legalities”.
“The type of title can determine the amount of land or property the homeowner owns, who is responsible for maintenance and making decisions, and what sort of insurance is needed to best protect the investment,” Fox-Slater says.
To avoid being under- or over-insured, she advises investors to understand the insurance cover that is already in place for their property.
“For example, if you purchase a strata-titled property, you typically do not need building insurance as this is managed by the body corporate,” Fox-Slater explains. “However, this is usually contrary to community-titled properties.”
The strata scheme and the by-laws can vary between each state and territory, so it’s essential for investors to do their own due diligence prior to making a purchase.
Edward Love, managing director of LOC Property Group, recommends investors to spend a couple of years being actively involved in the committee, as it will give them a better understanding of the maintenance that’s required on the building to ensure that it continues to attract tenants.
“These plans all have their own little nuances,” Love says. “Depending on the age of the scheme and terminology used, [which] can be vague and hard to interpret, it is imperative that you seek advice on these matters and also review the lot liabilities for your particular lot as this can lead to you having to pay larger levies and wear greater costs than other properties due to how the plan was originally set out.”
A strata title – How will it affect you?
Having to comply to a strata title is to be most expected with apartments and flats, Fox-Slater from EBM RentCover shares.
“Investors who buy in strata-titled complexes are typically responsible for what is within the four walls of their property,” she says.
On the other hand, when it comes to the building in which the unit resides in, Fox Slater says: “Because the building structures are owned collectively and managed through the body-corporate, responsibility for insuring the building or complex does not fall to the landlord.”
“It is the responsibility of the body-corporate to take out strata insurance, which covers the building, common property and common area contents of a strata scheme,” she says.
In already having this type of cover, some landlords might assume that they do not need to take out any additional insurance themselves, but Fox Slater says, “they still generally need landlord insurance if they want to cover risks like loss of rent, tenant damage and legal liability”.
Pouring over the finer details of exactly what repairs or maintenance works will fall over to the body-corporate or the investor isn’t always “clear cut” and “needs to be assessed on its own merits”, Love from LOC Property Group shares.
“What is a lot owner responsibility or body corporate expense is governed by what is set out in the associated plan,” Love says, also recommending investors to “make pertinent enquiries in relation to the financials”.
But as each strata-title and legislation differs significantly across each state, Love suggests a rule of thumb for insurance.
“If you were to tip your property upside down, anything that stays in place will be covered by your strata insurance, and any items that move would be covered by your contents or landlords insurance policy, unless requested by the body corporate to have it added to the strata insurance policy such as floating floors,” he says.
“It’s always handy to look at a property’s claims history to see if there are large excesses due to past insurable events that may cause you issues further down the road,” Love adds.
A community title – how does it differ to a strata title?
A community title strikes resemblance to a strata title in the fact that there is shared responsibility for the common areas of the complete property asset.
But the point of difference rests in the how the boundaries are defined, and in the case of a community title, these are related “to the land itself and not the structural sections of the building”, Fox-Slater notes.
“When it comes to insuring a rental property in a community-titled complex, landlords may be responsible for insuring the entire building which sits on their lot, as the body corporate is only responsible for common area structures like driveways or common yards,” Fox-Slater explains.
She adds that investors need to be aware that community-titled properties don’t often provide landlord or contents insurance, so as in the case of a strata-title, the investor needs to make sure that they are appropriately covered for these.
Community title schemes are most common in New South Wales and Queensland, and are being proposed in Western Australia, Love from LOC Property Group shares. He also notes that in Queensland, properties are assigned into standard, accommodation, commercial and small schemes.
“The management of a community title scheme can be complex and multi-tiered. Usually found in big developments and complexes, they can often span large areas of land and consist of a mix of commercial, residential and retail lots with conflicting interests,” Love says.
“Much like in strata titles, everything is managed via tabled meetings. The community scheme committee deals with day-to-day issues and general meetings are held for larger issues which each individual lot owner may attend.”
Love adds that in some instances further building plans could be in the pipeline for the greater asset, such as staged developments, and investors need to be mindful of this.
A company title – how likely are you to come across it?
A company title allows a buyer to gain ownership of a unit in a shared property through the purchasing of a share in the company that owns the title and land.
But as this title is based on an older model, the chances of an investor coming across it is becoming increasingly rare, Fox-Slater shares.
Like a strata and community title, she says that a rental property under a company title will not often come with insurance to cover contents, liability and tenant risks.
“Sometimes building insurance is also excluded,” Fox-Slater says. “So when purchasing a company-titled property, you really need to find out what is and isn’t covered as you may need to insure everything or just part of the property.”
Love from LOC Property Group says that it can be the “most contentious form of ownership”.
“There is no actual plan of subdivision as you are actually becoming a shareholder in a company title corporation for which you buy a limited number of shares in a company and therefore fall under the provisions set out in the corporation’s act,” Love explains.
The owners are also governed by a “memorandum and articles of association” that can be difficult to interpret at times, he says.
“On this basis, the banks appetite to lend on these forms of ownership is reduced and they will often either refuse to lend or request a greater LVR in some instances,” Love adds.
He recommends investors to connect with the strata manager to gain transparent information on a building and the title that’s attached to it.
The great sinking fund debate
When it comes to attracting tenants to a rental unit, how the building holds together on a whole becomes just as important as the condition of the individual asset.
Edward Love says that while owner-occupiers are known to put a little more cash towards their apartment block’s sinking fund – being the collectively pooled funds of every owner to keep the building in top shape – investors can at times “run it very lean”.
“Where that hurts them is that the building starts to deteriorate and then you are not getting the market rent that you would, say, compared to a newer building down the road, and I think that investors now are becoming a bit more savvy and looking at the bottom line of how much money is being kept in those sinking funds,” Love shares.
The condition of the greater asset and its financial backbone can in-turn affect how the property will perform when it’s put up to the selling market.
While it’s mandatory in New South Wales and Queensland for a sinking fund, Love says that this is not the case in Victoria unless it’s a prescribed owners corporation (over 100 lots).
“If the building is showing signs of age and there is only a small amount of residual funds being held in the strata account, it is very probable that you will be served with a special levy and it could be a substantial amount to help reduce further deterioration of the building fabric whilst improving the overall appearance of the building and the common areas,” Love explains.
He says it’s imperative to build up that bank balance and keep on-top of maintenance works.
“It also helps to reduce the costs of the works, and in the instance of an emergency, there are always sufficient funds available to carry out the works immediately without needing to wait for members to pay or having to take out an unsecured strata loan,” Love says.