In decades gone by it was common for first-time buyers, in fact, all buyers, to purchase a house in the suburbs.
A lot has changed since then, however, and more and more people are choosing to buy and live in units and townhouses, usually because of their superior positions closer to the city, their affordability, and less time required for maintenance.
Nationally 9% of our population live in apartments or 15% of households. Unsurprisingly, New South Wales has the highest proportion of apartment dwellers at 15% of its population (22% of households)
However, interestingly, it was the smaller territories that followed, with the ACT and NT recording an equal 10 percent of their residents in apartments (17 and 19 percent of households, respectively).
Tasmania has the lowest, with only three percent of residents living in apartments, just under WA and SA’s equal four percent.
But if you’re considering buying into a strata scheme, there are some unique and some not-so-unique elements that you must understand before signing on the dotted line.
What is a strata title?
Strata title is a method of facilitating individual ownership of part of a property – generally an apartment, unit, or townhouse.
Uniquely, strata title allows for individual ownership of an actual lot or unit whilst sharing ownership of the common grounds on which it is built.
The concept only came into being 50 years ago, however, there are now more than 340,000 strata title properties nationally providing close to three million homes across Australia.
Investing in a strata title property can be a smart move – it’s often an affordable way to enter the property market, and can be beneficial in managing repairs and renovations down the track
But whether you’re buying a unit or a townhouse, you should look into the history of the property and its strata scheme before you sign the contract to ensure you know exactly what you will own and what’s deemed to be common property, that is, shared by all of the owners in the owners’ corporation or body corporate.
Generally, as a strata owner, you own the air space within the boundaries of your lot, while the owners’ corporation owns and controls the fabric of the building and the land under and around it.
Common property is all of the areas of the land and building that aren’t included in any lot.
The common property boundaries of each lot are generally formed by:
- the upper surface of the floor
- the under the surface of the ceiling
- all external or boundary walls (including doors and windows).
Being an owner in a strata scheme:
- Your ownership includes your individual unit or apartment as well as sharing ownership and responsibility for the Common Property.
- You are automatically a member of the Owners Corporation, which has responsibility for the Common Property.
- You will regularly (generally every 3 months) need to contribute to the cost of running the building by paying Strata Levies in addition to rates and taxes for your property.
- Compared to owning a freestanding house, there could be lifestyle restrictions in a strata scheme, e.g. there are rules (by-laws) that may affect you doing renovations to your unit; where you can and cannot park your car; noise control; where you can dry washing; whether you can or cannot keep pets.
- Each owner has principle obligations in relation to their lot and the common property and if they are an investor to ensure compliance with the scheme’s by-laws is a condition of the tenancy agreement
You should study all of the provisions of the contract – including the description of the property – and make sure that the plans attached to the contract match the property.
You should also check the following:
Before exchanging contracts, you must check that the list of inclusions is accurate and complete.
All fixtures are included in the purchase without having to be named.
Under the law, a fixture is something that’s so attached to the land that it must have been intended to remain there permanently.
If you’re in doubt whether a particular item is a fixture, it’s best to mark it as inclusion or mention it by name in the contract.
Fittings such as floor coverings, cupboards, and the kitchen stove may belong to you as the new owner, but they’ll need to be itemised as ‘inclusions in the contract.
Where possible, include as much detail about the inclusions, including brand names to avoid any doubt.
Once you’ve settled on the property and taken ownership, you may replace or modify the fittings without consent.
However, with strata units, if you want to make changes to the fabric of the building, or wish to build new structures – such as installing an air conditioning unit – it’s important that you first notify the owners’ corporation first.
This is because the owners’ corporation has the power to stop any alteration or structural renovation being made to a lot if they believe it will interfere with the common property or the supporting structure of the rest of the building.
Each lot owner has title to air space, as shown by the lot boundaries in the strata plan, and has the right to use the fabric of the building and the access ways, corridors, and the grounds around the building in common with the other owners.
Each owner also has a share in the common property, called a unit entitlement, which decides voting rights, and each owner’s contribution to the maintenance levies including insurance premiums, upkeep of the property, and so on.
As an owner of a strata property you, or your tenants, must comply with the relevant by-laws of the strata building.
These can be changed by a decision of the owners’ corporation or body corporate.
There are similarities with strata by-laws so generally, they cover such elements as safety and security, rubbish disposal, use of the common property, noise control, behaviour or residents, and the appearance of the building.
It’s important to understand that the ownership of pets is contained within strata by-laws.
Living in a strata scheme can present its own complexities, often because of people sharing close quarters as well as using the same common property.
Disputes aren’t uncommon between owners or between owners and the owners’ corporation, however, there are well-defined dispute resolution pathways enshrined in law to assist in these matters if they occur.
It also insures for injury to ‘voluntary workers’ and against public liability and for workers’ compensation.
The building, for insurance purposes, may include carpets in common areas, hot water systems, light fittings, toilet bowls, sinks, shower screens, cupboards, doors, and stoves.
As an investor, it’s always recommended to take out landlord insurance to cover potential losses due to non-paying tenants, damage to the property, or public liability for your lot.
Liability for strata contributions
When buying a strata property, the vendor is usually liable for a contribution levied by the owners’ corporation before the date of the contract (except future payments under an installment scheme).
You do run the risk of suffering a liability, such as paying a share of remedying a fault in some part of the common property that occurred in the past before you owned the property, which is why it’s important to inspect and assess the property and the records of the owners’ corporation thoroughly before committing to buy it.
4 things to look for when buying a strata property
1. Owners vs. investors
It’s usually better to have more owners occupiers than investors because they’re more likely to proactively keep the building to its optimum level.
Now that’s not because investors don’t care.
It’s more to do with the fact that investors aren’t onsite and can’t physically see any problems.
One of the other keys to successful strata investment is buying into a smaller complex because they are more desirable to future owner-occupiers who are prepared to pay more for property.
A smaller body corporate also means fewer owners to deal with and fewer owners who need to agree before a decision can be made.
2. A numbers game
In the rush and excitement that goes into buying a unit, many buyers fail to have a professional scrutinise the books and records of the body corporate.
This leaves them clueless about their current finances and unaware of the issues they might be facing.
A bad example might be that as a new owner you will automatically have exposure to major expenses or even lawsuits with neighbours!
The secret is to make sure that you check out the financials before you buy.
3. Repair history
Similar to checking out the books, you must complete a thorough investigation into the history of the building.
Has the building got ongoing problems that are costly to fix?
Will you be landed with a share of the bill to get a new roof within weeks of buying the property?
Most of the new multistorey buildings I’ve been involved with over the past few years have had water issues with their balconies.
While sellers legally have to disclose any material facts about a property, some are actually selling because they don’t want to deal with an ongoing repair problem.
Don’t get lumped with a problem that you can avoid.
It’s as simple as getting a hold of past committee meeting minutes, which can save you thousands of dollars in the long run.
4. Maintenance schedule
It’s an unfortunate fact that many bodies corporate don’t adequately plan for future maintenance.
This can be especially true with older schemes, which means you could inherit a property that hasn’t been adequately maintained over the years.
And that usually means money out of your pocket when the inevitable repairs (that could’ve been prevented!) start cropping up.
As well as assessing committee minutes for major problems, check whether the sinking fund is appropriately financial to undertake a long-term maintenance regime.
The bottom line:
Despite the various issues related to strata and the levies you may need to pay, I’d rather own an apartment in a high-growth inner suburb than a house in a lower growth outer suburb.
As always, it comes back to weighing up all the factors of the property.
A strata property may still be the best investment for you if all the ducks line up.
But as I explained, strata schemes are only as good as the owners within them.
If you have a dormant body corporate that usually spells trouble for the future profitability of the complex.
Like I’ve said, investing in investment-grade units and townhouses can provide capital growth potential and solid yields.
But not if you buy into a scheme that doesn’t even have any money saved for a rainy day or one where the owners don’t seem to care about the upkeep of the building.
Over the last few years, we’ve built too many of the wrong type of apartment – many in high-rise towers aimed at overseas investors.
Smart investors are steering clear of these investor-dominated buildings for many reasons including no likely capital or rental growth for a decade and the scare of poor quality building issues.
However buying older established apartments (those that were previously called flats), villa units, or townhouses, which are located in the right inner and middle-ring suburbs of our capital cities, can make good investment sense.
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