Should you be worried about high strata fees?
Often when people tell me about the investment unit they’ve recently purchased, they describe how beautiful it is and detail the list of impressive amenities in the building. While it brings a smile to their face, it often brings a worried look to mine. This is because they often see these amenities as a benefit and great selling point; however I see it as a liability and a good reason not to buy. So when it comes to strata fees, how do you know what to look for?
How much should strata fees cost?
As will all property costs, strata fees will vary depending on the building, location, age and price of the property. I typically buy second hand units that are 30-50 years old in the inner city of Sydney for $700-$950k with strata fees ranging from $650-$950 each quarter. This equates to around 0.5 per cent of the property’s value.
Are fancy amenities a good or a bad thing?
Amenities such as lifts, gyms, pools, sauna’s and 24 hour concierge are often found in brand new buildings, and look very appealing in the glossy brochures as they’re what most of us look for when we think about holiday and leisure time. However, these are all very expensive items in a building and will certainly cost you in terms of strata fees.
While a number of tenants will be attracted to the buildings with these types of amenities, I don’t think they will actually pay much more rent, if any, for those items. Also, if they want the very latest technologies, as new buildings get built up in the area chances are they’ll move away from the ones that are a few years old and move into the latest and greatest one.
I think the exception to the rule is if you are buying the property to live in yourself, and the amenities are what you really want and are happy to pay for. This then becomes a partly emotional decision rather than a 100 per cent financial one. Another exception would be if you are specialising in holiday lets or serviced apartments, as these could be a necessity for these particular investments.
Increased levies or special levies?
When analysing a property to invest in, you can’t just look at the amount of the levy and make a decision. You need to delve further and look for the reasons for the levies, as high levies may be a great investment decision.
A few years ago two of my unit buildings both had similar quarterly levies but wanted to raise $50k for some maintenance work. The building in Coogee decided to increase the quarterly levy by $500 each quarter and raise the money over two and a half years, as it was easier to cash flow for most unit holders. However the block in Tamarama decided to raise a single special levy and get all owners to pay $5k in one lump sum.
If I was to sell the units during the process many buyers would be put off the Coogee unit as the strata levies would be $1,250 per quarter rather than $750. In reality both blocks were great investments, they just chose to raise the extra money in different ways, and the Coogee block would revert the levies back down in a few years. The Coogee block could have even been a better investment decision for many younger buyers, as they may not have the $5k lump sum needed for the Tamarama block.
Active strata versus passive strata
Higher strata fees can be a great sign of a good investment, and low strata fees can actually be a sign of a disaster waiting to happen.
Many small and minor maintenance issues can turn into major and expensive ones if left untreated, so I always look for an active strata when analysing potential investment properties. Take concrete cancer as an example – if treated immediately it can be a matter of a few thousand dollars, however if ignored can lead to bills in excess of $1m and collapsed roofs. Imagine buying a unit and then getting a $100k per unit special levy a few months later!
If the strata is actively spending money on a building it often means it’s preventing problems getting more expensive, saving you money in the long term, or that they’re beautifying the property, which is adding value and giving you capital growth. However, there is a fine balance between adding value and over capitalizing.
Order a strata report.
My advice for anyone buying any type of strata property is to invest in a strata report EVERY time you consider buying an investment unit. This will cost around $200-250 and should summarise what has happened in the strata records for the last 5-10 years, and what the plans are for the future. By looking at the report you can see where the money is being spent. You should also speak to the strata manager to get a feel as to the other owner’s intentions.
I would also get a building inspection, which will cost you around $300-$500, to double check the building. An inspection will reveal if there are any issues that the strata have not yet uncovered or been made aware of.
I’ve seen one case where the strata hid discussing a $75k special levy from the strata records, as one of the owners wanted to sell beforehand and knew it would put off the buyers. The unsuspecting buyer, who did order a strata report, then had a horrible shock a few months later. Unfortunately, there’s still no guarantee it can’t happen to you even if you do order the reports – that’s all part of owning in a strata block.