Tips for when you’re looking to buy strata residential property

2019-05-14
Sitting on the fence and thinking about whether to buy a strata property? Heres some tips to get you started. Sitting on the fence and thinking about whether to buy a strata property? Heres some tips to get you started.

If you're looking to buy into a residential strata property, there are many new things to consider and learn.

Case Study

Terry was looking to buy a 2 bedroom home in Sydney and came to us to arrange the investment mortgage. As the property was 17 years old, there had been some renovations completed inside the unit and some repairs were still being made to the common property.

As the property was selling at auction there were a number of things to consider, particularly because Terry was buying into an existing strata plan property.

Here are some of the things we discussed.

Jump Ahead

Rule #1 Remember the real estate sales agent is the agent of the seller

The sales agent is never the agent of the buyer (you). You are responsible for making your own inquiries so don’t take the agents word for it. Just don’t.

Rule #2 Be prepared to learn the lingo

Understanding the specific language of any profession is a shortcut to better understanding what’s at stake and this is even more important when buying into residential strata scheme property.

  • Strata property generally means a ‘building or collection of buildings that’s been divided into 'ownership lots'. These lots can be individual units, townhouses or houses or even garages or parking spaces.

When a person buys a lot in a strata property, they own their individual Lot but they also share the ownership – and cost of maintaining - of all the common property with other lot owners. (This has particular importance for investors using depreciation as part of their property investment strategy)

  • Common property generally includes things like gardens, external walls, roofs, driveways stairwells, onsite gyms lifts, and pools. Before buying into a strata scheme, understand the common property boundaries. (Refer to the strata plan for the individual strata scheme. For our NSW clients in see the NSW Land and Property Information service).
  • Strata Levies generally relate to the ongoing fees property owners are charged by their strata property managers for day to day upkeep and maintenance when you own Lots in a strata property.

While every Lot owner pays levies, some may be higher than others depending on their own Lots ‘entitlements’ and usually include the size of a Lot. For example; 3 bedroom Lot with a double car space may pay more levies than a studio Lot with no car space etc.

  • Sinking Fund refers to the Strata Levies paid that are allocated for and set aside for future major expenses like repainting the common property, replacing all the gutters in the complex, replacing garage doors and other major future capital expenses.

(Also called a Capital Works Fund Forecast or Strata 10 year Plan).

  • Depreciation generally relates to the tax-deductible costs - claimed by investors – from when fixed building structures and major items reach the end of their economic life.

The ATO recognises a property will deteriorate over time – carpets need to be replaced and repairs and maintenance work will need to be completed, so investors can continue to receive rent and produce a taxable income. For investors buying into strata property, having a depreciation schedule of the common area items can have a significant effect on their tax planning.

Rule #3 Always set a burn budget

Be prepared to spend money to make an informed purchase (or walk away) decision. This means you’ll need to decide ahead of time how much money you’re prepared to spend (and yes it can feel like burning money) in assessing the property you are interested in purchasing, to see if you should continue and make the purchase.

If a Property Inspection Report found termites, you’d probably be happy to walk away from the purchase and be happy you spent the money on the pest inspection to find that out before you commit to buying a terminate farm.

We always suggest you set a burn budget for each purchase you’re seriously interested in buying.

Rule #4 Always get the right property searches and reports

A Strata Information Search is well worth the investment and can help avoid surprises or disappointments so speak with your legal professional about what they recommend and why.

Pro Tip: If you’re not prepared to do your due diligence and spend the money in obtaining a strata search before buying into a Strata Property Scheme, expect problems. Once you get the Strata Inspection Reports, read them, that’s right, actually read them and discuss what’s found with your legal representative and be sure to ask for their insights too.

  • Strata Information Search Report - This may also give you an early warning if there is an ongoing maintenance issue that needs attention.
  • Sinking Fund or 10 Year Plan and budget - The strata manager is required by law to have a budget for future maintenance and repairs that will be paid by the owners by annual levies and special levies collected and held in trust for future works.

You may also need to consider additional inspection reports like:

  • Pest and Building Inspection
  • Asbestos or Lead Paint Inspection (for older properties)
  • Local Council inquiries (about road and infrastructure plans that may affect your potential property purchase and any special zonings you need to be aware of for surrounding properties)
  • Reports recommend by your legal representative about any special by-laws in place

Rule #5 Seek to understand what’s likely to happen in the near future with a potential strata property

As a strata property scheme is really a shared community, so always look at the sinking fund balance and future budget that has been set by this community.

Understand the reasons for the strata fund balance

  • If the strata fund balance is particularly low, you would hope there's been a recorded expenditure in the strata records showing what recent maintenance and repairs have been completed by the strata manager.
  • Conversely, if there is a high balance in the fund, you should expect that major maintenance is due. When considering buying into a strata scheme if you find they don’t have the financial reserves for regular maintenance and they haven’t funded their 10-year plan (or don’t have the capacity to plan ahead) this could be a bad sign.

Either way, when you buy into a strata property scheme, you’re buying that portion of the strata fund that was paid by the existing property owner for future work.

If there is a financial deficit in the Strata Information Report, you could be buying into a significant future debt – so always get legal advice on how to interpret these types of situations.

For more helpful information, see the Departments of Fair-trading regarding strata issues to look out for.

Contact us today here to see if we're the type of people you'd like to work with.

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Drew Browne

Sapience Founder & Director.
Simplifying Financial Complexity

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