A very narrow gap between gross rental yields and mortgage interest rates is a buy signal for investors.
Taming the Owners Corporation
The persistent oversupply of new apartments across Melbourne in recent years has, unsurprisingly, resulted in weak unit capital growth relative to houses.
But whilst avoiding new and recently built apartments will greatly reduce the risk of investment disappointment, owners of established properties should not be complacent. They are still vulnerable from many sources of underperformance, not least the poor upkeep of the asset and an unwillingness to meet contemporary expectations of tenants by keeping features up to date.
I have little sympathy for the penny pincher investor who suffers sub-par capital growth and lower rents, high turnover of tenants and extended periods of vacancy because they failed to upgrade an apartment’s presentation and features.
I’m more kindly disposed to an apartment owner whose returns are impacted by failings of the owners corporation (OC). That’s because even the most conscientious investor can come a cropper when they are only one voice amongst many, and it turns out that their fellow apartment owners are short-sighted ‘she’ll be right’ types.
The most common manifestation of this issue is tired-looking external walls, roofs and internal common areas such as corridors and stairways. But it can be more subtle, such as the evidence of dysfunction sitting within the OC’s meeting minutes, which scares off prospective buyers.
Sadly, I know of too many cases where exasperated apartment owners have lost tens of thousands of dollars of their resale potential because of the inertia and neglect of the OC.
But, if you are up for a challenge, it is possible to effect change within most blocks. The first step is: get involved, and ideally not just when you need something done. Attend OC meetings and familiarise yourself with the personalities and processes. After a few months seek to join the ‘house committee’. This group consists of a small subset of owners charged with driving strategy and decisions – subject to ratification by all the members. Most pertinently, it oversees expenditure on maintenance.
If and when you secure a place on the ‘house committee’, the temptation may be to table an extensive – and expensive – list of projects at the first opportunity. That would probably be a mistake, especially if the list is skewed towards upkeep that disproportionately benefits the sponsor (say a new roof when you live on the top floor). It’s likely to result in defeat and a loss of face and future influence.
Making haste slowly is likely to be a better strategy. Identify like-minded and respected members of the committee. Befriend the obdurate, and perhaps even try to understand their perspective. As importantly, get to know the owners corporation manager, the external professional party usually engaged to manage operational OC matters.
Ultimately, your proposals for change need to show a real purpose that will survive the house committee’s scrutiny and gain acceptance from the majority of members. Few OCs are interested in building up the rainy day general purpose sinking fund just because you think it is vaguely prudent.
Consider supporting your plans with a (not too complex) cost benefit analysis that shows the return of investment on your proposed works. If you can, find examples of other apartment blocks that have undertaken renovations that have added value. The OC manager should be able to help you with this.
Just as it is with internal renovations, one probably need not be overly ambitious when addressing common area issues. Invariably, it is relatively cosmetic and cheap work such as painting and gardening that can add real value.
I won’t downplay your task. It can be hard work, and the fruits of your labours will benefit all, including the free-loaders. But console yourself with the thought that committee work is a valuable skill, and may ultimately lead to some great friendships as well as happier tenants and a greater return on your investment.Richard Wakelin