There’s no shortage of opinions and commentary across the property investment landscape – some of it valuable, but a lot probably should be discarded.
We believe our ‘Rewarding Property Decisions’ blog and podcast series definitely make up for the former, so we are passionate about sharing our knowledge to protect investors from the latter.
As we always say, ‘investing in property makes sense, investing in the right property takes knowledge.’ While we’re always busy researching the latest issues and trends we believe you need to know – we also want to provide you the opportunity to ask us the questions specific to your personal property journey.
That’s why we’ve been busy collecting our audience’s burning property questions over recent months, to help optimise your next property investment decisions.
First up, Stuart asks; what’s the difference between Strata, Stratum and Company Share Titles, and how do these impact on value and growth performance?
The ownership structure of apartments has evolved over the decades, beginning with Company Share Title, moving to Stratum Title, then up to the modern day Strata Title.
A Company Share Title is a scheme of land ownership through which a company owns the title to the apartment. Shareholders who have purchased shares in the company are entitled to exclusive occupation of a flat in a building on that land. In this regard, shareholders in a company title building do not technically ‘own’ the land.
A Stratum Title is an arrangement, which sees the property subdivided into lots. Each unit owner is the registered proprietor of their lot and also holds shares in a service company established under the Corporations Act 2001. The service company owns and manages common property.
A Strata TItle provides an individual ownership of a unit or apartment within a multi-unit complex. All apartment owners are joint owners of the common property (common areas shared by all the unit owners).
From an investment perspective, the nature of each title has an impact on capital growth rates. That’s down to bank lending preferences. Due to strength of ownership, banks favour Strata, followed by Stratum and then finally Company Share.
The less favoured titles mean reduced loan and purchasing capacity amongst buyers, which in turn limits demand, competition and prices, thus inhibiting a property’s capital growth.
Next up, Hayden asks; common advice suggests that you should buy a property with good land to improvements, value ratio, as land appreciates while buildings depreciate. But how do you value period style buildings? Because if a standard accounting depreciation is used, the building would be worth nothing, however in many instances they still add value.
Land to improvements ratio is multifaceted and an important factor when considering values. The land is where appreciation occurs, whereas buildings, particularly if they are new or renovated, is typically where depreciation occurs.
However, eventually buildings get to a point where like antique cars or furniture, they begin to increase in value.
It’s helpful to first look at the three core principles of valuing property, which we’ve outlined in previous blogs. These are the direct comparison, summation and capitalisation assessment methods.
Typically, the direct comparison method is the most accurate method to assess period homes.
If you need to determine what the improvements portion of that total value is, the best way to do that is to determine the end value – the total value of the property – then assess the land value component. Then deduct that land value from the end value. That will give you a good indication of what the improvements add, in terms of overall value.
Next question comes from Jay, who asks, should I be looking for suburbs going through gentrification when purchasing an apartment?
Suburbs undergoing gentrification can be a really good option for buying property, as it enables buyers to get in on the ground floor, while there is still a strong upside to be realised.
The problem with gentrifying suburbs from an investment grade apartment perspective, is that due to their lower price points throughout the years, houses were much more affordable. And as such, there often aren’t many investment grade apartments – typically built between the 1930’s and 1970’s – when compared to the more established and affluent suburbs.
Houses in gentrifying suburbs are often a better option, or if you do want to go down the apartment avenue, something with a point of difference, such as a converted warehouse, can be a good option.
Dimitri asks, could you please share the pros and cons of buying a large family house versus buying an entire apartment block (eg 4-6 apartments)?
When looking at investments, there’s three elements that drive capital growth – strong underlying land value, scarcity value and multifaceted demand. The first two elements can certainly be achieved with both of these types of properties. However, the multifaceted demand is going to be more limited with the house. That’s because demand is likely to be limited to a family, or potentially a developer.
A block of four to six apartments has more flexibility to it, as you could potentially sell it off to individual owners. This could span owner-occupiers, first time buyers, downsizers, someone looking for a city base, as well as investors. You could also sell the whole block to a developer or someone wanting to convert the block into a large single family home.
There is also greater flexibility from a rental perspective, as the apartment block has the ability to attract a much larger spread of renters, whereas the large home is only likely to attract families.
Diana asks, do you pay a premium price when buying off the plan or for a brand new apartment?
When buying off the plan, the objective of the developer is to make as much of a profit as possible. They need to factor in a price premium to achieve this. New developments are built to look shiny and new during inspections, but typically don’t hold their sheen well in the preceding years.
Like a brand new car, as soon as you drive it out of the lot, it drops in value.
There is a reason that as an investor you are able to claim depreciation benefits on a brand new apartment. That’s because the bulk of what you’ve purchased is going down in value.
That’s particularly the case with larger developments, where a significant portion of the purchase price is made up of the improvement’s value rather than any notional land component.
Older style apartments in more boutique developments, on larger parcels of land, have a greater scope for growth going forward.
Natalie asks; I’m very nervous about bidding at auction, do you have any tips?
We’ve covered the dynamics of auctions previously, and my initial advice, first and foremost, is if you don’t feel comfortable, then have a trusted friend, family member or advisor bid for you.
Auctions can be a nerve-wracking experience and having someone with the experience and without the emotional attachment can be a much better option.
If you do decide to do it yourself there are a number of key factors to remember:
- Position yourself where you can clearly see and hear the auctioneer and they can clearly see you. If possible also in a position that allows you to see most of the crowd.
- If you are nervous, bid early. This will ensure the auctioneer knows you are interested and will refer back to you.
- Call your bids out – literally. Don’t just nod your head or agree with the auctioneer. This will help you to remember where you are up to and also demonstrate confidence.
- Finally if a property is going to pass in within your budget make sure it passes in to you. This ensures you have first right to the vendor’s reserve price.
Tom asks, should I buy two, 2 bedroom apartments or one house with a budget of $1.2m?
With that budget, I’d tend to go for the house. The stronger land component and greater scarcity value tend to mean that the growth will be stronger.
The benefit of two apartments is that you have the opportunity to diversify or if required you could sell one and retain the other.
Although diversifying with two budgets of $600,000 means that it will most likely only be geographically, rather than style and size.
Holger asks, what does the rental situation look like at the moment. Is it ok to increase rents back to pre-lockdown levels?
As of late November 2022, industry data shows rents and vacancy rates are better than prior to the pandemic. This isn’t necessarily the case for all properties, so you’ll need to conduct an individual assessment.
However, the broader data definitely means that you need to be reviewing when leases end, to ensure you are moving back towards market levels.
Separate industry data, shows those searching for rental properties in Australia from overseas are now back to pre-pandemic levels. Thus indicating migration levels are likely to head back to pre-pandemic levels in the near future. This added dynamic is further increasing pressure on the rental market, pushing up rental prices and sending down vacancy rates.