Under the right conditions, buying a block of units can be a great investment as it is often at a good price and the potential for return on capital and good rental income is Student.
But the coronavirus pandemic has placed the entire property market in extraordinary circumstances – investing in this type of property right now also requires extreme caution.
Scott O’Neill, founder and director of real estate investment firm Rethink Investing, recommends investing in unit blocks only "if the net return accumulates".
He says that a "block of units with a gross return of 6%, but with expenses that reduce the net return to 3%", for example, is not an option viable. In such cases, he rather suggests "investing in another asset class for better cash flow", such as commercial properties "where the net return in capital cities can exceed 7%".
The pros
However, O’Neill says that investing in unit blocks in the midst of all the uncertainty in the market still has its advantages.
"You can have multiple sources of income, which can spread your income risk due to the multiplicity of tenants," he says. "The chance that you will have them vacant at the same time would be very small."
O’Neill adds that unit blocks offer investors a lot of flexibility when it comes to selling.
"There are often opportunities for strata titles that allow the division and sale of units individually," he says. "Yields are generally higher than self-contained units or houses in the same suburbs."
The disadvantages
Unit blocks are not inexpensive, and investors often need a considerable amount of money to pursue this option. O'Neill says that lenders often treat three or more units under one title as a business loan, which requires a larger deposit.
He added that "although there may be opportunities for strata titles, the work required to get them approved can often be very expensive."
"Firewall installations, for example, will erode the profit margins preserved from individual sales," he says. "In addition, the market for individual sales of units may not be strong, particularly in the COVID-19 environment."
O’Neill says that municipal rates also increase after ownership has been divided, as dwellings become "measured and assessed individually for consumption by city council".
"While the returns may be higher, so can the expenses," he says. "Maintenance can accumulate, especially when you have more than four separate tenants in an old complex. The board and water rates will also be much higher than the standard house. »
Residential or commercial: where to invest?
According to O’Neill, commercial assets always produce a "higher cash flow" compared to housing blocks.
"The key is to calculate the true net figure by calculating the full rent minus all expenses such as rates, water, maintenance, insurance, vacation pay and rental management, "he says. "Once all these costs are taken into account, it is rare to find a net return which would correspond to that of trade."
He says that the tenants pay the expenses of the commercial buildings.
"Very high-yield properties with long leases will be in high demand because the residential markets have weaker growth prospects," said O’Neill. "More people will be rushing to trade for the cash flow that residential properties cannot offer."
The future of the commercial real estate market in Australia
The COVID-19 pandemic has changed the number of businesses and O’Neill expects these changes to have a significant impact on the future of the commercial real estate market in Australia.
"Marketing expenses can change," he says. "Less money will be spent on [face-to-face interactions] like conferences and more will be spent on online marketing. Retail stores may find that operating 100% online may be a better financial option. »
"As a commercial investor, you need to think about how these types of changes can affect trading assets. For example, I see the strength of industrial markets as local manufacturing develops and there is a greater need for storage as online sales explode. »
O'Neill adds that some companies that use industrial properties are apparently impervious to the impact of the pandemic.
"The majority of companies related to logistics, trade and storage were able to operate even in the worst moments of the closure," he says. “In most cases, you need to target essential service and industrial properties. If you stick to these types of properties, your chances of success will be greater in these strange times. »
