For the strategic real estate investor, buying in a building or a strip of townhouses usually means a more affordable entry point into the market and higher rental yields in some places.
However, unlike a self-contained house, a unit will generally be grouped with a specific stratum scheme, which will see the underlying asset shared by a group of owners; some of whom constitute the committee and have the collective power to call the shots.
Saying this, how can you guarantee that your investment will be properly covered?
Sharon Fox-Slater, Managing Director of EBM RentCover, says that different properties are sold under different titles and that "each one has slightly different legalities".
"The type of title can determine how much land or property the owner owns, who is responsible for maintenance and decision-making, and what type of insurance is needed for best protect investment, "said Fox-Slater.
To avoid being under or overinsured, she advises investors to understand the insurance coverage already in place for their property.
"For example, if you buy a titled property, you generally do not need building insurance, because this is managed by the legal person," explains Fox-Slater. "However, this is generally contrary to community property."
The scheme of strata and statutes may vary from state to state and territory to territory, so it is essential that investors exercise due diligence before performing a purchase.
Edward Love, CEO of LOC Property Group, recommends that investors spend a few years being actively involved in the committee, as this will allow them to better understand the maintenance that is required on the building to ensuring that it continues to attract tenants.
"These plans all have their own little nuances," says Love. "Depending on the age of the scheme and terminology used, [which] may be vague and difficult to interpret, it is imperative that you seek advice on these matters and also consider the responsibilities of the lot for your Particular lot, as this can lead you to have to pay higher levies and bear higher costs than other properties due to the way the plan was originally defined.
A stratum title – How will it affect you?
Most apartments and flats must conform to a stratum title, Fox-Slater of the EBM RentCover action.
"Investors who buy strata complexes are generally responsible for what is inside the four walls of their property," she said.
On the other hand, regarding the building in which the unit resides, Fox Slater says: "Because the structures of the building are collectively owned and managed by the corporate body, the responsibility for Insuring the building or complex is not falling to the owner. »
"It is the legal person's responsibility to purchase stratum insurance, which covers the building, common property and the contents of the common parts of a stratum system," she said.
By already having this type of coverage, some homeowners may assume that they do not need to purchase additional insurance themselves, but Fox Slater says, "They generally need to Homeowner's insurance if they want to cover risks like loss of rent, damage to tenants and legal liability. "
Paying down to the smallest details the repair or maintenance work which will be the responsibility of the legal person or the investor is not always "clear" and "must be evaluated on its own merits ", Love from LOC Property Parts of the group.
"What is the responsibility of an owner or a corporate lot expense is governed by what is set out in the associated plan," says Love, also recommending that investors "investigate relevant to financial data '.
But since each stratum-title and legislation differs greatly from state to state, Love suggests a golden rule for insurance.
"If you reverse your property upside down, anything that stays in place will be covered by your stratum insurance, and anything that moves will be covered by your content or your homeowners insurance policy , unless the legal person asks you to add it to the strata insurance policy like floating floors, "he says.
"It is always useful to consult the history of claims of a property to see if there are significant excesses due to past insurable events which can cause you problems further" Love adds.
A community title – how does it differ from a stratum title?
A community title resembles a stratum title in that there is a shared responsibility for the common portions of the entire real estate asset.
But the difference lies in the way the boundaries are defined, and in the case of a community title, they are related "to the land itself and not to the structural sections of the building," notes Fox-Slater .
"When it comes to securing rental property in a community complex, owners may be responsible for insuring the entire building on their land , because the legal person is only responsible for the structures of common spaces such as entrances or common courtyards. Explains Fox-Slater.
She adds that investors should be aware that community properties often do not provide owner or content insurance, so that in the case of a stratum title, the investor must be ensure that they are adequately covered for these properties.
Community title regimes are most common in New South Wales and Queensland, and are offered in Western Australia, Love from LOC Property Group. He also notes that in Queensland the properties are used for standard, accommodation, commercial and small projects.
"Managing a community title system can be complex and multi-layered. Usually present in large and complex developments, they can often span large areas and consist of a mix of commercial, residential and retail lots with conflicting interests, "says Love.
“Just like in the titles of strata, everything is managed via deposited meetings. The Community Program Committee deals with day-to-day issues and general meetings are held for the larger issues which each lot owner can attend. »
Love adds that, in some cases, new construction plans may be in preparation for the most important asset, such as phased development, and investors should be aware of this.
A company title – what is the probability that you will meet it?
A company title allows a buyer to acquire ownership of a unit in a shared property by purchasing a share of the company that owns the title and the land.
But as this title is based on an older model, the chances that an investor will meet it become increasingly rare, shares Fox-Slater.
Like a community title and strata, she said that a rental property under a business title will not often be accompanied by insurance covering the content, responsibility and risks of the tenants.
"Sometimes construction insurance is also excluded," says Fox-Slater. "So, when buying a property under the name of a business, you really need to find out what is and is not covered, as you may need to insure everything or part of the property. "
The love of the LOC Property Group says it can be the "most controversial form of property".
"There is no real subdivision plan because you actually become a shareholder of a joint stock company for which you buy a limited number of shares in a company and therefore fall under hit the provisions set out in the company law, "Love explains.
The owners are also governed by a "constitution and articles of association" which can sometimes be difficult to interpret, he says.
"On this basis, banks' appetite for lending on these forms of property is reduced and they often refuse to lend or ask for a higher LVR in some cases," Love adds.
He recommends that investors connect with the strata manager to obtain transparent information on a building and the title attached to it.
The great debate on the sinking fund
When it comes to attracting tenants to rental housing, the way the whole building fits becomes just as important as the condition of the asset individual.
Edward Love says that although homeowners are notorious for investing a little more money in the sinking fund of their building – being the collective funds of each owner to maintain the building in perfect condition – investors can sometimes "manage it very thin".
"Where it hurts is that the building starts to deteriorate and you don't get the market rent you would get, for example, compared to a newer building , and I think investors are now getting a little more savvy and looking at the bottom line of how much money is kept in these sinking funds, "Love shares.
The state of the top assets and its financial backbone can in turn affect the performance of the property once it is placed on the market.
Although it is mandatory in New South Wales and Queensland for a sinking fund, Love says this is not the case in Victoria unless it is a corporation prescribed owners (more than 100 lots).
"If the building is showing signs of aging and there is only a small amount of residual funds held in the strata account, it is very likely that you will be served with a special levy and it could be a substantial amount to help reduce the deterioration of the building fabric while improving the overall appearance of the building and common areas, "says Love.
He said that it is imperative to constitute this bank balance and to keep abreast of maintenance work.
"It also reduces the cost of the work, and in case of an emergency, there is always enough money available to carry out the work immediately without having to wait for members to pay or pay. # 39; have to take out an unsecured strata loan, "says Love.
