Purchase or Pass? Chris Gray looks at high strata fees in Coogee
On this week's Purchase or Pass, Chris Gray is joined by Stuart Waugh director of Bell Partners Accountants to take a look at an investment property with high strata levies to decide whether they think it’s worthy of a purchase.
As always, we’re assuming the location is a given, it’s more the finer details we’re trying to analyse. This week we have a two-bedroom unit with parking, 7.8 kilometres from the Sydney CBD and 700 metres from the local action.
It’s in a blonde brick block of nine units, which isn’t that attractive. The unit itself is on the top floor and faces north so it gets plenty of sunlight. It’s in good condition and has a balcony for some outdoor living and the strata fees are around $1,200 a quarter. What are the initial thoughts on the description?
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Stuart Waugh: I don’t mind it. The initial purchase price and the initial rent looked quite attractive. I mean, we’re going to talk about the strata levies in a second but from initial thoughts and the photos I’ve seen, and also the way it faces and the rent you’re getting for the purchase price, I like it.
Chris Gray: Yeah, so certainly all those pictures it’s perfectly livable, there are plenty of trees in the background and an ocean view, so generally it does look pretty good there. One of the things it said on the advert was pet friendly, now with a lot of young people these days, not everyone’s getting married in their twenties like the old days. Pet friendly has got to be another bonus as well, doesn’t it?
Stuart Waugh: It is for people who like pets, for people who don’t like them –
Chris Gray: I hate them myself.
Stuart Waugh: Yeah I’m not a huge fan of pets myself, especially in an apartment block. For people who want to bring pets it’s a big plus.
Chris Gray: Obviously the blonde brick is a bit of a negative there; it doesn’t look that pretty, but again that can be rendered for a price. So really it’s the strata fees, so $1,200 a quarter, we would probably look around $750, so an extra $500 or $600 bucks, do you think that makes a difference?
Stuart Waugh: It makes a huge difference. It’s more the outgoings Chris, it’s not just the strata levies. The strata levies are a part of that obviously, but you’ve got rates, you’ve got land tax if that comes onto it as well, a special levy, that comes onto it as well. They’ve got to look at all the outgoings as far as what they blend together, whether they make it affordable or not. The other thing with this one though, I thought the rent was quite attractive at $650 against $695,000, it’s getting up towards 5%, so I did like that and that will make it very affordable as far as the strata levies.
Chris Gray: Yeah, I mean the big thing is I’m just doing my accounts, we’re only a week into the year but I’m trying to get my accounts done in advanced so I know where I am with things. A lot of my expenses used to be 1% of the property value, now they may be 1% to 1.5%, so again another $500 is suddenly another $2,000 a year. Sure, it’s tax deductible but it does start to mount up with all the other figures doesn’t it?
Stuart Waugh: It does and you have to try to make sure you’re getting the growth out of the property for the maintenance fees you’re paying. I mean ultimately, a strata levy is a maintenance fee, so you’re maintaining your asset; therefore you’re trying to maintain your growth to make sure you can pay yourself back.
Chris Gray: Now the other thing I thought I’d bring up is, look if they’re raising money to maybe put on another level or some bigger balconies or even glass balconies. Sometimes that can be a good thing, rather than raise $10,000 on a special levy they might add an extra $500 on for the next few years. So you do need to look at the reason for the high levies, but if it’s generally that they’re just not doing anything and it’s high levies then it’s probably not a good thing.
Stuart Waugh: And that comes in to it. If you’re going to be a person who holds that property for a long period of time, hopefully if you’re a good part of the body corporate there, you might say, well yeah you are going to put something into the property in the next five years and if you’re going to hold the property for ten years, you’d be part of that improvement.
Chris Gray: So a purchase or pass for you?
Stuart Waugh: I say purchase.
Chris Gray: Well this property does tick a lot of the boxes but cash flow is already negative in those inner city areas and strata fees over $750 a quarter do drain a cash flow so for me, until I see the strata reports and see what they’re putting in to it, I’m probably going to pass on this one for the moment.
