Investing in a strata property
What is a strata titled property?
Strata title is actually an Australian innovation in property law that has been copied around the globe, according to the Strata Community Association.
Strata title enables individual ownership of part of a property (usually an apartment or townhouse and referred to as a ‘lot’), combined with shared ownership in the remainder of the property e.g. lifts, foyers, gardens, which are referred to as ‘Common Property’. The property management of strata schemes is organised through a legal entity known as the body corporate, strata company, community association or owners corporation and there is usually an appointed strata manager.
Strata Community Association says there are now more than 270,000 such schemes encompassing more than two million individual lots across Australia, including strata-titled retirement villages, caravan parks, resorts and vineyards, although most developments tend to be for residential, commercial or retail use.
What does strata cover?
Strata fees, or levies, cover maintenance of any shared or common areas in a building, for example garden areas, foyers, elevators, gyms and pools. According to realestate.com.au, there are three main types of levies:
- Administrative fund levies
These cover the day-to-day running of the scheme, such as cleaning, gardening, strata management and the paying of utility bills for common areas.
- Sinking fund levies
Sinking fund levies are typically used for bigger or longer-term projects such as building works, painting, plumbing and repairs.
- Special levies
Special levies are usually unexpected and might include major building works and repairs such as a new roof or elevator. They require every owner to chip in extra funds and are not part of the administrative fund levies.
Are units a good investment?
The pros of strata investing
With a strata property investment, you benefit from:
- Lower costs of the property in relation to the land it occupies Buying a strata titled property can be cheaper than buying a freestanding house where you’re paying a premium for land. If you buy in a metropolitan area with plenty of demand from renters then there’s still significant value in investing in a strata property.
- High demand from renters If the complex you’re buying into has all the mod cons, such as a pool and gym, you shouldn’t have any trouble securing renters. If you buy in a popular area you might also expect good capital growth over time.
The cons of strata investing
Investing in a strata titled property also comes with watchouts:
- Strata levies can be high Even though strata levies can reduce the amount you’ll pay for the property overall, make sure you check how much you’ll be required to pay each quarter and factor that into the overall price. Modern apartment blocks with advanced common areas that include elevators, swimming pools and fitness facilities, tend to have higher levies.
- If one block owner sells at a low price, you may find your strata property loses value too Unfortunately, such issues are beyond your control. This is a risk inherent in strata investing and something to think about if you’re worried about getting into financial difficulties.
- Noise Investing in a strata titled property, where there are multiple owner occupiers and renters, means you may face disruptions that make it noisy to live in a strata property.
What are the strata fees?
Strata fees will vary widely depending on what you’re buying. A modern apartment with an elevator, pool, gym and garden, for example, is likely to have higher strata levies than a unit in an older-style building with no lift or on-site facilities.
What is the difference between Torrens and strata title?
A strata title refers to some parts of the property being shared and maintained by all of the apartment or unit owners collectively, whereas a Torrens title property refers to one in which the purchaser owns both the house and the land on which it stands.
Apartments and townhouses tend to be strata title, however it’s not uncommon to find Torrens title townhouses too.
Is strata tax deductible on an investment property?
Typically yes, strata is tax deductible on an investment property. The ownership of the common property varies according to the relevant state strata title legislation. However, in all states, the income derived from the use of the common property constitutes assessable income of lot owners.
Accordingly, expenses attributable to the derivation of the income from the common property, such as depreciation and capital works, may be able to be claimed as deductions by the lot owners in proportion to their lot entitlement.
You may be able to claim a deduction for body corporate fees and charges you incur for your rental property.
Anything else I should know?
- It’s very important to make sense of strata levies before you purchase. Check the contract to find out exactly how much they are – and check the frequency. For example, one agent might tell you strata fees are $1400 and refer to them being paid a quarter and the next agent at a different property will tell you they are $8000 and be referring to annual costs. Be sure you know the breakdown.
- Also check for special levies. Some people will sell their apartment with special levies attached. Make sure you read and understand the contract carefully. You don’t want to purchase a place and not realise you owe $15,000 in special levies for the installation of a new roof – on top of the $1600 a quarter you’re paying into the administrative fund.
- Beware that if you’re looking at large blocks of units, with 80 apartments or so, some lenders will only lend to 10-15 units in that complex and not accept any further loan applications in that building. This is because they don’t want to over expose themselves.
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This information is general in nature, and you should always seek professional advice when making financial decisions.