How to avoid a 'lemon' when buying an investment apartment: Frank Valentic

Owning a home has long been a dream for most Australians.  In recent years, the property squeeze has forced many potential buyers to look at other alternatives such as units and apartments. With people living busier lifestyles today, apartment living is proving to be a very popular option.

In fact, over a quarter of our population (27.3%) are now living in units and apartments.  More people are choosing to leave the quarter-acre suburban block behind that was popular in the 1990s and opting for the “lock-up-and-leave” advantages of an apartment.

Consider also the hundreds of thousands of immigrants moving here from Europe and Asia, with many of them also buying apartments. In these parts of the world, apartment living is the norm – generally because it is very affordable compared with buying a house. Low-maintenance living is the way of the future and in my opinion, is here to stay.

With the above information in mind, it would be remiss of me not to mention the flipside of apartment buying. To avoid purchasing a “lemon”, be prepared to do some homework, as it will save you lots of dollars and heartache in the long run.

Not all apartments will make profitable investments, mainly because some of them achieve minimal capital growth over the long term.  This is due to a multitude of factors and may include things such as: exorbitant body corporate fees that eat into your rental returns, buying in a low-growth location or simply buying in a bad position.

Our buyers’ agency has adopted a strict “investment-grade” criteria in helping over 2,000 buyers purchase apartments in the last 12 years.

So what are some of the advantages of apartment living?

•             Less repair work – An apartment will generally require far less maintenance and repair work than a house, which will always have more structural issues including plumbing, wiring, stumping, roofing and much more.

•             Minimal maintenance and general upkeep – Houses generally require more attention in terms of ongoing maintenance than that for apartments. There is no need to mow the lawn or do the gardening.  Leave this to body corporates. Enjoy more time to yourself on weekends to do the things you love.

•             Access to leisure facilities – Depending on what you buy, you might have access to communal leisure facilities such as swimming pools, gymnasiums, barbecue areas and bar/restaurants.

•             Higher investor returns – For investors, the returns are generally 1 to 2% higher than for houses.  This results in better cashflow and less money out of investor’s pockets.

So how do you avoid buying a “lemon”?

Here are some of the things we look for that will make your next apartment purchase easier and more profitable.

1.            Scarcity value

Ensure you buy an apartment in areas where the local council has strict height planning controls.  This will ensure you are not competing with thousands of new apartments each year.  If you look at areas like Elwood or St Kilda, height controls are generally restricted to four-level high buildings. This ultimately adds more scarcity value when compared to buying in Port Melbourne or South Melbourne, where new high-rise towers can shoot up like mushrooms every month.

2.            Land value

Apartments can still have “land value” if you buy in small boutique blocks of 10 or fewer. Make sure you are not one of 100 or more apartments, as this will substantially diminish your land-to-value ratio.  Remember, it is the land that appreciates and this will ultimately determine your property’s value and growth potential. Keep in mind, low-rise buildings where fewer units share the benefits of rising land values will increase in price faster than high-density developments. Therefore, buying an apartment in any high-rise building would be a costly mistake, as you would be compromising on land value and hence, future capital growth potential.

3.            Location

The three golden rules in real estate 101:  1.Location! 2.Location! 3.Location! Buyers should look for suburbs that have strong, positive attributes. If you get the location right, capital growth should follow. Look at buying an apartment that is walking distance (not car dependent) to cafes, schools, parks, water and transport, as this will supercharge your investment potential.  Add to this a quiet, wide, tree-lined street to further enhance the property’s value.

Check out the walk-score distance on walkscore.com to determine how close or far away you are from these popular amenities.  If it’s a score over 70, then you are more than likely too far to walk. Having said that, avoid “C-grade” locations such as main roads, train lines, close proximity to petrol stations and power lines, as this may have an adverse effect on the value of the property.

4.            Appealing aspect

If it has a negative view where you are looking straight into a brick wall, this will impact the growth potential of an apartment.  Any apartment with a park, city or water view will always have a broader market appeal and ultimately be in stronger demand.  Sometimes it’s better paying a 10% premium in price to get one with an appealing aspect or view.  Cheap apartments will always be just that:  cheap and inferior.  Go for upper-level apartments, as they generally have better views and superior aspects.

5.            Sunny orientation

If an apartment is not facing north or north-west, it more than likely attracts little sunlight. Apartment buyers tend to prefer bright, sunny and well-lit homes that require more energy-efficient and sustainable living arrangements, as this helps to save on growing electricity bills.

The next time you’re out apartment hunting, bring your compass along (or use it on your iPhone) and make sure the living areas are not facing the less preferred, dark southerly orientation.

6.            Security

buy apartments in complexes that offer full security features such as security gates, security doors and intercom systems. This is especially important for females living alone. Although ground-floor apartments have advantages of entertaining yards, upper-level apartments are more secure and harder to break into. Avoid suburbs and streets (eg: Grey Street, St Kilda) where security concerns will limit the numbers of interested tenants and future buyers for your property.

7.            Other amenities

Aim to buy an apartment that has supporting features such as car parking, an outdoor area or private laundry.  An ideal find would include things such as:  an apartment with a distinctive hallway entrance rather than walking straight into the lounge from the front door and a central bathroom as opposed to an en-suite bathroom, as you don’t want to be walking through a bedroom to get to it.  The preference also is to have a practical floor plan that allows for better living arrangements, such as: not having bedrooms running off living areas.  It also works to your advantage if your apartment is on the corner of the building with only one party wall.

8.            New vs old

As a general rule of thumb in real estate, stay away from buying “brand new”. It is not uncommon practice for the developer to load up the price by an extra 10% to cover the GST they would have to pay when constructing a brand new property.  Buyers are better off buying something that is one or two years old to avoid paying GST.  Keep in mind, brand-new properties are often sold at premium prices and can be “loaded up” if sold through marketing and promotional agencies.

The same goes with buying off the plan.  Even though you may save on stamp duty, you would still have the GST component to pay, which offsets this supposed saving.

9.            Wow factor or ‘twist’

Aim to buy an apartment “with a twist”, meaning, there needs to be a “wow factor” about the property that sets it apart from the tens of thousands of apartments in Melbourne.  This could be in the form of a courtyard, the size of the apartment or simply park or water views.  It needs to have a USP – a unique selling proposition that differentiates it from other similar properties. If it has the extra bells and whistles and generally ticks more boxes than other comparable properties, you will be well on your way to securing a great investment.

In summary, we would generally recommend buying older-style apartments that you can add value to via internal and external renovation. Remember: you can change an apartment’s characteristics but you can’t change its location or aspect, so aim to buy a property in the best street and the capital growth will follow.

Our buyers’ agency has purchased over 60 blocks of apartments in the last few years that we can “bulk-buy” and add instant value to with sub-divisions and external/internal renovations.