Real estate: Pam Walkley
Consider all the costs when buying an apartment or a place in a lifestyle community
More and more Australians are embracing alternatives to the traditional freestanding home on a quarter-acre block (just over 1000sq m) as its cost has become prohibitive for many, especially in our major cities. But apartment blocks, townhouse developments, and the alternatives for older Australians – retirement villages and over-55 communities – have their own financial traps.
Many of these are strata title, meaning you own your apartment or townhouse as well as sharing ownership over “common property”, such as the driveways, foyers, swimming pools and gardens. The common property is managed by a legal entity, usually called the owners’ corporation or the body corporate. To cover these expenses, as well as insuring the building, individual owners pay strata fees, which can be very high.
The more bells and whistles your strata property has – lifts, swimming pools, gyms – the higher the fees. In NSW, for example, average strata fees range from 0.3% to 1.2% of the property’s value: 0.8% to 1.2% with facilities, 0.3% to 0.7% without facilities.
Before buying an apartment, it’s important to do your research. This includes looking at strata reports and may involve enlisting the help of a conveyancing lawyer. In the strata report you’ll find expected levies and fees for the year – these can be a significant hit to the hip pocket, especially if you’re in a fancy new building. Body corporate fees should be considered along with mortgage repayments to determine if you can afford an apartment or townhouse.
For investors, fees will impact your returns. For example, a three-bedroom, two-bathroom apartment in Hunter Street, Newcastle (for sale at the time of writing for $695,000 with an estimated rental return of $31,200), would show a gross rental return of 4.5%. But after rates and levies totalling $10,134 ($8455 strata fees) are deducted, rental return falls to 3%. Other costs such as management fees, advertising, repairs and maintenance would reduce this further, probably closer to 2%.
When considering a strata title, also pay attention to the building’s history of repairs. For example, if there have been repeated structural repairs it may be best to steer clear – even more so if special levies have been raised to pay for the work.
Relatively low-cost lifestyle villages or manufactured housing estates (also called land lease developments) where residents buy their own home but lease the land are growing in popularity. They are generally restricted to those aged over 50 or 55.
The housing affordability problems, short supply of downsizing dwellings and lack of savings for many people entering retirement, are set to drive further expansion of the sector. Listed companies, including Ingenia Communities (ASX: INA), with estates in Victoria, NSW and Queensland, have proved popular with investors. Lifestyle Communities (LIC), with estates in Victoria, has also performed well. At the time of writing the share prices of these companies have grown 20% and 37% respectively over the past 12 months.
People buying these properties enjoy the benefits of relatively affordable prices for well-maintained or new prefabricated homes with communal facilities, which can include gardens, pools, gyms, libraries, bowling greens and clubhouses maintained by the operator. Buyers pay no stamp duty because the land is leased. And many operators do not charge exit fees or claim any of the capital gain if you sell your home.
At Ingenia’s Hervey Bay on Queensland’s Fraser Coast, for example, you can buy a two-bedroom, two-bathroom home from $275,000. The company describes the development as a boutique oasis of contemporary living with a big range of facilities.
Of course, the downside in buying into any of these developments is that you have to pay the operator an average site rental fee of $120-$300 a week.
Generally, pensioners are able to offset part of this cost through the federal government’s rental assistance scheme. The maximum assistance is $139.60 a fortnight for a single and $131.60 for a couple.
Because you only lease the land, big considerations are how often and by how much site fees can be raised, and security of tenure. All states and territories have their own rules so research them and your individual contract before you sign up.
Certainly for many older people, lifestyle communities are a more affordable option than retirement villages. And if you do decide to sell, most operators don’t charge deferred management fees, as levied by most retirement villages. These can amount to 35% or 40% of the sale price of an individual home or unit. Some retirement village operators also take a cut of any capital gains.