It’s little wonder that property buyers avoid properties with higher than normal strata levies but this could be a very big mistake!
There can be a number of reasons for a strata building having high levies. The most common reasons are:
+ Rectification work
+ Regulation upgrades
+ Poor or corrupt strata management
+ Improvements to the property which often increases values over time
The good news is that most of these issues can be solved, and once this occurs the values of each property rises substantially. Buying a property with higher than normal strata levies can be an amazing opportunity in disguise. You see many buyers prefer to look for properties with low strata levies. These same buyers will look to renovate the property to increase the value.
Let me share a story of a couple looking for a 2 bed apartment in Surry Hills.
The couple wanted a property that would rise in value over the next 3 to 5 years so they thought they would buy a property with low strata levies. They looked at more than 20 properties over a 6 month period. They were steering clear of properties with high strata levies and focusing on properties that were renovation opportunities with a view to renovate and improve their value.
They eventually purchased a property for a little over $1,450,000 and the strata levies were $1,700 per quarter. They ignored a better property that they could have purchased for around $1,300,000 because the strata levies were $3,200 quarter. They never investigated why the strata levies were high because this was not their strategy. They thought that purchasing a property with strata fees of $1,500 per quarter less would achieve savings of $6,000 per year which they could use to renovate.
Sounds like a sound strategy, right? WRONG!
The apartment they passed up that was $150,000 cheaper in price and would have saved them $6,000 a year in interest payments alone for many years You see special levies are usually only temporary and once the works are completed and the building has been improved these levies come down. The net result is an improved building, which is more desirable for buyers, and this creates demand for the property.
And guess what… the prices go up!
So it seems that a clever strategy would be to do the opposite of what most buyers “sensible” logic suggests.
+ You can end up buying a cheaper property
+ The high strata levies stay high only for a short period and then return to more acceptable levels
+ The value of the property is more likely to increase over the medium term
+ Even though the strategy seemed like a higher risk strategy you receive a commensurate higher return
In this example the lower risk property cost $150,000 more meaning you were paying more interest. This difference was some more or less equivalent to the addition strata levies. The difference is that the strata levies are only a short term cost whereas the interest cost stays for the life of the mortgage or until you sell.
Also the buyers who bought for $1,450,000 instead of $1,300,000 still have to spend money on renovations but have higher carrying costs for the life of their investment. The purchaser who buys the higher strata levy property also has to spend money on renovations but has a lower cost base and a lower running cost (interest rate cost plus strata levies) once the levies are reduced. More importantly they have a much bigger capital gain potential because they bought cheaper and have a fully renovated complex which buyers love.
So take your time and think through the full picture before you dismiss some properties. You may be missing a great opportunity.
Good luck with your property search!