Buying an apartment in Melbourne is a risky task with many factors that must be considered to avoid a property money pit. Mark Ribarsky, a real estate commentator looks at the problem’s buyers face like negative equity, poor capital growth, low rental yields or property that’s hard to lease or resell. Also some hot tips on buying the right apartment. Reference article: Buying An Apartment In Melbourne. If you have any questions on buying an apartment, feel free to comment below, we’ll have it answer ASAP.
APPARTMENTS, ARE THEY A GOOD PURCHASE? | Transcript.
00:32 Ben: Okay. Hi guys, it’s Ben here. Today we’ll be talking to Mark, who is a leading buyers agent in Melbourne. Has years of experience buying and selling properties in and around the Melbourne market. Today specifically will be talking about buying apartments. And what some of the pros and cons are.
Firstly, we’ll be talking about apartment money pits. Things like negative equity, low rental yields and why apartments can be hard to sell. We’ll talk about how mistake… We talk about the mistakes that buyers make in this process. And finally how to buy the right apartment. So let’s jump straight in. So it’s safe to say, you’ve bought and sold a few apartments in your time, Mark. Is that right?
01:13 MR: There has been a few. Yes, Ben, that’s correct. Yeah. [chuckle]
01:15 Ben: Well look, personally, there seems to be a sort of general notion out there that buying apartments are bad ideas for investments. Is that true?
01:26 MR: Well, that’s straight into it Ben, but look there is a lot of purchases that are riddled with problems when it comes to the finance side of things. But look, we’ve been buying apartments successfully that have increased in growth. But yeah, there are a lot of rules around what you can and can’t buy to make sure that it is a good investment. Typically most apartments are… So you could say that, yes, that they’ve been bad investments based on what people have bought it for off the plan and what they’re selling for these days, so.
01:55 Ben: Sure, okay. What are some of the most common problems that buyers run into when considering apartments as investments?
02:02 MR: Sure. Just a couple of simple ones are things like negative equity. So they’re basically not… The apartments don’t have the same value that they have when they were initially purchased, when settlement comes. In Melbourne, we’re finding that apartment buyers are generally losing about 20% of a property’s value, if not more, in some cases, if you’re buying directly in Melbourne CBD. We’re finding that apartments have got small floor plans these days. The problem with small floor plans is that you will struggle to attract tenants that are willing to pay in premium rent. And also issues with lighting and then resell as well. Trying to get rid of these apartments are really difficult. Hence why the only strategy sellers have in place is price reductions. There’s big issues with fire cladding, that’s another massive one. I’m sure you’ve heard of that.
02:55 Ben: Yeah. A lot of people that I know that have bought apartments are really struggling to get rid of ’em because of the fire cladding issues.
03:03 MR: Spot on, spot on. Yeah look, with a lot of our clients that have come into it, so they come to us and saying, “Hey look, Mark, I’ve got this apartment, what do we do? We’ve got this fire cladding issue where it’s been deemed as having defective materials on the front of the building that can potentially be a hazard during a fire.” They’re finding that they can’t even sell it, that buyers will go nowhere near it. And once again, that all comes down to really poor capital growth. They’re the main areas that we look at when we buy properties, and we just wanna talk a bit about how to stay away from these areas and taking the right steps in buying the right kind of property the first time around and just avoiding these issues.
03:45 Ben: So it seems that our buying apartments can be a little bit more complex than buying your standard sort of house or unit. Would you say that’s true?
03:54 MR: Yeah, definitely, Ben. That’s definitely the case.
03:56 Ben: Yeah, fair enough. Well, I guess a lot of investors that have bought a few properties in the past, they might find that they wanna move into apartments or find that there’s a good opportunity in apartment buying. What would you say are some of the most common mistakes that an investor could make when considering an investment in an apartment?
04:14 MR: Yeah, definitely. Look, things that we’ve discovered is the cost of upkeep. For example, there’s body corporate fees that are very high and they’re hard to maintain. For example, in Docklands in Melbourne, there’s a lot of apartments there that don’t have the common services you would expect from an apartment. But they’re charging upwards of $10,000 per annum for body corporates. Body corporate fees to maintain these buildings, which is quite a lot of money. Some of them charge up to $15,000. So you wanna make sure that the body corporates are manageable by you as an investor. Or even if you’re moving into a property, you wanna make sure that they’re at reasonable rate. You wanna do things like check the minutes in meetings and make sure there’s no major concerns with structural issues in the building. I can see them being aware of a lot of issues that have cracked buildings. A lot of issues around damaged balconies. So balconies, it’s quite common for balconies to have water damage and the body corporate would have to pay for the replacement of all the balconies in the whole building, which could be hundreds of thousands of dollars.
05:20 Ben: That information about body corporate fees and any maintenance issues, is that sort of readily available, or do you have to do a bit of digging?
05:27 MR: You do have to do a bit of digging, yeah. And there’s quite a bit of research in that. So things like checking the minutes of meetings when you get the contract of sale, you can find it there. But typically, a lot of these issues might not come up immediately. So essentially, there’s a number of different ways you can look through. I guess, council warnings that have been issued through different government websites that have notices that have been issued against defective fire cladding, for example. All these kinds of issues need to be looked at as a cost that falls back on the body corporate. And it ends up falling back onto the owners, which ultimately gives you a very higher cost of upkeep when maintaining the apartment.
06:09 Ben: Obviously location of your investment is important in real estate. Does this general rule apply to apartments? Can you buy an apartment in a bad area?
06:20 MR: Yeah, that’s a really good question. Look, the properties that we found that have the best capital growth generally aren’t in the CBD, even though there are some pockets and certain streets that will prove that theory wrong. But generally speaking, most apartments aren’t the best in Melbourne CBD just because of a large oversupply. And you also wanna make sure you’re not buying too far out from the city as well. There is a hot zone. Anywhere from about 8 kilometres radius around Melbourne, it seems to be a really, really good buying spot. There’s a lot of criteria that we look at at what filters a good or bad property. But having this location that’s around this hot zone of Melbourne is… Or basically any capital or major city, sorry, is really good buying because these suburbs offer excellent facilities like cafes and places to hang out, shop, places to do things. For example, going to the movies and lifestyle amenities that tenants and homeowners look for. And that’s typically the places that are most desired by buyers when it comes to buying these kind of property.
07:28 Ben: You mentioned CBD apartments, Mark. Generally speaking, we think of investments that are closer to the CBD are generally better investments, generally speaking, of course. So then one might assume that buying in the CBD, that’s the ultimate goal. Can you talk a bit more about that?
07:45 MR: Yeah, look over the last five years we’ve had a massive influx of apartment buying. So generally, I would agree there’s many apartment markets around Australia that are doing really well in their CBD. But in Melbourne there’s that much supply that it’s actually given us a situation where it’s dime a dozen property. There’s nothing special about the property, firstly. And people basically can’t tell the difference between one apartment and the other. The only thing that’s really going on with these buildings is different parts, they’re offering different parts of the city. And that’s where the better ones have been in the posher parts of Melbourne. But when you kinda go to the parts that are less desirable in Melbourne, you’ve got these high rise building complexes that are 10-plus storeys up to 40, 50 storeys, and they’ve got so many apartments in there that you just can’t tell them apart. It really is important to get something that’s special that is unique and that doesn’t have an oversupply of property.
08:45 Ben: What you’re saying is that it’s generally better to stay away from CBD apartments?
08:50 MR: Look, I am. If you’re not gonna use a buyers agent that understands the market and the hotspots, I would really think that it’s probably just wise to stay away from that market just in general, just because it’s so plagued with mistakes and the ability to pick up something that’s a cash flow disaster is definitely there. So yes, stay away.
09:09 Ben: Sure sure. Well, in that case then, what are some good qualities of apartments? What should we be looking for and what can make a successful investment in an apartment?
09:20 MR: Sure. So some of the criteria myself and my buyers agency use… Just very generally look at things like having a minimum size of apartment, make sure it has good lighting, as many windows as possible, there’s a healthy balance of apartments and residential in the property. So for example, there is residential apartments and also the rentals as well. We don’t have too many rentals or hotels or commercial-concept properties inside of a complex. We wanna look for something with a low level of apartments per level and also a low number of floors as well. Secure car park is obviously very important. Lifestyle options, things like cafes, shops, parks, beaches, things that really, really get a tenant out of their property and enjoy what’s in the surrounding suburbs.
10:10 MR: High rental returns. You wanna make sure you get your best rental return possible. Always aim for a 4% per annum and certain prox… You wanna have good proximity of the city, public transport, things like that. Wanna make sure that it’s approved by the Fire Safety Board, they don’t have the cladding issues. And also making sure that you always read the minutes of meetings that are out. So you wanna make sure that there isn’t any highlighted issues that have come out and maintenance issues that are out there. So they’re the main things what you look at when it comes to buying a good quality apartment. There is a lot more that we applied to it, but that generally would make sure that you’re ticking most of the boxes that will protect you and make sure you’re buying a good quality property.
10:54 Ben: Thanks very much Mark, that’s been really informative. If some listeners are wanting more information about buying apartments, where can they find that?
11:02 MR: Look, you can leave some comments below in this podcast, and we normally answer those pretty quickly. We’ve got a couple of great articles on the Wise Real Estate Advice website as well, just on buying apartments and pretty much what we’ve talked about today. The pros and cons, and we got a nice little checklist as well, and what you should have when it comes to buying an apartment.
11:22 Ben: Really, thanks a lot Mark. Well, that’s it listeners, thanks for listening. If you have any questions, feel free to leave a comment below. We answer everything that we receive. And also feel free to subscribe if you’re enjoying our content and wanna hear more from us. Thanks guys.