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Expert warns of apartment pitfalls

20 May 2014 Staff Reporter

Investors buying units or apartments need to be wary of overspending on both the property itself and strata fees, a property analyst has warned.

Neil Smoli from research and investment firm Aviate Group said too many investors buy the wrong type of property, forcing them to sell before the investment has paid off.

“Where an investment property becomes too difficult for the investor to hold in the short term, so much so that they decide it’s easier to sell up and move on, this is symptomatic of the wrong criteria being applied to its acquisition,” Mr Smoli said.

In particular, he highlighted buying an overly large apartment as a potential danger.

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“Take the example of two one-bedroom units in the same market, where one is considerably larger than the other. In terms of the price paid, both apartments would likely sell for the same price per square metre, meaning the larger apartment would be more expensive,” he said.

However, in Mr Smoli’s experience, both apartments are likely to attract a similar rental income.

“The purchaser of the larger apartment, while they may have considered the extra space an advantage, has actually jeopardised their yield,” he said.

In this scenario, he suggests converting the apartment to a two-bedroom, or a one-bedroom plus study, to boost the achievable rent.

Mr Smoli also warns that investors buying into larger, high-density blocks could face higher strata fees than in a smaller building.

“Body corporate fees for apartments in boutique developments, without common grounds like gyms and pools, can realistically be expected to be considerably less than the fees associated with the higher-density apartments,” he said.

Internal competition between tenants in large blocks could also increase vacancy risk and affect sales returns, he suggested.

“While investors make the decision to invest in property by accurately identifying trends, perhaps the most prevalent being the cultural shift among Australians to embrace apartment living in places near major employment nodes, they often fail to consider the many criteria that can identify specific apartments primed to outperform the market average over the long term, in terms of rental and capital growth,” he said.

Expert warns of apartment pitfalls
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