- Hey, it's Connie from Prosperity Finance.
Now recently we got some inquiries
about buying apartments as investment property.
Now normally when I help clients with the inquiry,
firstly I normally ask why.
Why you want to buy apartments or rental property?
The most common answers are,
number one, it's more affordable compared buying a house.
Now especially if your budget is limited,
let's say you have 600K as your budget,
now to buy a decent quality of house freehold
is pretty hard in Auckland.
However, with apartments it's relatively easy,
you could have many options.
Now the second most common reason
of buying apartments as investment property
is the good cash flow or good rental yield.
Now we all know investment property,
we need to make sure we have a positive cash flow.
Otherwise, we have to tap in more money
from our own pocket, depends how much you have
to contribute.
It's a lot of burden for us.
So have a positive cash flow investment property
is really important, and also help you to borrow more,
as the rental income is part of your total income
that helped with a serviceability.
However, in today's video, I'm going to share with you
my opinion about what are the downsides of buying apartments
as rental property so that you can weigh up
the pros and cons and make informed decisions.
So firstly, normally there's a body corp attached
with apartments or unit title property,
the amount of body corp it's driven by the total body corp
for the whole apartment block.
So with a very high maintenance,
the building like very old apartment building,
generally total body corp is higher
because they need to spend certain amount of money
to maintain the building.
Number two reason is if there's a lot of common area
like lifts or the landscaping area they need to maintain,
therefore, there will be a higher body corp amount
for the whole building.
Then they allocate according to the floor area.
So if you have a good size of apartments,
you have to pay more body corp compared to
a smaller apartment units in the same building.
But generally speaking, we see the body corp vary from 3000
a year to about 10K a year.
So it can be really significant.
So if you really after the cash flow
from that apartment rental property,
also bear in mind how much you have to pay
for the body corp because your tenants is not going to pay
that it will come out out of your pocket.
So you need to take into account the body corp
into accounts when you work out the net yield.
The second reason that you need you need to be careful
with buying apartments for rental purpose
is the limited capital growth.
We know with our apartments, there's only just one base
at the bottom it's not like a freehold,
you have your own kind of a piece of land.
With apartments is really the value driven
by supply and demand.
The capital growth normally it's quite limited
and also very fluctuate in terms of value.
That depends which kind of property cycle you in.
Also, recently because the Auckland Unitary Plan
there are more houses to be built under a high density area.
So it's really common to see apartments
and new apartments and new terraced houses.
Because that's a trend going forward.
So with more and more apartments being built,
especially in the city area,
then potentially there'll be more supply than the demand.
Therefore capital growth is even subdued.
So be careful with that because you, you not only after
the cash flow, you also want some capital growth.
Otherwise the cash flow won't make you wealthy, right?
So it's a cash, it's a capital growth.
The next point is apartments, if it's leaky
then despite is your own unit or any parts of the apartments
even the common area like carpark
or other parts of the building,
then you have to pay the bill as well.
Now normally, if that's happened, bank will get notified,
this apartment block is leaky.
So they will no longer take your apartments as a security.
So that's number one issue, number two issue is,
if it's a leaky, the bank won't fund you the repair,
so you have to find the money somewhere else.
So it's a chicken and egg thing, you know?
Sometimes you need the extra money to pay for the repair.
But the bank say I'm not going to finance that.
Unless it's not leaky.
So it's become a dilemma, right?
So be careful with apartments, if it's, you know,
has leaky potential.
Now, the next thing is about finance is quite tricky,
especially when we are going through
the slump property cycle where the property actually dropped
in value, or we're going through economic downturn
like now, we have COVID-19.
Now, bank policy for apartments purchase change rapidly.
Now recently we saw a bank reduce the LVR for apartments
to 65%, despite the normal LVR is 80 or 70,
depends on what the purpose of the property.
So they reduce LVR because they want to reduce their risk.
So apartment because of the volatile bank
is really careful about that.
So normally when you have to finance apartments,
the bank want to know what is the size of the apartment.
If it's too small, the bank may not fund it at all
or only lend 50% on the value.
Now what is the minimum size?
It's actually depends which bank you talk about
that from the 40 square meter.
So I'm talking about the floor area
that excluding a balcony size.
So, if the floor area 40 square meter or more,
then you probably have a better chance to get a finance.
So, some bank use a 40 some bank use 50.
Some banks size is driven by a number of bedroom.
If a one bedroom needs to be minimum 45, if a two,
the minimum is 55 square meter so size does matters.
So smaller apartments like less than 40 square meter
is really hard to get a finance for,
you probably experience reducing value for the apartment
like that dramatically during economic downturn.
The bank just not funding at all.
So the only buyer to buy your apartments is cash buyers
or people who have equity other property,
but they won't they won't pay market price, get a bargain.
So just be careful, apartments normally really volatile
finance policies so hard to get a finance sometimes.
So here's some kind of three, four points,
that potentially the pitfall of having apartments
as rental property.
Now the point here is not to scare you.
Not to say you shouldn't buy apartments.
It's really just let you know the potential pitfalls
so that you can weigh up the pro and cons
and to make good decision.
If they're still right buying rules, then still go for it,
but just be in mind those potential risks.
All right, so I think that's all for today.
Thank you so much for your time.
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Until next time, see ya, bye bye.