The uneducated fear of special levies
June 17, 2014 / Written by Rich Harvey
Nothing frightens an investor away faster than the prospect of unnecessary costs. After all, if you're buying an investment property in Australia to make money, what's the point of subjecting yourself to extra fees?
However, not all expenses are created equal. In fact, some costs - such as special levies - can even provide added value to investors savvy enough to spot the right opportunity.
This is an important lesson to learn, especially as recent data from the Real Estate Institute of New South Wales (REINSW) shows more unit developments coming to market.
The REINSW recently reported Sydney's residential vacancy rate has increased for the second month in a row during May thanks to a rise in rental stock. With large apartment projects being completed, now might be the time for investors to consider their options when it comes to units, especially as rising home prices have led many home seekers to focus on renting instead of buying.
"We are getting back to a more neutral position with high volumes of apartments being completed," REINSW President Malcolm Gunning said.
"Fifty per cent of new apartments are purchased by investors and we are now seeing them seeking tenants. The development stock gives tenants a bit more of a fair go and choice."
So just what are special levies and how can they help investors?
Strata in Sydney
Strata schemes are incredibly popular in New South Wales. In fact, a 2013 report from the state government showed that five more new schemes were registered each day.
"It is estimated that close to a quarter of the state's population live, own, or are employed within a strata scheme," the report stated.
In short, strata schemes differ from other apartment complexes in that you own your unit while also sharing ownership and responsibility for common property, such as stairwells and parking lots.
If you own the unit, you are a member of the owners corporation, the body in charge of maintaining the complex. This makes it your duty to contribute to the cost of operations and upkeep through levies, as well as adding to a sinking fund, which is used to pay for future expenses, such as building repairs.
Special levies, on the other hand, are required when there isn't enough money in the sinking fund to pay for essential costs.
Keep in mind that special levies can't be used for any old cost. While a building might require a new paint job, this wouldn't fall under the banner of "essential". On the other hand, serious damage to a building that threatens the integrity of the complex or the safety of residents would be considered essential.
While no one likes to pay extra bills, you should remember that special levies can increase the overall value of the complex and your investment in it. No one wants to live within a strata scheme that doesn't keep itself well-maintained, so think of special levies as a way of ensuring your investment continues to attract interest from quality tenants.
Staying smart with strata
While special levies aren't necessarily a bad thing, it's still important to make sure you're left on the hook for exorbitant costs.
For instance, before investing in a strata property, find out if there is any outstanding building work or planned changes that will lead to special levies. Also find out if there is enough money in the sinking fun to cover other long-term repairs and maintenance.
You'll also want to make sure the complex is properly insured before signing on the dotted line.
All investments come with their own unique costs, so expenses like special levies shouldn't scare you away from what could be a lucrative property purchase in Australia.
However, it's always a good idea to explore your options and obtain as much information in advance before taking the plunge.