Question:

What should one consider when it comes to investing in the Apartment markets (particularly Auckland and Wellington central)? My understanding is that investing in apartments are vastly different from investing in houses. What are the things that should be included in the evaluation of potential attractiveness of an apartment as passive cash-flow generator?

Answer:

The apartment market is certainly a niche market, that has many differences to other types of property. I live in an apartment, but have not yet bought one as an investment, although I have been looking into the possible opportunities. From my (limited) knowledge, here are a few things to consider:

- financing can be a big issue with apartments. Many lenders, especially banks, have different criteria for apartments, and you may (depending on the size etc of the apartment) find it more difficult to get high levels of finance (above 80%).

- a cost to be taken into account with apartments is body corporate fees. If these are high relative to the cost of the apartment, they can skew cashflow etc significantly even if yields seem high;

- each apartment block/building has it’s own body corporate, and some are wildly different in fee levels than others, so you need to find out the level of fees, what owners could have to contribute to in the future, and the ability of the BC to raise the fees etc;

- many apartments (especially near the Auckland waterfront) are leasehold - so you need to consider all the issues involved with such ownership rights - check the lease to see the lease amount you need to pay and how this can change/be raised in the future and to what levels etc;

- as apartments generally have little or no share in any land, even if property prices in general rise across the country, apartments may not experience the same capital gains - in a supply and demand market, an increase in available apartments could adversely affect your rental and consequently the value of your apartment;

NOW, do all these things mean that apartments are not a good investment? Certainly not. There was a very interesting article in the recent NZ property magazine about a Canadian immigrant who’s established a large portfolio founded mainly on small inner city apartments in Auckland, and he claims to have barely used any of his own money, even with lenders’ requirements for higher deposits on apartments. So like anything, just because the majority or the media may shy away, doesn’t mean that you couldn’t make money.

As always, it comes down to the numbers. With apartments there are other things to consider that will affect those numbers - but once you get that info, like always, run the numbers, and if they work for you and your investing goals/criteria, then jump on in!

Happy investing.

This entry was posted on Saturday, February 24th, 2007 at 10:53 pm and is filed under Real Estate, Millionaire Mindset, Business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.