Taking out a second mortgage for an investment property? If you buy an apartment or flat, you'll need to understand strata title.
Investing in property is a popular activity among Australians looking to grow their wealth.
By capitalising on your existing home equity and cheap home loans due to a consistently low cash rate, you can invest in your future by buying a second home.
A popular investment choice is buying an apartment. By appealing to those who work in the city with a well-maintained and accessible apartment, you could soon be earning a tidy rental income to cover your second mortgage.
However, it's important to get your head around Australia's strata title system, which is relevant to owners of anything from residential apartments to commercial offices.
What is strata?
When you own a unit or apartment that has shared use of common property, such as communal gardens, gyms or swimming pools, you'll be responsible for the ongoing maintenance of these areas so they don't get into a state of disrepair.
However, in order to organise this, apartment or unit owners become members of an owners corporation, which has joint responsibility for shared property.
What are my responsibilities?
You'll pay levies on a regular basis (in New South Wales, for example, every three months) as well as contributing to a sinking fund. This acts as a safety net for expenses that could arise in the future, such as exterior painting.
Strata types range from residential buildings to commercial, retail or mixed-use buildings. Lot owners not only need to pay strata levies, they also need to ensure their actions don't affect other residents' peaceful enjoyment of the property and comply with the by-laws of the scheme.
Strata by-laws - which may also be referred to as the strata rules - govern owners and tenants.
These rules can affect what you can and can't do in the building. This is particularly pertinent to keep in mind as an investor, because you'll be selecting tenants to live in the apartment who will have to abide by these rules.
As by-laws will change between different strata schemes, it's imperative to get a copy of the scheme that will apply to a potential investment.
Furthermore, certain rules can be changed at a general meeting between the members of the owners corporation. While it's important to know what the existing rules are, it's worth keeping in mind what other owners could want in the future and how this could affect your investment.
Many by-laws will be based on guides provided by the applicable state government. This can help give owners' corporations an idea of what rules to include.
Strata and leasing
Owners' corporations will generally require notification of a change in occupancy.
This means if you lease your investment apartment to tenants, you'll need to notify the owners corporation, given that you will continue to own the property, but won't be living in it.
You'll need to provide the names of new tenants, details of property agents involved (for instance, if you're getting a property manager) and when the tenancy commences.
Failing to do so could lead to trouble down the track, particularly if there are difficulties with your tenant.
It's necessary to complete thorough reference checks on potential tenants. While most will be respectful and pay their rent on time, it's important to vet people thoroughly so you don't end up with a bad egg.
Your tenant will need to abide by the strata by-laws, so it's essential you run through what's required of them when signing a lease.
As a lot owner, you'll not only need to inform tenants of the strata rules but also ensure that complying with them is an explicit condition on the tenancy agreement.
Strata title might seem like a lot to get your head around but if the market conditions are right, investing in an apartment could be beneficial for your future financial security.
Garrison Photography, Boise, ID