What makes for a good investment apartment ?

It’s obvious from research and anecdotal knowledge that strata apartments attract investors and that investor form a large stakeholder group in Strataland.

But what makes an apartment a good investment (as opposed to a good place to live) ?  Or are they the same thing ?

In a recent article in SMH Domain Carolyn Boyd wrote about Investor Tips for Units and identified the following things –

• Location of the apartment in relation to work, lifestyle and transport
• Amenities in the apartment and the building and nearby
• Large or small blocks (although she hedged on which is better)
• Outlook from the apartment
• The size of the sinking fund

Now, it’s hard to argue that these are all important but at the same time it’s not a sophisticated anaylsis.

So here are my 7 factors that will make an apartment potentially more attractive to most investors.

1.   Location – But location in relation to the things likely residents want.  The best suburbs and places are clearly going to get higher rents and lower vacancy rates but they will also cost more and therefore give a lower yield.  So location needs to be matched to the resident market.  Smaller inner city apartments need to close to professional work locations and low cost fun places since they will be occupied by white collar workers who spend their incomes.  2 and 3 bedroom suburban apartments need to be close to public transport for the couples who occupy them to get to  and from work cheaply and close to schools and day care facilities for the younger families they have.

2.  Useful space – The more space in the apartment the better but it also has to be useful.  A large corridor adds space but can’t be used so look for sizable and useable bedrooms, bathrooms, kitchens and living spaces (plus make sure the parking space can actually fit a normal car).

3.  Good quality fittings - Although everyone wants designer interiors in the real world for most people they would rather have a stove, dishwasher, taps, drains and lights that work all the time.  And, doors, windows and cupboards that open, close and store things properly.  Plus after years of tenant use only quality fittings are still functioning without needing regular repairs.

4.   Stable Strata Financial Affairs – Whilst lower strata operating costs are desirable for investors since they increase yields, it’s more important that strata operating costs are stable and vary only a little from year to year.  It’s no good making an extra $1,000 one year because strata levies are lowered only to have to pay $2,000 more (or worse) the next to make up the shortfall. 

5.  Simpler Buildings – The more complex features there are in a building the higher the operating costs and unless the rent is proportionately higher because of those features, investors will be worse off.  So the simpler buildings are best unless you can get higher than average rents for the extras.

6.  Good Strata & Property Management – Getting slightly lower strata levies or slightly higher rent is nice but if it comes at the risk of a crisis because of poor strata or property management the gains will be lost very quickly.  A strata problem that adds $500 to your next year’s levies will be 2-3 times the strata managers fees and not having a tenant for 2 weeks more than normal is a 4% revenue loss in that year. 

7.  Good Tennants – Obvious isn’t it !  Good tenants pay rent on time, stay longer, accept fair rent increases and look after the property.  And other tennants do the opposite – costing you money every time.  What makes a good tenant is debatable but at least investigate potential tenants properly to make the best decision you can.

What do you think ?  

Do you have others factors and/or do you disagree ?

Francesco …