Purchase or Pass? A three-bedroom Coogee apartment

In our Purchase or Pass segment this week I am joined by Stuart Waugh, the executive director at Bell Partners, to asses another potential property investment. As always the location is a given, it’s the finer details about the property that we can debate.

It’s a three-bedroom unit with a lock up garage, 8.6-kilometres from the CBD and less than 500-metres to the action. The unit is in a block of 26 units set out in a horseshoe shape with three entrances and two different garage areas. The unit is east and west facing with views from the balcony across the district and the ocean. The unit recently sold for $855,000 and rents for $840.

Chris Gray: The first thing I want to concentrate on is basically the size of the block. I always prefer to get in small blocks of 12 units, this is 26, what difference does this generally make being in a big block rather than a small block? 

Stuart Waugh: Big blocks generally mean strata levies are quite high and there could be things wrong with the building. There could be a couple of lifts in there, so you have to maintain all these things. You and I were just talking before coming on the show about maintaining blocks and how expensive they can be. Just be careful with big blocks like these, you could get strata levies that may be unaffordable.

Chris Gray: Also the thing I find with bigger blocks is it’s hard to get decisions made. Trying to get 12 people on the same page at the same time is a nightmare, trying to get 26 people is almost impossible. Things then don’t happen and a $100,000 problem turns into a million dollar problem.

Stuart Waugh: Exactly right, you see blocks deteriorate over time because they can’t get a decision made so therefore you have things growing all over the brickwork. You get concrete cancer and you have landscaping that’s not maintained. Those sorts of things can be a big deterrent to a building. You’re right, if you have big meetings and big decisions to make, it doesn’t happen.

Chris Gray: The first property I bought in Coogee in the late nineties, we have to raise $100,000 to get the roof replaced, which is $10,000 each. But we’re trying to say pre-worn, we need to fix balconies, we need to render, we need to spend $1 million in the next few years… it’s never a good time is it?

Stuart Waugh: No, especially in apartments because people who buy apartments can’t afford $100,00. They’re going to be first homebuyers, young families, those sort of people don’t have $100,000 lying around. It’s not going to happen.

Chris Gray: And then the 65 year olds who have paid off their mortgages might have the equity but they do not want to get a mortgage at 65.

Stuart Waugh: That’s right, they have plenty of equity and assets like you said but not the cash flow to service a debt if they do get debt.

Chris Gray: One of the things I did like about this particular block is there’s two separate entrances on different streets. So suddenly it’s not like your Sydney parking 26 cars, so it’s kind of split in half. Also in the horse shoe shape there’s three different entrances and it’s only three-stories so it’s not the same as being in a 26-storey building with massive a car park. You have to try to look at the building, because they’re not all the same are they?

Stuart Waugh: Exactly right, if you had have seen this in the newspaper with 26 units you probably would have assumed it’s a ten storey building but that’s not the case with this one, there is actually a couple of entrances.

Chris Gray: And obviously that’s why the agents don’t put in the effort as well.

The other thing I was going to concentrate on was a three-bedroom at $855,000, it’s obviously slightly more expensive a three-bedder over two, an issue for you?

Stuart Waugh: Not in this case, the yield was quite good. I thought $855,000 was quite reasonable and quite a well maintained block. The yield was quite attractive in this particular case.

Chris Gray: Purchase or pass for you?

Stuart Waugh: I say purchase.

Chris Gray: Overall, I think this is a good unit and you can overcome being in a bigger block due to those separate entrances we just talked about and being low rise, which still makes it feel reasonably boutique. Sometimes a three-bedder can be a good option for affordable renting between three people, and you end up with a higher rental yield than maybe going for a two-bedder. If it were me, I’d go for a purchase to slightly diversify my current portfolio.