If you’re looking to invest in property in Australia, it’s important to know the differences between purchasing apartments and townhomes vs. a standalone single residence. Many people who plan to purchase a property do not realize that apartments and townhomes fall under body corporate law. It’s important to understand the role of a body corporate and what the owner or entity is responsible for handling and what future tenants can expect if they reside in a property that falls under a community title scheme automatically making them body corporate members with some say over the actions and decisions that impact the community.
In the next twenty years or so, there will be more strata title properties than individual-owned residences in Australia, suggesting this is the future for most investors. Setting up a body corporate varies slightly by territory so it’s important to follow the guidelines and regulations of your state. A body corporate in Melbourne falls under title law and you need to be sure that you know exactly what you are getting involved in before you ever sign on the bottom line.
Continue reading to learn more about body corporates to read our step-by-step breakdown as to what every property investor should know before finalizing any investment.
What Is A Body Corporate?
A body corporate must have an elected committee to act in the best interests of body corporate members. The committee is usually chosen at an annual general meeting; the owner of the fund can also participate in committee meetings if they wish. Often the committee will carry out basic actions and responsibilities freeing the owner of such tasks. All owners will receive notifications of meeting agendas regardless of participation.
Body Corporate Funding
A body corporate is funded by the owner, so you need to be clear on exactly how your funds are allocated and what you could be expected to pay. In the initial annual general meeting, it is usually decided how much the owner will put into the body corporate fund quarterly. The body corporate manages two funds, an administration fund that covers the cost of ongoing maintenance for common areas. Other expenses and services like cleaning and property insurance can also be paid from this fund.
The second fund is known as a sinking fund, where the owner puts capital for larger future expenses like repairs, lift maintenance, painting and any major properties are paid out of this.
Cost Considerations
Now that you understand how funding is allocated it is crucial you understand the most common factors that influence costs when you own a strata title property.
Certain aspects like property age will play a major factor in the future costs and contributions you will need to put into your body corporate fund. If major repairs or updates are needed your sinking fund payments could sharply increase. New build strata-titled properties usually require less initial capital expenditure and have lower running costs. It pays to remember the higher the capital outlay the higher the body corporate fees will be.
Given that the body corporate administration fund covers maintenance, all properties with additional recreational areas or facilities must be kept in good condition and updated over time if deemed necessary. The idea of higher fees typically deters new strata-title investors from taking on properties with extras like BBQs, gyms and pools.
But this is sometimes a costly mistake in the long-term as such desirable features help to attract highly desirable tenants making for a harmonious community environment and ensuring lower vacancy rates. High body corporate fees usually mean higher rents which ensure you better earning potential over time. It’s worth remembering that quality properties are easier to sell.
Tax and incentives
Once you own a strata property you are entitled to claim depreciation on all common areas including additional facilities and recreational facilities mentioned above. The greater the spaces the more you can expect to get back. Assuming you treat your strata property as an investment, you can get a tax deduction on your body corporate fees as they are an expense. These benefits should help you decide whether a specific property is worth investing in.
Understanding Insurance
A body corporate is required to hold public liability and building insurance for all common areas. This insurance may extend to some aspects of the lot. Let’s use a storm as an example, water damage that affects the walls of a property would be paid out of the body corporate sinking funds as it’s a larger expense. While the carpets and new paint would be covered by your insurance policy. It’s in your interest to know ahead of time which areas and aspects of the property are your responsibility as it’s not always as clear-cut as you might think.
The Ownership Debate Will Continue Moving Forward For Investors
Some investors still like to debate whether owning strata properties is worth it when you compare it to owning individual homes. You may not have to pay body corporate fees when you’re a standalone homeowner but it doesn’t mean you won’t have to payout for the property, especially over time. Having the body corporate sinking fund ready and waiting if needed and an active committee that can make reasoned decisions and act on the necessary repairs or improvements also relieves the owner from some of the stresses of property management.
When a body corporate is well managed, strata title properties will have reasonable maintenance fees based in line with profit, comparable to that of a traditional home. What kind of property you choose to invest in is going to be entirely based on personal preference and financial state but now we’ve outlined what a body corporate agreement is, you can make your decision based on fact rather than uncertainty.