Kevin: Last week in the show, I was talking to Michael Yardney about not so much the pros and cons but the benefits of buying older units and how adaptable they can be. It got us to thinking during the week that obviously, we go wrong in a lot of areas in real estate; where can you go wrong with buying older apartments? What should you be aware of? What should you avoid?
Good morning again, Michael, and welcome to the show.
Michael: Hi Kevin. Thanks for having me again.
Kevin: Yes, it was an interesting conversation after that last interview. Can you run through some of the things that you think we should avoid or be aware of?
Michael: Just to make things clear, we’re talking about what when you and I were growing up used to be called flats that were built in the 1960s and the 1970s and today make good investments compared to many of the new, smaller, off-the-plan high-rise and high-density blocks. But again, not all properties are good investments, and in my mind, still probably less than 5% of established apartments – these older what we call flats – are investment grade.
One has to start from the top and choose the location. You can’t just buy any apartment and hope it’s going to make a great investment. Maybe 70% or 80% of your investment property’s performance is going to be dependent upon its location. The rest of it is, of course, going to be dependent upon the property’s specific, unique features.
A common mistake investors make buying established apartments is not strategically looking at the state and then that location, the suburb in the state – one that’s got the right demographics that’s going to outperform the averages, because it’s a gentrifying area, it’s an area where people’s wages are high, it’s an area where people are moving into and there’s a lack of supply and lots of demand, Kevin.
Kevin: We did make the point last week, though, that a lot of those older units are in some of those areas that are becoming gentrified. We can look around the cap cities and think of many locations where the flats were always looked down upon but now they’re in quite good, emerging areas.
Michael: In the early days – sorry, my early days – the inner suburbs were the working class areas. Interestingly, if you look back, that’s where a lot of the factories used to be as well, a lot of the manufacturing and warehousing, and the heavy industrial was in the inner suburbs, and the workers were living close to them.
Then in the 1970s and ’80s, with the advent of our freeways, the industrial areas moved to the outer suburbs and migrants moved into these inner suburbs. They became a bit more bohemian, and restaurants and cafés came out. And these areas are still gentrifying, Kevin, so yes, there definitely has been a significant change, hasn’t there?
Kevin: Yes, there certainly has. I guess, too, when you’re looking at some of these older units, you really have to dig deep and have a look at the history of the building, not so much just the history of the area.
Michael: Very much so. Not just the area, but also the right streets. Not every street in the suburb is going to be good. You want one with a good feel to it. Some streets have a different feel, a better feel, a unified feel, and if you’re buying apartments, you’d like, if possible, to have a street where there are homes and a lot of owner-occupiers, as well, rather than a street just of apartments.
But you’re right in what you were saying a month ago, Kevin. That you can get a lot of research not just on the area, but because it’s an established apartment, you can get information about previous sales, sales within the block, how it’s performed, owners corporation information about potential disputes, repairs, sinking funds – the sort of information you can’t get on new properties, because they don’t have a history.
You only really know what a new property is worth when it’s sold down the track in the secondary market, and unfortunately, some investors are getting disappointed when they see what happens to the property’s prices a year or two after they’ve purchased it.
Kevin: Yes, and that’s a good thing about older units, too – they do actually have a history; you can check on it. We can learn a lot from looking back, as well.
What about position and outlook, Michael?
Michael: When you’re buying new property, you often have an opportunity within the block to choose “Do I want to be on the 10th floor or the 4th floor? Do I want to face north, south, east, or west?” You don’t have that luxury of choice with established properties, but that doesn’t mean that you should buy it if the outlook and the position in the block isn’t good.
Light and amenity is important, so the direction it’s facing and being able to get good light during the day, the views that you have are important, what floor it’s on. There’s not a correct answer. Some people don’t want to be on the ground floor because they feel a level of security on the first floor.
I think in these older blocks, if you had to choose, the prime position is the first-floor front unit, and sometimes if there are two or three stories up, maybe the top story, people don’t particularly want. We’ll often find tenants and owner-occupiers don’t want to walk that extra level with their shopping at the end of the day.
So yes, look at the positon and the outlook of the property, and if it doesn’t suit, just go to another block.
Kevin: Michael, many people are concerned when they’re buying a unit that there’s no land with it. How does that impact the value?
Michael: That’s an incorrect thought that people have, because if you own an apartment in a block of ten, then you basically have a tenth of the land component underneath you, and I’d rather own a tenth of a block of land in a good inner suburb of Melbourne, Sydney, Brisbane, as opposed to hectares of land out in the middle of nowhere. It’s the land component that is important, and that’s what is going to create the scarcity.
The other interesting thing is that a lot of these established apartments are bought below intrinsic value, meaning you couldn’t replace them. If that block of ten apartments burned down, under today’s town planning regulation, you wouldn’t be able to build them at that size or with that amount of car parking, so you’d often have to dig in and do underground car parking, and it would be much more expensive.
So the land component is what’s underpinning the increasing value of your property, because as I said right at the beginning, 70% or 80% of the heavy lifting is going to be done by the location and the land, and the rest by the value of the property.
Kevin: One of the outstanding things that we’d discussed last week, too, when we’re talking about these older units, Michael, is the opportunity to renovate and add some value.
Michael: In today’s market where the property market is not going to grow as strongly as it did in the last couple of years, I like the concept of adding value. I’d still be buying established properties even if I didn’t have the budget to do a renovation now, because the added value upside is still going to be there a bit further down the track if you can’t do it today.
So buy the best property you can, knowing that in two, three, or four years’ time, you’re going to have the ability – when you’ve saved a little bit more – to add value, and that’s going to bring the insides up to the standard – or it should bring the inside up to the standard – of the modern apartment with new kitchens, new bathrooms, and that’ll make it attractive to tenants and ensure that you have a top performing investment.
Kevin: Indeed, Michael. Once again, thank you very much for your time. We’ll look forward to catching up with you again next week.
Michael: My pleasure, Kevin. Thank you.