Purchasing A Block of Flats

[bennit]

Hi all, I have been a long time reader of this forum and really appreciate all the knowledge and experiance people are willing to share with other fellow investors! At present I am looking buy a block of flats and really need some advise from anyone who has done this about the best way to go about it. I have not bought anything with more than one dwelling on it so am not sure if there is anything particular i need to look at.

Cheers

[SuperDad]

Hi bennit,

I'm sorry that I can't help you with your question, but instead can only ask a question.

What is the attraction of investing in a block of flats? (I have never considered flats as an investment.)

Paul.

[bennit]

Hi SuperDad,

I am looking at blocks that are close to the CBD and that are offering a good yield. I figure that the residential high zoned land is a good long term investment for capital gain and the multiple income streams offered with a block give a better yield than a lot of single unit dwellings in the suburbs.

Cheers

[Monid]

Paul the answer is typically higher rate of return and control of the whole area.

You can also make artificial capital gains if you can divide off the units and put them on their own titles. So for example we bought a set of two flats for $129900 but if we had bought each flat individually we would have paid a minimum of $85000 each at the time.

There is some debate about whether their rate of growth is as good as that of stand alone houses. There was a good discussion of this in PT. I think Kieran's opinion was that their growth rate was roughly in line. In my opinion I think it is about the same, taking into account the smaller amount of land per property.

That said given that the strength of the asset is cashflow and most units don't presently give you that I probably wouldn't bother unless it was an excellent deal.

In terms of things to look at, obviously title, how likely subdivision is to be possible, the general quality of the tenants and mostly the usual stuff. Sometimes banks view these as commercial investments allowing no more than 65% borrowing, so it might be worth having a chat to your mortgage broker/bank manager as well.

Cheers
David

[SuperDad]

Thanks for those responses.

To put my question in perspective bennit, I have a house in a street that is dominated by six-packs, of cinderblock costruction. When I look at the yields (5-6&#37, I wonder why anyone would bother.

Paul.

[bennit]

Hi David, thanks for your helpful advice.

I am only looking at blocks that can be improved and therefore have an increase in rents. The control factor is also a big part of it for me too, the quality of tenants can be 'upgraded' by improvements and flats close to CBD are only going to increase in value and rentability as petrol prices climb ever higher.

The big question i have at present is how to establish the true value of a block of flats - is it based purely on a certain cap. rate?

Cheers, Ben

[bennit]

Thanks for those responses.

To put my question in perspective bennit, I have a house in a street that is dominated by six-packs, of cinderblock costruction. When I look at the yields (5-6&#37, I wonder why anyone would bother.

Paul.

Paul

One block I am looking into at present is a block of eight and I believe i can get it at a price that it would be returning a yield of about 9% (after improvements).

Cheers, Ben

[revdev]

Hi ben,

I purchased a block of 3x2 bedroom flats about 2 years ago. Same scenario to what you are after, in that I was able to lift the valuation and the rent roll by a general refurbishment of all the flats.
My experience getting this valued was that they applied a combination of similar sales in the area (if possible, not always) and a cap rate.

My advice would be to concentrate heavily on how to increase the rents and spend your money there. Given the choice, I think valuers prefer to use a cap rate if the numbers stack up that way.

All the best
G

[bennit]

Many thanks for your advice G.

[SuperDad]

That's a good return bennit.

Good luck.

Paul.

[whitt]

I have a block of 6 in CHCH that would yeild around 9% if I sold it ( which I seriously am considering).
Yes the yeild can be higher but so can other costs too.
I pay for a couple of wheelie bins to encourage tenants to keep place tidy and the lawn mower man also.

[dmdmdm]

Hello Whitt, i would be interested in your block in chch, is it possible for you to give me their address please.
thanks
darryn

[NzDuder]

Hi Bennit

I haven't done what you are proposing but have looked at a few multiple dewellings in the past. My advice would be to check with your insurer, I believe insurance will be different because you have over a certain amount of tenants. I'd also guess that you may need to form a body corporate which will combine insurance and maintaince of the block. The biggy is the fire saftey issues.

thanks NzDuder.

[flyernzl]

I bought a block of four in a working class suburb almost two years ago.
I consider it a good cash-flow investment, I'm not really focussed on the capital gain.
I had no problem raising 100% finance through a broker with HSBC.
Points to consider:
- separate power and water meters (saves arguments)
- factor professional lawnmowing and garden maintenance into your costing (again, saves arguments)
- ensure you buy the whole block, not just part of it. Owner/occupier residents in the same block will always be restive if they are living alongside what they consider lower life-forms.
- insurance was no problem, with AMI. I have had a couple of very small claims (broken glass, fence damage) and they settled like lambs.

I'm currently looking for another similar block (showing similar returns), so you could say that I'm very satisfied with the deal.

[Lynda]

Hi Bennit and all,

I have bought a few blocks - some to keep and some into a trading trust to sell. They can be a good way of both tapping into a higher yield, and creating equity, but there are some things to watch out for.

One of the things that makes a big difference to the banks is whether the block is on one title, and how many units are in the block. As a general rule, if there are 3 or more separate units on one title, then the banks consider that a higher risk, and tend to require the investor to have higher equity in it. In other words, they'll lend a smaller percentage of the purchase price. That's not hard and fast, of course, if they want your business they'll lend more.

As far as insurers are concerned, they'll want to know that the fire protection is up to date (hose reels etc can be required depending how many units, and how many titles), and if the block is older than 1970 (ish?) they'll want an electrical inspection before they'll insure for full replacement. That's how I've found it with my insurers, anyway.

In my experience, there's definitely equity to be created by subdividing (whether unit-title or fee simple). Some of the issues to look at with regard to subdivision are: fire-ratings between units (concrete block is great in that regard), water (separate meters are required, and they probably have to be on the road-side for fee simple, so you may have to dig up the drive), parking, driveway construction (you will most likely need a formed driveway if it services 3 or more units).

To give you an idea of the equity to be created, I'm investigating a project at the moment with these projected numbers:

PP $683,000
Subdivision $ 50,000 includes water, fire rating, new carports, legals, survey
Minor repairs $ 15,000
Total $748,000
Value after subdivision
$850,000

Investigations so far are confirming those numbers, with the value maybe being a bit higher. Rental assessment puts the yield based on the PP at 9.2%, and 8.4% after subdivision costs.

Blocks can definitely be a good thing!

Good luck with your investing.

Cheers,
Lynda.