The pros and cons of buying a block of units

The benefits and drawbacks of buying multiple properties on the same title.

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Pros and cons of buying a block of units

Buying a block of units on a single title can be a winning strategy for the right kind of property investor. When you buy a block of units, you’re essentially “buying in bulk”, which means you can pick up a number of properties at a wholesale price.

A block of units isn’t the right strategy for everyone, though, as the barriers to entry are much higher than those of a more straightforward investment property purchase. The initial price is higher and the financing is often trickier. But if you have the funds and you’re willing to deal with some of the complexities involved, the returns can be attractive.

We’ve outlined some of the benefits and the drawbacks of buying multiple properties on the same title so that you can decide if it’s a sound strategy for you.

ProsPros

Buying a block of units can be an excellent investment under the right circumstances. You’re likely to get a good price and the potential for capital returns and a good rental income is high.

1. You won’t have as many buyers to compete with

The market for entire unit blocks is much smaller, so you’re likely to find yourself competing with far fewer potential buyers at auction.

2. They’re a better price than individual units

Blocks of units under a single title usually sell at a significantly lower price compared to units sold individually. This means that you can pick up several units for much less than if you were to buy the same number of units under separate titles. If you separate the units by converting the block into a strata title, you can also see a jump in value when it comes time to sell.

Separating the title

Should you wish to sell any of the units individually, you’ll need to separate the single title for the block into multiple titles. This can be done by applying for strata titling. Each council will have its own application process and fees involved in strata titling. You’ll generally need to provide the building plans and have the block assessed to make sure it meets building and fire codes. If you find your block isn’t up to code, it may mean an additional investment.

The benefit of applying for strata title is that you’ll have the flexibility of selling the units individually. The individual units are likely to be valued higher than the block as a whole would have been under a single title. This means that converting to strata title is likely to increase the amount of equity you have in the property.

The drawback to strata titling is that each unit will be charged council rates, rather than the building as a whole being charged. This can mean a hefty jump in council rates. Applying for strata title can be well worth it if you plan to sell any of the units individually, but if your strategy is to hold onto the block for its rental income, then the additional rates may mean that strata titling won’t be worth it for you.

3. You can set your own rules

If you buy an entire block of units, you’re not bound to existing strata bylaws. As the owner of the block, you can enact your own rules to govern the way the property is used. Should you choose to convert the property to a strata title, you can set the strata bylaws.

Some sample strata bylaws

4. You have flexibility when it comes time to sell

Should you decide to convert the block to a strata title, you have added flexibility. If you need an injection of cash or you simply want to take advantage of the capital gain on the property, but you still want ongoing rental income, you can sell one or two of the units while retaining the others. You’re also likely to get a higher sale price when the units are valued individually.

MinusCons

Buying multiple properties on one title isn’t a good strategy for everyone, as it takes a much bigger initial investment and can come with its own unique set of challenges.

1. It’s much more expensive

Make no mistake, odds are that you’ll need a significant amount of cash to pursue this strategy. Blocks of units don’t come cheaply. Relatively affordable unit blocks can be found in some regional and remote areas, but these can be much more difficult to tenant and you could face problems getting finance. For a block of units in or near a capital city, expect a multi-million dollar price tag.

2. It concentrates your risk

Buying multiple properties on one title means you’ve basically put all your eggs in one basket. Your success or failure as a property investor will be reliant on the performance of the property market in the area that you’ve chosen to buy. You’ll also be heavily reliant on rent, so untenanted periods can pose the risk of causing you financial hardship.

3. You could pay higher interest rates

If a lender chooses to assess your loan as commercial rather than residential, you could find yourself paying significantly higher interest rates. Many lenders consider a block of more than two units on the same title to be a commercial loan rather than a residential loan. However, a good mortgage broker may be able to steer you towards a lender who will assess your finance as a residential loan, even if the block you’re buying has more than two units.

4. Finance can be trickier

As mentioned above, many lenders will consider finance for more than two properties on a single title to be a commercial loan rather than a residential loan. If you do end up being sent through a bank’s commercial lending division, you can expect to pay substantially higher interest rates.

Should you be able to find a lender that will consider a residential home loan for multiple properties on the same title, the loan-to-value ratio (LVR) available to you will depend on the number of units in the block:

  • For two units on one title, many lenders will lend up to 95% LVR.
  • For three units on one title, many lenders will lend up to 90% LVR.
  • For four units on one title, most lenders will only lend up to 80% LVR.
  • For five or more units on one title, most lenders will only lend up to 75% LVR.

The maximum number of properties allowed on one title is 10. For 10 units on one title, most lenders will only lend up to 65% LVR.

5. It can take a lot of work

To get the most out of your investment in terms of both rental returns and capital gain, a block of units may need a significant amount of refurbishment. This means an additional investment in both money and time. Moreover, since most blocks are already tenanted when they’re sold, you’ll have to be extremely vigilant to ensure that maintenance issues are reported and addressed. An attentive property manager is invaluable.

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