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  • Avatar of jenny111jenny111
    Participant
    @jenny111
    Post count: 90

    Hi.

    I’ve heard a lot of Con’s in owning a studio in central city, as it is very hard to resell. While the rental income on the surface seems reasonable, however, the running costs keep rising out of proportion and it also take a long time to rent out, particularly at this time with the constant number of new apartments being erected. Summing up, I’d be very very lucky to get my investment back.

    I am aware it is almost impossible to obtain finance for studios, But are the above ‘facts’ really true?
    Has anyone got any Pro’s to share, please? Thanks.

    Regards,
    jenny

    Avatar of Jamie MooreJamie Moore
    Participant
    @Jamie-M
    Post count: 4,548

    Hi Jenny

    There’s a tonne of info on studio apartments on this forum – do a quick search and you’ll be able to read up about the pros and cons (there’s much more of the latter).

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
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    Avatar of Nigel KibelNigel Kibel
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    @Nigel-Kibel
    Post count: 1,278

    Lets look at the facts. You buy a studio apartment that you are loosing money on and it has no capital growth. Why would you put your hard earned money into something that is unlikely to grow.

    Investing is simple. If you are going to loose money you have to make it up with capital growth if its to be a worth while investment.

    Nigel Kibel | Property Know How
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    I teach people how to invest successfully in Australia and the United States

    Avatar of jenny111jenny111
    Participant
    @jenny111
    Post count: 90

    Thanks, Jamie & Nigel.

    Will definitely read a bit more as suggested.
    Seeing agents advertising big rental returns (7% and sometime 8.5% gross return) is quite tempting on the surface.
    Regards,
    Jenny.

    Avatar of TheFinanceShopTheFinanceShop
    Participant
    @TheFinanceShop
    Post count: 1,253

    Hi Jenny,

    The other thing you need to look out for is strata. Some studios have very high strata costs.

    TheFinanceShop | Elite Property Finance
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    Avatar of jenny111jenny111
    Participant
    @jenny111
    Post count: 90

    Hi.
    strata cost – did you mean the ‘Body corporate’ cost or is it in addition to the body corporate cost.
    The agent quoted the body corp fee was about 2K a year, which seems quite high in comparison to the size of the studio.
    And I have a feeling that the body corp fees increase at a much faster rate than the rent.

    Jenny.

    Avatar of TheFinanceShopTheFinanceShop
    Participant
    @TheFinanceShop
    Post count: 1,253
    jenny111 wrote:
    Hi.
    strata cost – did you mean the ‘Body corporate’ cost or is it in addition to the body corporate cost.
    The agent quoted the body corp fee was about 2K a year, which seems quite high in comparison to the size of the studio.
    And I have a feeling that the body corp fees increase at a much faster rate than the rent.

    Jenny.

    Yes. You should also review the body corporate financial statements which include the balance sheet, income and expenditure statements for the administration fund and the income and expenditure statements for the sinking fund.

    TheFinanceShop | Elite Property Finance
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    Avatar of jenny111jenny111
    Participant
    @jenny111
    Post count: 90

    Hi. I can understand about expenditure for the administration fund. But what is the significance of expenditure of sinking fund? What is a sinking fund? And how can one work out the most appropriate rost ratio per unit? Thanks.

    Avatar of jenny111jenny111
    Participant
    @jenny111
    Post count: 90

    sorry – that was 'cost ratio per unit'.

    Avatar of TheFinanceShopTheFinanceShop
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    @TheFinanceShop
    Post count: 1,253
    jenny111 wrote:
    Hi. I can understand about expenditure for the administration fund. But what is the significance of expenditure of sinking fund? What is a sinking fund? And how can one work out the most appropriate rost ratio per unit? Thanks.

    Hi Jenny111,

    A portion of the strata paid by you is allocated to the sinking fund. The committee can agree on what amount should be in the sinking fund. The committee may vote that more is required in the sinking fund and therefore this would have an impact on the strata. It is important to see how much money is in the sinking fund. If it is too little then that is worrying. Why? if something happens where the funds are needed then the committee would need to draw on those funds. If there isn’t much there then this impacts the strata (it goes up). If there are adequate funds in the sinking fund then this is a good thing. Hope that explanation made sense!

    TheFinanceShop | Elite Property Finance
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    Avatar of lisasunlisasun
    Member
    @lisasun
    Post count: 7

    hrmmm….I won’t consider to buy studio apartment in Melbourne CBD.

    I think 2 bedroom apartment will be a better idea.

    PRO’s – cheaper
    CON’s – bank doesnt like it
    Melbourne CBD oversupply risk
    no capital growth
    harder to resell it

    However, there are still ways to make it work.
    It really depends on your strategy :)

    Avatar of jenny111jenny111
    Participant
    @jenny111
    Post count: 90

    Ok. Thanks to a number of you. A little research through this forum has basically summarised that there is literally no capital growth in studios, banks don't lend under 40sq m size and high overall running costs.
     
    So my questions are:
    1. On the capital growth issue: banks tend to be a little more liberal these days – some have reduced their size criteria from 50sq m to 40sq m.  Given this trend, one could hope for further reduced criteria to 30sq m or even 20sq m in the near future.  If this was the case, would there be a higher demand for studios as more people would be able to borrow to buy? And higher demand will ofcourse equate to 'easier to resell' than now?

    2. Oversupply issue: if CBD studios and 1beds are hard to resell and banks don't like them, then why do Council planner and developers and the like keep erecting them, if not due to high demand (well, that was what I used to think)? Currently there are at least 3 new buildings are being built in the CBD (not counting Southbank). 

    3. Is 3.5% annual capital growth for studios sounds reasonable? Obviously one would like a lot higher, but is 3.5% p.a achievable, or is it simply no capital growth at all?

    Avatar of lisasunlisasun
    Member
    @lisasun
    Post count: 7

    hrmmm like what I said, it really depends on what you want from the property itself.

    ? capital growth by negative gearing? positive cashflow? quick cash? …etc.

    And what’s the reason that you would want to focus on studio apartments?
    Why would you want to target on Melbourne CBD?

    I think success usually comes to doing things differently.
    But you have to have enough valid reasons to go for it.
    Otherwise you might buy a lemon at the end.

    In addition,

    I know commonwealth bank is the bank which is “happier” than other banks in terms of lending money to small size units.
    I would think demands come from what “people” want more than what “banks” want.
    If people have a choice then I believe people would choose a 2 bedroom instead of a studio.

    Avatar of jenny111jenny111
    Participant
    @jenny111
    Post count: 90

    Hi Lisasun,

    I work in melb and melb cbd studios have the price range that I think I could save for in the next couple to 3 years. Another reason is because I may want to live in it in between tenants (usually tenancy for these type of studios are only 6 months and it takes up to 4 weeks to refill another tenant. It is convenient to go to work. The studio ofcourse will be purely for investment purposel; otherwise it would be too costly to live in.  Another reason why I've been thinking of stuido is because of the positive cashflow (but then again when I weighed against the ongoing high running costs and the constant agent costs as there is a high tenancy turnover, I am not quite so sure whether positive returns still hold true).

    It is for long term, as I don't think I will be able to resell it quicly for quick cash.  And because it is for long term, I am hoping that it will at least make the equivalent of CPI gain per annum, i.e. 3 to 3.5% capital growth. Does this sound unachievable for capital growth?

    Just the high running costs that worry me. But I've done the calculations. 4months of rental will cover all costs. 2 weeks vacancy for in-between tenants every 6 months; i.e. 1 month of vancy.  In total 5 months to cover all costs. I will be left with 7 months of rental checks in my pocket, which work out an equivalent return of 6%, which is roughly around bank deposit return. So all I am hoping for is at least a capital return equivalent to roughly CPI per annum. If this is not even achievable, then I think it is very tough to invest in studios.

    You mentioned CBA may do smaller size – do you or anyone know their minimum square meter? Thanks.

    Avatar of Richard TaylorRichard Taylor
    Participant
    @Qlds007
    Post count: 11,159

    Jenny if you are referring to CBA Colonial (their Broker division) as long as the property has at least 1 bedroom and the lvr is less than 80% there is no minimum square metreage.

    Just settled one for a forum member in Melbourne and his property was 32 square metres.

    If it is a studio then depends on a couple of other factors.

    Cheers

    Yours in Finance

    Richard Taylor | Taylored Financial Solutions I Mortgage Broker
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    Avatar of Richard TaylorRichard Taylor
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    @Qlds007
    Post count: 11,159

    Sorry if it is a studio then will need to have a separate bathroom area and you will probably get 70%.

    Rate on the last one we did was 6.95%.

    Cheers

    Yours in Finance

    Richard Taylor | Taylored Financial Solutions I Mortgage Broker
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    Mortgage Brokers specialising in Investor Loans. Request a copy of my API interview 0-40 in a decade

    Avatar of jenny111jenny111
    Participant
    @jenny111
    Post count: 90

    HI Richard,
    I think they all have a separate bathroom. Anyway, by 'separate', did you mean a bathroom with its own door for privacy?  If the answer is yes, then the studio does have a separate bathroom together with a toilet, but a very small bathroom though. The total size  of the studio is only about 16 – 18 sq meter.  Do you reckon I could get finance at 70% value even for this studio size?  I am in Melb.
    Thanks. 

    Avatar of Richard TaylorRichard Taylor
    Participant
    @Qlds007
    Post count: 11,159

    Hi Jenny

    No i hate to say i dont think you will at that size.

    Cheers

    Yours in Finance

    Richard Taylor | Taylored Financial Solutions I Mortgage Broker
    http://www.tayloredfinancialsolutions.com.au
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    Mortgage Brokers specialising in Investor Loans. Request a copy of my API interview 0-40 in a decade

    Avatar of TheFinanceShopTheFinanceShop
    Participant
    @TheFinanceShop
    Post count: 1,253
    jenny111 wrote:
    HI Richard,
    I think they all have a separate bathroom. Anyway, by 'separate', did you mean a bathroom with its own door for privacy?  If the answer is yes, then the studio does have a separate bathroom together with a toilet, but a very small bathroom though. The total size  of the studio is only about 16 – 18 sq meter.  Do you reckon I could get finance at 70% value even for this studio size?  I am in Melb.
    Thanks. 

    A lender will not look at that security however the real point is you should never instead your funds in a studio let alone one that is 16sqm. It is a very bad investment.

    TheFinanceShop | Elite Property Finance
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    Avatar of ten_burnerten_burner
    Participant
    @ten_burner
    Post count: 240

    I cut this straight out of my blog…

    I have recently read some articles on purchasing small inner-city studio apartments* as investment properties in the Sydney CBD area due to the cheap entry price into the market.

    I have been monitoring the Sydney CBD market closely over the last several years and strongly disagree with this strategy for many reasons.

    The biggest reason being:  there is very little demand for these types of apartments!

    Lenders class studios as high risk as they know it is difficult to on sell them, those who do provide the finance will offer a much lower Loan to Value Ratio than they would for larger apartments. The above issue results in fewer people being in the market for studio apartments.

    Experienced property investors will agree that supply and demand are the true drivers of property prices, if a property is difficult to finance (like studios) then it will be in less demand and this equals less growth.

    * My definition of a studio apartment is anything under 40sqm of internal floor area and with no wall to divide the living and the bedroom areas.

    ten_burner

    twitter.com/Bennytee1

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