Property investor? You may be paying unnecessary costs

From tiles to kitchen fires, if own a strata property you may be very surprised to learn what costs should be paid by the strata rather than the individual lot owner.

The concrete slab floor is an owners’ corporation responsibility but so is everything embedded in it.

Rising interest rates have adversely affected the cashflow of investment property owners who are now looking for ways to reduce their out-of-pocket holding costs.

Many have increased rent. In fact, rental income has had double digit growth in many of the major cities.

However, despite the headlines over rent increases, they simply do not “cover” the dramatic increases that mortgaged property investors have faced in recent times.

As a property owner you cannot do much about the rise in official rates, other than to look for the best possible rate in the market.

But few have considered what they can do to reduce property related expenditure and think they are all fixed costs.

One of the most important issues for an investor is to know precisely what they must pay for in the building, and what costs are not their business but rather that of the body corporate or the owners’ corporation.

If you own a strata property such as an apartment, townhouse or villa, you may be surprised at what costs should be paid by strata rather than the lot owner.

There are potentially thousands of dollars in expenses that owners pay unnecessarily due to not understanding their rights.

Stephen Brell, president of Strata Community Association NSW which is the peak industry association representing strata managers, owners and strata suppliers says: “Original floor tiles, balcony tiles and wall tiles that separate two lots or border common property are the responsibility of the owners’ corporation.

If the tiles are original, then they are the responsibility of the owners’ corporation.

“Carpet and floating floorboard, on the other hand, are the responsibility of the lot owner.”

The concrete slab floor is an owners’ corporation responsibility but so is everything embedded in it such as the waterproofing and tiles. However, non-permanent floor coverings that get placed on top of the concrete slab, such as carpet and floating floorboards, are the lot owner’s responsibility.

This means that if a bathroom in an investment property develops a leak and if the tiles are original, it is likely that the cost to remove the existing tiles, redo the waterproofing and lay new tiles should be met by strata – which could cost thousands of dollars.

Of note, if the tiles are original, then they are the responsibility of the owners’ corporation. But if the original tiles have been replaced by the owner during a renovation, the tiles then become the responsibility of the owner from that point onwards.

This is something strata owners should think very carefully about before making changes. In other words, if they alter the original tiles then they will lose the ability to push future maintenance and repair costs on to strata.

In terms of what is yours and what is common property in a strata property, Brell says: “When you buy a lot in an apartment complex, you are buying an entitlement in a strata plan and the air space bounded by the four boundary walls of the apartment, ceiling and floor.

“What is within that air space is yours to deal with as you please, such as the paint on the walls, carpet and internal fixtures such as kitchen cupboards, taps and light fittings. Everything outside that is common property and maintained by strata.”

Building insurance is another area where investment property owners may be overspending. In a strata complex, the owners’ corporation has a duty to insure the property which includes the physical building.

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The strata insurance policy covers the common property building but is also likely to cover internal items for each strata owner such as internal fixtures and fittings, kitchens and bathrooms.

Consequently, property owners should request and review the strata building insurance and only fill in the gap in coverage with a separate policy.

“If there was a fire in the kitchen, this should ordinarily be covered by the owners corporation insurance policy,” Brell says.

“However most landlords will normally take out a separate building insurance policy not realising that this is doubling up on what is already provided by strata.

“Instead, lot owners should just insure for the things not covered under the strata insurance policy – such as carpets, floor coverings, light fittings and the paint on the walls.”

One type of insurance that Brell strongly recommends landlords take out is liability insurance.

“I have seen a situation where a child was swinging from a light fitting and it broke, injuring the child who needed to be hospitalised,” he says.

“Although there was no negligence on the property owner’s part, the landlord was sued by the tenant and the tenant won. And since the landlord did not have liability insurance, they had to pay the approximately $30,000 out of their own pocket.”

If you own a villa or townhouse, part or all of the front lawn may be common property depending on where the surveyor drew the boundary in the initial plans. As such, if you pay for the gardening cost of the investment property, this may actually be something that strata should be paying for.

Other common expenses paid by lot owners that strata could be requested to pay include replacing windows, balcony doors, the front door and the intercom system.

If your strata manager refuses to pay for expenses that you feel are theirs rather than yours, every state has its own dispute resolution tribunal. In NSW it is the Civil and Administrative Tribunal (NCAT) and in Victoria it is VCAT.

Although you still indirectly pay part of the costs if met by the owners’ corporation as you pay regular strata fees, understanding what costs should be shared by all owners versus what you need to pay for can help reduce unnecessary investment property spending, which is especially useful at present to offset rising loan repayment costs.

James Gerrard is principal and director of Sydney financial planning firm www.financialadvisor.com.au