Beware control of petty tyrants

Done right, apartment ownership is just fine. But apartments are cheaper for a reason.

I’ve become a big fan of apartment living in the last few years. It gets you right in the heart of the action. Ideally, you can walk everywhere, or cycle. You get all the benefit of communal facilities without the maintenance. You don’t have much space, but that doesn’t matter when you’re mostly out and about.

But then again, I’m a renter. Buying an apartment is a whole different story.

Lots of first-home buyers are quite understandably setting their sights lower these days: apartments are several hundred thousand dollars cheaper than houses in the same areas.

As always, you get what you pay for. Here’s a non-exhaustive list of the problems with buying apartments:

BODY CORPORATES

Most apartments and townhouses are unit titles, which means you’re also buying a share in all the common infrastructure: driveways, lifts, facades, lobbies, gyms, etc.

You and your fellow unit owners pay fees as a group – the body corporate – to take care of all of the associated maintenance and management.

On the one hand, this is great: someone else does all the admin. But this centralised decision-making can also be hugely frustrating.

LACK OF FREEDOM

The body corporate lays down the rules by which you must abide. Mostly these are reasonable: say, guidelines around noise and parties.

But they might also extend to whether or not you can have a pet, what colour curtains you hang in the windows, and if you’re allowed to hang your washing to dry on the balcony.

This is the kind of petty tyranny that most renters are trying to escape from. Unlike homeownership, you don’t have full control over how you choose to live your life.

MY PROBLEM IS YOUR PROBLEM

If the building requires renovations or has issues with watertightness, the unitholders are levied to pay for it. Fair enough. But even if only some apartments are affected, you might still end up on the hook.

That means it’s not just your own unit you have to be confident in, but all your neighbours’ too.

Add this concern to the growing heap of due diligence: has the body corporate set aside enough money for long-term costs? Are there issues with watertightness? Any ongoing legal actions? Problems with insurance?

In theory, you can find this out by reading through the minutes of the body corporate meetings, but there’s still no guarantee you’ll get the full picture.

LEASEHOLD VS FREEHOLD

A waterfront Auckland apartment with a large deck and uninterrupted views across the harbour recently sold for the astonishingly low sum of $20,000.

What gives? Among other problems, it was a leasehold apartment, which means the residents don’t actually own the land that it sits on.

Instead, they have to pay a ground rent, which tends to increase sharply over time, and don’t capture capital gains, which are generally associated with the underlying land.

This limited ownership structure can lead to spectacular losses, with leasehold apartments often selling for a fraction of their registered valuations.

FINANCING

You might think it’d be much easier to get a mortgage for a small apartment than a big house, but the exact opposite is true.

The banks won’t lend money to buy a shoebox or a leasehold unless you jump through some serious hoops: typically, stumping up a deposit of 40 per cent or more.

Individual policies vary, but as a general rule, you’re going to have a tough time buying anything smaller than 50sqm.

RISKY BUSINESS

Banks are not exactly known for passing up opportunities to make money. If they’re unusually wary of lending on apartments, it’s worth paying close attention to that fact.

The underlying theme is that it’s risky to not have control over your property.

If you buy leasehold, you don’t control the land, and the associated hikes in ground rent. If you buy freehold, you don’t control the building, and might not even have total control over your own unit.

And even if you do a ton of homework, there’s always the problem that you don’t know what you don’t know.

There are plenty of sad stories in which buying an apartment turns out to be a false economy, and costs the purchaser dearly.

That’s not to say it’s a nonstarter. Done right, apartment ownership works out just fine.

You just have to be especially careful, and make sure the fear of missing out on home ownership isn’t blinding you to potential pitfalls.