Have you ever heard or asked the question that comes up occasionally, Is buying that studio apartment a good investment?
In Australia, this is a common question.
They are predominantly marketed with a very healthy rental yield; however, that is sometimes where the attractiveness ends.
Here is some of the "noise" that surrounds them: The banks won't lend against small studio apartments, Student apartments are not an option, You won't get lending approval if the floor size is less than 50 sqm, Some banks won't lend for apartments in large complexes, The location of the apartment within the complex is important, Hotel or motel conversions are not acceptable.
While being just "noise" some of these points are somewhat valid. The recent credit crisis has stopped a lot of lending overall and small apartments and units have been affected by this more than most property investments. The biggest stopping point is usually lender's mortgage insurance (LMI). They are the ones imposing all the restrictions that are passed onto the bank. If you require LMI this is where the hard work starts
Hurdles:
Size: While this might not be important to the lender, you can expect the mortgage insurer to have minimum requirements on the floor space area. Always aim to avoid any apartments or units with a floor space less than 50 sqm. It should be 50 sqm of real 'living area' (not car space and balconies etc). In special cases, this may be stretched down to 40 sqm but the apartment would have to be in a "blue-chip capital city area". The Bank may not impose a floor-space limit but note that the LMI might fail the approval for that very reason.
Title: Strata/stratum title is normally acceptable, as are 'group' titles. Mortgage insurers are not usually concerned of company title and will lend, though they may adjust their Lending amount.
Location in the development/complex. One important factor may be whether it's in a good area in the development or if it's at the dark shaded noisy rear corner of the complex near the local highway or busy intersection.
Changing from commercial zoning to residential. Hotel conversions, holiday lettings and serviced apartments (commercial) lettings rather than residential units are categorized under different lending requirements (possibly commercial). So if they are being rezoned your finance may not be approved until the conversion is complete providing it meets all council's and lenders' requirements, most lenders will proceed but there may be a reduced LVR or restrictions on LMI until completion. The biggest reason is you are reliant upon the performance of the management company looking after the conversion or management in the mean time.
Number of apartments in a development: There might be a limit on the amount of apartments within the one development or area that you can put up for mortgage insurance. The bank may limit on lending on six apartments in any one development or limit lending for no more than one quarter of a development.
Here are some extra requirements you may have to satisfy for finance:
-More detailed valuation inspection and report.
-A lower Lending to value ratio (lvr) (70 to 80 per cent max, though some, usually non-bank lenders, only go to 65 per cent) -and/or a higher deposit required.
-Reduced lend amount.
-More expensive Mortgage insurance if even available or applicable.
-Reduced consideration of the rental yield to allow for longer vacancies.
-A call for additional or cross-collateral security (see earlier post here).
-Downright refusal of loan application at worst!
The fundamentals of real estate remain important, not necessarily the fact that its a studio apartment. There are plenty of studio apartments that have doubled their value over the last property cycle. The unit my have great rental yield, low vacancy rates and be located very well so a bit of hard work and research during the application may pay off long term!
In Australia, this is a common question.
They are predominantly marketed with a very healthy rental yield; however, that is sometimes where the attractiveness ends.
Here is some of the "noise" that surrounds them: The banks won't lend against small studio apartments, Student apartments are not an option, You won't get lending approval if the floor size is less than 50 sqm, Some banks won't lend for apartments in large complexes, The location of the apartment within the complex is important, Hotel or motel conversions are not acceptable.
While being just "noise" some of these points are somewhat valid. The recent credit crisis has stopped a lot of lending overall and small apartments and units have been affected by this more than most property investments. The biggest stopping point is usually lender's mortgage insurance (LMI). They are the ones imposing all the restrictions that are passed onto the bank. If you require LMI this is where the hard work starts
Hurdles:
Size: While this might not be important to the lender, you can expect the mortgage insurer to have minimum requirements on the floor space area. Always aim to avoid any apartments or units with a floor space less than 50 sqm. It should be 50 sqm of real 'living area' (not car space and balconies etc). In special cases, this may be stretched down to 40 sqm but the apartment would have to be in a "blue-chip capital city area". The Bank may not impose a floor-space limit but note that the LMI might fail the approval for that very reason.
Title: Strata/stratum title is normally acceptable, as are 'group' titles. Mortgage insurers are not usually concerned of company title and will lend, though they may adjust their Lending amount.
Location in the development/complex. One important factor may be whether it's in a good area in the development or if it's at the dark shaded noisy rear corner of the complex near the local highway or busy intersection.
Changing from commercial zoning to residential. Hotel conversions, holiday lettings and serviced apartments (commercial) lettings rather than residential units are categorized under different lending requirements (possibly commercial). So if they are being rezoned your finance may not be approved until the conversion is complete providing it meets all council's and lenders' requirements, most lenders will proceed but there may be a reduced LVR or restrictions on LMI until completion. The biggest reason is you are reliant upon the performance of the management company looking after the conversion or management in the mean time.
Number of apartments in a development: There might be a limit on the amount of apartments within the one development or area that you can put up for mortgage insurance. The bank may limit on lending on six apartments in any one development or limit lending for no more than one quarter of a development.
Here are some extra requirements you may have to satisfy for finance:
-More detailed valuation inspection and report.
-A lower Lending to value ratio (lvr) (70 to 80 per cent max, though some, usually non-bank lenders, only go to 65 per cent) -and/or a higher deposit required.
-Reduced lend amount.
-More expensive Mortgage insurance if even available or applicable.
-Reduced consideration of the rental yield to allow for longer vacancies.
-A call for additional or cross-collateral security (see earlier post here).
-Downright refusal of loan application at worst!
The fundamentals of real estate remain important, not necessarily the fact that its a studio apartment. There are plenty of studio apartments that have doubled their value over the last property cycle. The unit my have great rental yield, low vacancy rates and be located very well so a bit of hard work and research during the application may pay off long term!