Purchase or Pass? A block of units next to a housing commission in Maroubra

On this week’s Purchase or Pass, Chris Gray is joined by Tom Panos from News Limited to look at a block of units situated next door to a block of housing commission properties.

Once investors have bought a number of units they often chase blocks of units, but is that the right strategy to go for and would you still buy if it was next to a block of housing commission properties?

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It’s a small block of four units, 10.9 kilometres from the Sydney CBD and just 150 metres to the beach. The units are in reasonable condition with fairly new paint and carpet but there is potential to upgrade them as the years go on. The units are all identical layout and feature two bedrooms with an internal living space of 87 square metres each. There is parking for four cars at the rear. Next door to the unit block is two housing commission blocks of units.

Chris Gray: I guess the first question Tom is, how much demand is there for small blocks of units and I guess, blocks of units that are close to the beach?

Tom Panos: Enormous demand, enormous demand. Even last Saturday I was doing a block of four in Lakemba, which isn’t a suburb that is regarded as a hot suburb in terms of real estate, but I think there were about 20 people registered to bid there. Every block of unit that I’m ever involved in auctioning, you just see record number of registrations. Big demand for blocks.

Chris Gray: Everyone seems to want this, but it’s getting more and more expensive. So say if you have a budget of $3 million, there’s probably not that many blocks around for under $4 million is there?

Tom Panos: Very rare, that’s the bracket everyone wants to go in, so the smaller the block the more attractive it is for buyers.

Chris Gray: So I guess the big question here is obviously it’s a good unit, close to the beach, its got parking and all the rest of it, but the housing commission next door. Would you generally buy next to a housing commission? Would you recommend that sort of thing?

Tom Panos: Look I’ve lived in a street that had housing commission and I never noticed it. So I think the whole issue Chris is, how much of the proportion is there normal to housing commission in a street? That would be the factor I would be looking at. So close to the beach, it depends if there’s only a few housing commission properties there. I wouldn’t think it was a big issue.

Chris Gray: And what if there’s say, 90% housing commission and there’s only one or two houses, or one or two blocks that are regular blocks?

Tom Panos: I think you are then faced with a dilemma, when you are going to be a seller, everyone’s going to know that that’s a housing commission street. You’ve got to take into account that its going to affect the resale value and you should take that into account when you are actually buying the property.

Chris Gray: Because affectively, you’re buying the best house in the street aren’t you?

Tom Panos: Correct, which is generally not the greatest strategy in real estate. But I would say if it’s a small proportion of housing commissions, don’t let that stop you from buying a great block of units.

Chris Gray: When people are looking at blocks of units, a lot of people like the control they can have, all four units themselves and they don’t have to worry about other owners. What are some of the other risks maybe with finance or leasing or anything like that with blocks of units?

Tom Panos: I think maybe the biggest thing is the repair bill. Generally speaking, when something goes in a block of units, because it's far bigger in metres it's more expensive. So the cheque that you write out to the agent for the repairs or the trades people when you’re dealing direct is significantly more. I think the financing can be more expensive, the ratio of the amount of money you can borrow decreases because there’s a higher risk.

Chris Gray: Quite often once you have three or four different units the bank will actually treat it as commercial won’t they? They might only lend say 70% and charge you, maybe 10% interest, say maybe than 6% or 7%.

Tom Panos: Correct, which affects your return because if you look at it, it's about input output. So you might be getting a decent return, but if you’re paying 2% more in a commercial rate, that does affect your final return in your investment.

Chris Gray: Ok so purchase or pass at $2.55 million close to the beach for you?

Tom Panos: Based on what I’ve seen there, beach, small block, rare, purchase.

Chris Gray: And look, for me I think this is a pretty rare opportunity and with a current rent of 4.5% before you even do anything, then it’s a pretty good price based on that yield. I wouldn’t worry about the neighbours when you’re only 150 metres to the beach, there’ll be a whole queue of people to rent or buy, especially if you do it in the summer months. So I’ll definitely go for a purchase on this one as well.