A new type of property ownership came into being in Australia 60 years ago. It’s called ‘strata title’ or ‘strata scheme’, and it opened up affordable property ownership for a large number of new buyers.
The system has since been adopted by other countries, and is now so widespread in Australia that an estimated 2.2 million people (9% of the population) live in strata title units, apartments and townhouses, according to a report by the University of New South Wales.
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What is a strata title?
Most freestanding houses in Australia are registered under a Torrens title, recording ownership of not just a building or other improvements, but also the entire block of land on which it sits.
A strata title, on the other hand, is used to register ownership of an individual ‘lot’ (an apartment, unit, townhouse or duplex), plus a share in the common ownership of the land on which a group of dwellings has been constructed as well as shared property like roofs, external walls, gardens, driveways, foyers, stairwells, lifts, and even swimming pools and gyms.
How strata title properties are managed and maintained
The body corporate, or owners’ corporation, is a term used to describe the collection of property owners in a strata title scheme. The owners may elect an executive committee from amongst themselves to oversee the management and maintenance of the common property, or they may agree to use the services of a professional strata management company. In either case, all the property owners must make a regular financial contribution – known as a strata levy – to the cost of running and maintaining the property.
A body corporate may also create a number of by-laws governing the behaviour of residents in the strata title property. These by-laws may cover issues such as parking, hanging out washing, whether residents can have pets, and hours of use of shared facilities like pools and gyms.
Strata title vs community title
A community title is similar in many ways to a strata title, in that there is common ownership of areas like driveways, visitor parking and any other shared facilities.
However, the lots in community title properties usually have their own clearly-defined land boundaries. That is, they are freestanding individual townhouses or units constructed withing a shared larger property, such as a retirement village or gated community. Owners of the individual lots are usually responsible for the maintenance of the buildings they own, whilst the body corporate maintains the common property.
Pros and cons
Pros
- Lower purchase cost. It is usually less expensive to buy a strata title property than the equivalent size Torrens title property, because some or all of the land cost and building cost is shared with the owners of the other lots.
- Maintenance is taken care of. You don’t need to worry about maintaining common property areas and the structure and external surfaces of the buildings, since these are taken care of by the body corporate.
- Easier to sell. Demand for strata title properties can be stronger than for Torrens title homes, making it easier for vendors when the time comes to sell.
- Security. If there is a locked common entry door or gate, your property is likely to be more secure than a free-standing house.
- Access to upmarket facilities. You may gain access to desirable amenities like a swimming pool, gym and tennis court that would otherwise be out of your reach.
- Optional involvement in executive committee. You can choose to get involved in management of the property by standing for election to the executive committee if you wish. Hands on or hands off – the choice is yours.
Cons
- Strata levies can be expensive. The owner’s financial contribution to management and maintenance costs can be high, especially for older properties requiring extensive repairs, or properties with special facilities like a pool or gym. Strata levies are also likely to increase over time.
- By-laws can be restrictive. There may be rules preventing residents from owning pets, for example, or hanging out washing where it is visible to others.
- More noise. You’ll usually be living quite close to your neighbours, or have them above or below you, adding to the possibility of noise disturbance.
- Property value can be volatile depending on recent sales. If one of your co-owners has to sell suddenly (as a result of unemployment, say, or relationship breakdown) and accepts a low price, it could reduce the market value of your own lot.
Strata title implications for property investors
A strata title property can be an affordable addition to an investment portfolio, and it’s usually no more difficult to get an investment property loan than it is with a Torrens title. In fact, since it’s likely to have a lower price than the equivalent freestanding property, finance could be easier to obtain.
You will be sharing the property’s upkeep (for the building structure and shared facilities) with other owners, so you’ll probably spend less time and money on maintenance.
Yes, you’ll pay strata levies, but the rent you will be able to charge will reflect this, and the cost of the levies will be a tax deduction against your rental income (or an addition to your negatively-geared deduction).
It’s also possible to make strong capital gains on a strata title investment, since demand for cheaper properties like apartments and units can often be stronger than for freestanding homes in the same area.
However, you need to be aware of potential downsides, which include:
- Possible building defects in newly-built strata properties.
- Lack of control over strata levy spending if you’re outvoted by owner-occupiers.
- Lifestyle restrictions on tenants (pets, barbecues, noise) which could reduce your potential tenant pool.
- Inability to add value to the property by extending it.
But if you do your homework before buying (a strata title search to reveal body corporate meeting minutes and financials) and also research the value growth drivers for the location, you could be in a good position to derive real benefit from a strata title property investment.
