Thinking about major capital works in your strata common property can be daunting. How does the average strata owner deal with the complexities of aging or faulty major plant and equipment such as lifts, air-conditioning or pools or infrastructure such as windows, balconies, roof and facades? And if you live in a community title scheme, you may also have to consider items such as road works and the supply of electricity and water.
The difficulty of making good decisions about these highly complex and technical issues is obvious in high rise, but even working out how to replace the water heater in a block of six can cause unwarranted grief and heartache!
Decisions to do with capital works to your home or investment property are best approached with a clear set of guidelines. If you follow them you’ll find the decision-making process much less arduous, and that your choices are much more likely to result in real improvements to the value of your property investment and to your lifestyle.
First: Separate planning from funding
People in strata often make poor decisions because they feel they operate in an environment of scarcity. Typical thoughts are: “We don’t have much money, what can we get for what we’ve got?” or “We don’t have any money, what’s the cheapest we can get?”
Its plain common sense that if you need to spend $100,000 and only spend the $60,000 that you have, you’re asking for trouble. You’ll have to skimp on the work or skimp on the quality. At best you’ll have a temporary solution, at worst you’ll have to do it all again. We know that buying cheap is not always buying value – more often than not, cheap buys nasty.
Second: Make the capital works decision based on Return on Investment
If you have a choice of three projects, say costing $150,000, $200,000 and $250,000, the right choice is not the cheapest one – rather, it’s the one that will give you the biggest increase in return.
Return is measured by the increase in value of your property and that almost always means the improvement in lifestyle of all who live there. Think of major capital items as an investment. That way, you won’t make the mistake of going for the cheapest. All investments require a return and working out which option will give you the biggest percentage return on the amount invested will point you in the right direction.
Third: Make sure you choose the right contractor and engage them under the right terms and conditions
The person who quotes $90,000 may not give you the value for money that the person who quotes $95,000 provides. Investigate thoroughly exactly what the contractor will do.
Fourth: Now it’s time to think about funding
Only when you’ve worked through these issues is it time to turn your attention to funding.
There have always been three funding options in strata and community title schemes – sinking funds, special levies and borrowing.
State legislation does not prescribe or mandate what funding choice you should make. Look carefully into the legislation and you’ll see that it supports good planning processes (including your choice of obtaining expert assistance if it is warranted) and that the decision on how you fund your chosen capital works is entirely up to you. Government wants owners and schemes to think carefully about their needs and their situation and to make appropriate decisions.
Choosing the funding option that’s best for you will depend on the individual and specific circumstances of your strata scheme and of your fellow members.
Sinking funds, special levies and borrowing are neither good nor bad in themselves – they are tools for you to use. Weighing up the advantages and disadvantages of each option and how they apply to your situation will ensure you choose the right funding tool for your particular job.
Source: Paul Morton, Lannock Strata Finance
BCS Plus Magazine Issue No. 8