Buy-to-let investors under strain

Buy-to-Let Investors Under Strain

Withholding body corporate levies because of personal financial strain places the building in a precarious fiscal position, while jeopardising the property investment and its long-term viability.

Andrew Schaefer, MD of national property management group Trafalgar, warns many new developments are under strain as numerous owners lack sufficient knowledge and information about body corporate levies and their purpose, and so fall into arrears.

He believes many investors are experiencing negative cash flows on their property investments compounded by the challenging economic climate. Consequently, estate agents should provide estimates to ensure buyers can accurately budget for monthly bond, levies and municipal payments.

“Developers should consult managing agents before the sales launch to prepare accurate building maintenance and operational budgets and levy schedules (calculating future budgeted expenses plus reserve requirements pro rata for individual sections),” he says.

Owners underestimate the costs associated with property ownership – transfer and bond registration fees and monthly bond repayments, municipal rates and body corporate levies – leaving them struggling financially.

Buy-to-let investors using managing agents also contract to a monthly collection commission fee for rental collections. Schaefer says vacancies, unexpected maintenance and special levies are realities for buy-to-let owners, meaning they must anticipate absorbing and sustaining intermittent negative cash flows.

“Particularly buy-to-let investors either miscalculate when investing in properties or do not secure the rental escalations or occupancies that cover their associated costs in a high interest rate phase. Yet, in skipping the body corporate levies, they jeopardise their investment by potentially throwing the body corporate into the red and initiating a ripple effect on maintenance neglect, poor service and ultimately, an unattractive rental asset,” he says.

Schaefer says owners who generate levy arrears only escalate their problems by incurring interest payments on those outstanding amounts and potential legal costs in recouping their debts as well as prompting the knock-on effect to the body corporate.

The long-term outcomes are properties that attract lower rentals due to deteriorating infrastructure as well as the risk the body corporate may initiate a sale to recoup the debt. That means the investor loses both his investment and capital as the sale falls short of input costs.

On the other hand, Schaefer urges body corporates to swiftly approach defaulting owners to prevent the problem escalating where it affects cash flows or where legal action is necessary to recoup large-scale arrears.

“Like other assets, property follows cycles and although current prices have fallen from the stratospheric levels achieved several years ago, it remains a long-term appreciating asset and making every effort to keep financially balanced in the short-term pays future dividends when the market turns and the financial strain eases,” he says.