Pro’s & Con’s in buying Studio in Melb CBD

Thanks, Jamie & Nigel.

Will definitely read a bit more as suggested.
Seeing agents advertising big rental returns (7% and sometime 8.5% gross return) is quite tempting on the surface.
Regards,
Jenny.

Hi.
strata cost – did you mean the ‘Body corporate’ cost or is it in addition to the body corporate cost.
The agent quoted the body corp fee was about 2K a year, which seems quite high in comparison to the size of the studio.
And I have a feeling that the body corp fees increase at a much faster rate than the rent.

Jenny.

Hi. I can understand about expenditure for the administration fund. But what is the significance of expenditure of sinking fund? What is a sinking fund? And how can one work out the most appropriate rost ratio per unit? Thanks.

Ok. Thanks to a number of you. A little research through this forum has basically summarised that there is literally no capital growth in studios, banks don't lend under 40sq m size and high overall running costs.
 
So my questions are:
1. On the capital growth issue: banks tend to be a little more liberal these days – some have reduced their size criteria from 50sq m to 40sq m.  Given this trend, one could hope for further reduced criteria to 30sq m or even 20sq m in the near future.  If this was the case, would there be a higher demand for studios as more people would be able to borrow to buy? And higher demand will ofcourse equate to 'easier to resell' than now?

2. Oversupply issue: if CBD studios and 1beds are hard to resell and banks don't like them, then why do Council planner and developers and the like keep erecting them, if not due to high demand (well, that was what I used to think)? Currently there are at least 3 new buildings are being built in the CBD (not counting Southbank). 

3. Is 3.5% annual capital growth for studios sounds reasonable? Obviously one would like a lot higher, but is 3.5% p.a achievable, or is it simply no capital growth at all?

Hi Lisasun,

I work in melb and melb cbd studios have the price range that I think I could save for in the next couple to 3 years. Another reason is because I may want to live in it in between tenants (usually tenancy for these type of studios are only 6 months and it takes up to 4 weeks to refill another tenant. It is convenient to go to work. The studio ofcourse will be purely for investment purposel; otherwise it would be too costly to live in.  Another reason why I've been thinking of stuido is because of the positive cashflow (but then again when I weighed against the ongoing high running costs and the constant agent costs as there is a high tenancy turnover, I am not quite so sure whether positive returns still hold true).

It is for long term, as I don't think I will be able to resell it quicly for quick cash.  And because it is for long term, I am hoping that it will at least make the equivalent of CPI gain per annum, i.e. 3 to 3.5% capital growth. Does this sound unachievable for capital growth?

Just the high running costs that worry me. But I've done the calculations. 4months of rental will cover all costs. 2 weeks vacancy for in-between tenants every 6 months; i.e. 1 month of vancy.  In total 5 months to cover all costs. I will be left with 7 months of rental checks in my pocket, which work out an equivalent return of 6%, which is roughly around bank deposit return. So all I am hoping for is at least a capital return equivalent to roughly CPI per annum. If this is not even achievable, then I think it is very tough to invest in studios.

You mentioned CBA may do smaller size – do you or anyone know their minimum square meter? Thanks.