Cairns office: 07 4035 3044

WHY INVEST IN CAIRNS?

HISTORY OF CAIRNS CYCLES

Cairns is a relatively new city and most of the building happened in three distinct phases.

Phase One - This would have happened in the very late 1970’s and early 1980's. The unit blocks that were built were either single level or two storey. They tended to be in smaller blocks and I will guess that at this time there were a lot of Duplex pairs that were built.

These are concentrated in Edge Hill mainly. We personally have just one property in Edge Hill, and it is one of our least favourite ones. Some of the reasons include - the height of the ceilings. They are built to 12 blocks high, where as the standard is now 13. This means if you are a really tall person, you don't want to be putting your hands in the air whilst the ceiling fan is on. The plumbing and wiring is now 30 plus years old and many need to have this upgraded. The kitchens and bathrooms are original and you can't really get away with just changing the taps and handles to make it pretty.

The body corporates generally didn't start to collect money for future works until the mid 1990's and by this stage many were 20 years old and had not much done to them. It is a constant battle at the property we own to balance collecting enough levies and improving the property. Although Edge Hill is a very popular suburb as it has the Botanical Gardens and the Village - the rents aren't higher. In fact sometimes it is actually lower than the high density places we have in Manunda.

The next building phase was between 1988 – 1995, and this was your bomb proof but certainly not pretty developments. This includes the houses you will find in White Rock, Woree and Brinsmead to name a few. These were constructed with besser blocks and most of them finished to a budget finish - the besser blocks weren't rendered internally or externally, the kitchens and bathrooms were basic in design and fit out and the fixtures and fittings were cheap.

The unit developments of this era were mainly in the 5km CBD circle. This is up to Edge Hill, around to Whitfield and south to Woree. There were some developments at the northern beaches and some further south down to Edmonton but the bulk were in the Manunda, Manoora and Whitfield area. These were up to a maximum of three stories high. The size ranged from a simple 4 pack up to 45 units. There were also some duplex pair developments that were done but if they could squeeze more onto the block - they did.

The last building phase happened between 2003 - 2008. This was cut short by the GFC - it literally ground to a halt overnight and the rest is history. These developments were nice and on a much bigger and grander scale. We had the development along the northern beaches, the Esplanade in the City and other inner city suburbs. We also had the mega developments like The Lakes and Cairns One. Housing was also on a much grander scale and to a much higher specification. There were very few small developments and even fewer duplex pairs. I guess the economies of scale just weren't there.

During the rise of the last property cycle, the units that were built in the first and second building phase were pretty much bundled together and sold for about the same price.

OBVIOUSLY THERE WERE SLIGHT DIFFERENCES FOR LOCATION AND FIT OUT BUT GENERALLY THIS WOULD BE THE PRICE NEAR THE PEAK OF THE MARKET IN 2008:

• Studio Apartments - $80 - 100,000 - this is the really small ones at Chester Court, Jensen Street and even the motel style units at Anderson Road

• Bedsit Units $110 - 115,000 - this is the type that can be found at 85 Birch, 93 Birch and 55 McCormack Street.

• One bedroom units - $150 - 170,000 - the better the presentation the better the price.

• Two bedroom units - $220 - 240,000 - I know it is difficult to believe but you really couldn't buy a crappy one for $200,000

• Duplex Pairs - $500,000 plus. Yes these are the same duplex pairs I wrote about recently that if you shopped around you could buy for $400,000 and under.

• Houses - $300,000 plus. This would be for a basic three bedroom, one bathroom home in the not so good areas.

NOW TO PUT THIS INTO CONTEXT FOR TODAY MARKET AS IT STANDS RIGHT NOW:

• Studio Apartments - $40,000 if you hunt around you may even get one lower.

• Bedsit Units $85,000 - potentially there is $30,000 if the market goes back to just 2007 prices

• One bedroom units - $90 - 120,000 - these have dropped but not as badly as the two bedroom units.

• Two bedroom units - $95 - 140,000 - if they just go back to 2007 prices there is potentially $100,000 capital gains to be made.

• Duplex Pairs - $350 - 400,000 - these have gained $50,000 in price since we started tracking them 18 months ago.

• Houses - $250 - 300,000 - this is for your basic home in Woree, White Rock, Manunda, Manoora etc.

BODY CORPORATE – OUR THOUGHTS

I know most investors baulk when they see the body corporate levies, but I think that there are many that just don't understand what a body corporate levy is, what it pays for and why they are actually a great thing for investors that don't live where their investment is.

The key to a good body corporate is to have a great Chairperson who makes sure all the jobs are done - fortunately many of you have a great Chairperson, who happens to be their property manager as well! I know I am in Gloat Mode.

For an investor, it is difficult to understand what the body corporate is responsible for and what they aren't. As a general rule, the body corporate is responsible for all the common area, the building and the insuring of the actual structure. The internals of the unit are the responsibility of the owner but even so this is a bit blurry. If you have a leaking tap, then the owner is responsible to get the washer changed. If there is a burst pipe and that pipe is in the slab then it is the body corporate. If the kitchen needs replacing due to age, then it is the owners responsibility. If the kitchen is damaged due to an insurable event, then it is covered under the body corporate insurance cover.

Let's say the hot water system is located in the kitchen cupboard and it bursts flooding the unit. The damage to the kitchen is covered by body corporate insurance. The owner will have to pay to get a new hot water system installed. If the carpets are damaged, these are classed as contents and the owner needs to claim this through their Landlords Insurance. If the walls are damaged, this is a body corporate claim and their policy will fix this - yes I know very confusing.

I will use Palm Tree Apartments for the example. This is a complex of 44 units, with 24 of them being bedsit units and 20 being 2 bedroom units. The complex was built in 1995 and is a besser block, three storey, bomb proof place. It isn't the prettiest but it is perfect as an investment. The units themselves are basic internally but very functional. The beauty of these is they are big internally - much bigger than a two bedroom in a newer property.

When you have a big complex, you really need to be proactive - if something is wrong it needs to be fixed. If you leave something broken or dumped next to the bin area it sends out a message that this is acceptable. This is a learning curve that I had to have - just because we pick up that piece of rubbish near the letter box and put it in the bins, doesn't mean everyone else will!

There are two parts to a Levy - you have the Administration Fund, which budgets for the things that will happen each and every year, and then you have the Sinking Fund. This is for future works to be completed such as new roof, gutters, fences and repainting.

The Queensland Government realised that if they didn't make people put money aside for future works, then they wouldn't. In the mid 1990's they brought in Sinking Fund and each building had to do a report and estimate what works would be require, what time frame they were needed to be done in and the cost. They then work backwards and come up with a figure so that there will be enough money in the bank when the work is required.

PALM TREE APARTMENTS ADMINISTRATION FUND IS $70,670 FOR THE YEAR. IT IS MADE UP OF THE FOLLOWING:

Bank Charges $30

Cleaning $3000 - This is a big complex and tenants are for ever leaving juke near the bin and around the complex. For me to be able to charge it on to the tenant that dumped it, I have to have a witness to say it was them - and even then how I am going to prove it? I have within this cleaning budget an allowance to take things away. We also have someone go to the complex once a week and check the lights, pick up the rubbish and generally make sure it is clean and tidy. They also report any damages - basically they are my eyes. It also allows for basic pressure cleaning of the paths after the wet season.

Community Power $4600 - At this complex we have a swimming pool and this pump accounts for about 30% of the bill. We have lights throughout the car park and stair wells that come on at dusk and turn off at dawn. The place is lit up like a Christmas tree - and I can't have it any other way. I want our tenants to feel safe when they come home - there are no dark corners for people to hide in.

Fire Protection $500 - this complex is the only one that we have that has fire hoses on the common landings and we have to have them tested each year. We also have to have a Fire Evacuation Drill completed each year, as well as all the signs checked.

Gardening $7700 - this sounds like a big part of our budget, but I can't tell you the difference having a well presented building has on potential tenants. The gardens are a big part of this and we continually improve and maintain them. It has been a long process that has taken us about ten years to produce the results we have today. I deliberately took the slow and steady approach rather than spend tens of thousands at one time - this would have given us good results but the owners would have had to dip deep into their pockets which I didn't want to see happen. I have included some photos so you can see the results we have achieved. These are the ones I have on file and they are two years old. The complex has flourished since then but these will give you an idea of what can be achieved.

Insurance $35000 - this is 50% of our budget and there simply isn't a thing I can do to decrease it. When you look back and remember that it used to be $6000 per annum, you can directly see why the levies have increased. I am hoping there is light at the end of the tunnel, there certainly appears to be alot of talk from the Government acknowledging the issue. At least the premiums seem to have stabilised for now.

Pest Control $1000 - I have the common areas inspected every six months to be sure we don't have any active termites. The complex is a concrete bunker so there isn't a lot of timber in it, but I still want to be sure we have none around. This is about half of the budget. With the other I have it sitting in reserve. With all the rain, we get rodents and these need to be treated. When I know they are about we get the baits refilled and knock a hole in the population.

Secretarial Fee $6200 - this is the fee that Body Corporate Services charge for their secretarial service. Even if we were in a smaller complex, I would have them do this side as they know what they are doing. It works out to be $140 per owner and I think this is money well worth spending.

Taxation Fee $650 - because we earn interest on the money we have sitting in our account, we have to lodge a tax return. There is a quarterly return that we have to submit with our income - this is just the interest and not the levies themselves.

Communication and Outlays $4000 - this is what Body Corporate Services charge us for Postage and Stationary. We have a fixed fee, which makes budgeting easier for me. The cost per owner is $90 - this covers the issuing of levies, the AGM papers and lots more.

R&M Electrical $1000 - this sits there for when and if I need to send an electrician out. Let me tell you the tenants can be sitting in darkness in the car park and stair wells, but as soon as the booster to the aerial looses power and they can't watch TV - the phone runs hot. There are some years that we spend more than this, and others were they aren't called out. Some the cost is out of our control - vandals break the lights and I have to send them out.

R&M Plumbing $1000 - This particular complex was built slightly later than some of the others we are involved with. So far we have been lucky and the number of burst pipes we have hasn't been a lot. City Park on the other hand has battle scars all over the car park where they have had to cut the concrete to get to the burst.

R&M General $2000 - things are going to go wrong, or need to be done so I have this sitting there for just these times. It can range from getting the carport gutters cleaned out, the replacement front doors - which body corporate are responsible for. The owner is responsible for the security screen door, but not the wooden door. The other interesting one is that body corporate is responsible for the shower screens, but not the vanities. Fortunately we have this down pat and in a great price range thanks to Bart our Wonder Handyman.

R&M Pool $4000 - this is the one thing that if I could get rid of easily I would. No one uses it except for the neighbourhood kids that come and cause drama. It is costly to service and have the power running the pump - but tenants just love to know there is a pool in the complex. I make allowances for things that can and will go wrong - chlorinators, pumps, cyclones dumping lots of debris in the pool, the wet season with all the rain and a whole load of other things.

The total is $70,670 or in the case $1104 for the bedsit units, and $2208 for the two bedroom units.

THE SINKING FUND IS THE SECOND PART OF THE LEVIES

This is for the future works or something that doesn't happen all the time. This can include tree lopping, pressure cleaning, big garden upgrades etc. Palm Trees has a healthy sinking fund of $48,311, but we also have $13,178 in the administration fund spare. This gives us a combined bank balance of $61,489. This sounds like a lot but when you have a building that is 19 years old, it isn't alot really. For this complex, we collect $20,000 each year but know that some of this will get spent. This adds $312.50 for the bedsit units and $625 for the two bedroom units.

In total the bedsit levies for the year are $1416.50.
In total the two bedroom unit levies for the year are $2833

Using Palm Tree Apartments as my example, although there is a cost to each owner annually there are results that can be seen. The building was repainted 7 years ago, the gutters are cleaned each year, the gardens are well looked after an asset to the building, the insurance is paid - and best of all we have $61,489 in the bank to do any future works.

I KNOW THAT SOME OF YOU WILL BE GOING - WOW THAT IS A LOT. SO NOW I WILL TALK ABOUT A DUPLEX PAIR AS THESE ARE SIMILAR AGES, SIMILAR SIZES AND REQUIRING SIMILAR WORK TO BE DONE:

Insurance for the pair is $2500 - you may get it cheaper if you are lucky but I will use this figure for now.

Pest Inspection twice a year $600 as this should be done regardless of being in a body corporate or not.

Repairs and Maintenance $1000 - this is a minimal figure and will only be for the outside.

Total $4100 or $2050 per side. Sure this is a saving of $783 per side over the two bedroom unit, but let's look at the difference.

• You haven't upgraded or done anything to the gardens. You are relying on the tenants to do this for you - green thumbs are not normally present when it comes to tenants.
• I have only allowed $1000 maintenance and this isn't going to get a lot done.
• If something goes wrong with the plumbing this hasn't been allowed for.
• If something goes wrong externally - this hasn't been allowed for.
• The outside of the house and the paths haven't been cleaned, and after a wet season like the one we are having let me tell you the mould is growing as you watch.
• The gutters and down pipes haven't been cleaned out.
• There is no money sitting in reserve for the jobs that are going to need to be done - fences, gutter replacement etc

I have been driving around and looking at all our properties, and let me tell you that the outsides are starting to look tired and need some work done to them. If they are in a body corporate it is easy, get the quotes, pass it via the committee and get the work done. The money is there sitting and waiting for the work to be done.

On the other hand, if it is a property not in a body corporate - the owners have to find the money to get this work done. If you happen to live in Cairns and can do this work, then this is a good thing and you can save the money. If you don't live here then we have to get someone to do the work. At the moment, I can get this done and the prices are pretty good but my big concern is when the economy does take off this is going to change - and quickly.

Why investing in Cairns makes sense

Linda goes backs to the Tools

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Property Ladder Realty Cairns
128 Aumuller Street, Cairns, Queensland, 4870 Australia
Telephone: 07 4035 3044 Fax: 07 4035 3077
Email: info@plrealty.com.au

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