Earthquake prone apartment
Question from Arihia updated on 27th September 2013:
I'm a first home buyer and looking at a three-bedroom apartment in Wellington with a $400,000 RV (accepting enquiries from $280,000). The current rent is $525 per week. The only issue is that it's earthquake prone and needs strengthening by 2030. My question is, would this be a wise purchase as a first home? My intentions are to live in it and get tenants/borders and slowly do cosmetic touchups and finally use it as a rental property. Your feedback would be much appreciated.
Our expert Ollie Mitch responded:
Firstly, a rateable value (I'm assuming this is what you mean by RV) doesn't mean anything. Therefore, based on the rental income and assuming expenses of $5,000 per annum then I'm going to give the apartment a value of $320,000 (around a 7% net return). Being earthquake prone there are risks that you will need to do your best to quantify, the safety risk you will need to assess yourself. Financial risk will be a bit easier although it is unlikely that exact costs to carry out the seismic strengthening required have been established. Talk to the body corporate committee and ask if there has been any suggested plan to carry out seismic strengthening and if so the estimated cost. The likely result of the low seismic rating (apart from the risk of the building being substantially damaged in an earthquake which is a real risk you will need to consider) would be for your body corporate levies to be significantly increased over a ten year period to build up sufficient funds for the strengthening work to be carried out. This is going to have a negative effect on your return and therefore the value of your investment. Risk and reward is an assessment each investor needs to make for themselves, my personal opinion would be that there are safer bets that a first home buyer could make.Ollie Mitch is head of sales at Iconicity, leading apartment investment specialists and the largest private buyer and seller of apartments in Auckland City. Phone 09 300 5073, email firstname.lastname@example.org or visit www.iconicity.co.nz