It’s the nightmare scenario for property investors. You invest in a brand-new apartment. Tenants move in, the construction company moves on, and you start generating income.
Then, suddenly, you discover a building defect. Your tenants move out. It’s not clear whether it’s a problem with your apartment or the whole building, and you have no idea how much it’s going to cost.
There are still too many investors who believe this is a problem that only affects those impacted by the 2018 Opal Tower fiasco, which saw over 3,000 residents evacuated from the Sydney apartment building just four months after construction.
In reality, the Opal Tower is just the tip of the iceberg. New-build apartment buildings are riddled with problems. One survey by the government of New South Wales found 53% of apartments registered between 2016 and 2022 have at least one serious defect.
In other words, if you bought a property built in the past 10 years, it’s more likely than not to have had at least one serious defect.
How much do apartment building defects cost?
Unlike a fresh coat of paint, building defects can be cripplingly expensive. Research conducted by Equity Economics and commissioned by the Construction, Forestry, Maritime, Mining and Energy Union (CFMMEU) suggests that repairing defects in apartment buildings completed in the past decade could cost more than $6.2bn to repair.
And when you include older buildings? That figure more than doubles, the CFMMEU says. For individual investors, even a small share of that cost could be ruinous.
What are the most common building defects in apartments?
If you’re thinking of investing in a new apartment and you’re not sure what to look for, you should start with the most serious common defects:
1. Combustible Cladding
What is it? External building materials, such as aluminium composite panels or other highly flammable materials.
What’s the problem? Increased risk of a fire, risking lives and leading to catastrophic damage. Properties with combustible cladding may fail safety inspections, resulting in higher insurance premiums, huge repair costs, and decreased value.
2. Water Leaks
What is it? Water seeping through the structure due to faulty plumbing, poor waterproofing, or damaged roofs and walls.
What’s the problem? Leaks cause water damage, mould, and structural problems. The damage and repairs reduce a property's lifespan and significantly lower its market value.
3. Fire Safety Defects
What is it? Inadequate fire exits, faulty alarms, non-compliant sprinkler systems, and poor fire compartmentalisation that make fires more likely and more dangerous.
What’s the problem? By increasing the risk to residents and first responders in an emergency, buildings with fire safety defects may not comply with regulations, necessitating repairs and reducing buyer interest.
4. Structural Defects
What is it? Faults in the building's foundations, load-bearing walls, beams, or roofs. These arise from poor design, substandard materials, or just poor workmanship.
What’s the problem? Structural defects can lead to cracks, sagging, or even partial collapse of the building. A damaged or unsafe building will need costly repairs, scaring away investors even after the problem is resolved.
How much does it cost apartment owners to fix defects?
The impact of these kinds of defects is far more than an inconvenience. For any investor, a property is one of their biggest financial assets.
At one apartment building in Melbourne, dangerous combustible cladding led to a repair bill of close to $8 million, split between only 33 apartment owners. That’s money they simply didn’t have. The apartments became unsellable.
Even at a moderate level, repairs could cost between $5,000 and $8,750. More substantial issues typically cost between $9,000 and $60,000 but can run higher, as the example from Melbourne shows.
Some residents have been able to retrieve their costs from the builder, but not always. Recently, a common cladding for apartment buildings, Biowood, was banned after a legal case found it was a dangerous fire risk, with builders ordered to repair any building erected in the previous six years.
That was a win for those taking legal action, but not for anyone whose building was over six years old. Those residents were left paying for their own repairs. Legal action itself is never cheap and just knowing that a building has been subject to disputes in court will deter many investors.
There are also government schemes to fund repairs, but funds are limited, and any government scheme comes with bureaucracy.
And for those dealing with more general building defects? Nearly 60% of owners were forced to put money into sinking funds, while a quarter had to stump up special levies, a Mozo survey found.
What can you do to identify and prevent defects?
If you’ve already invested in an apartment, you might wonder if you can do anything to avoid expensive repairs. There’s no magic wand, but you can reduce the risk:
1. Conduct Regular Inspections
Check for cracks, water damage, or signs of wear in your apartment and common areas. Keep records to track changes.
2. Hire Professionals
Engage licensed inspectors or engineers periodically to assess structural integrity, fire safety, and plumbing.
3. Stay Informed and Proactive
Review building certifications, safety compliance, and regulation changes. Act promptly on any issues.
4. Work with Owners’ Corporations
If you have an owners’ corporation, work with them to organise regular building maintenance, inspections, and repairs.
5. Secure Insurance and Maintenance Plans
Ensure your property is covered for defects and damage. Invest in waterproofing, plumbing, and fire safety checks.
Finally, be thorough before you buy. Don’t rush in when you see the flashy brochure and freshly laid floors. Ask yourself if the building meets the regulations and employ a surveyor to inspect before you purchase.
What can landlords do to pay for building defects?
If the worst does happen, how can you pay for the repairs? Property investors have options for raising funds, but there are pitfalls here to watch out for as well.
Strata loans are one option for apartment owners. A strata loan is a loan whereby the body corporate borrows money, repaid by higher levies charged to individual owners.
The issue? Everyone in the building pays for the work in the same way, but that may not suit everybody. Owners with spare capital might prefer to pay up front, while others with limited cash flow might prefer to repay over a longer period.
The higher contributions, meanwhile, might put off investors in the future.
Instead of loans with hefty repayments, landlords could pay for work upfront with funds provided by Futurerent. Rather than a loan, Futurerent gives landlords a lump sum of their future rent, with repayments made through future rental income.
The Futurerent approach is less of a deterrent to investors and, because you only pay when your apartment is generating rental income, you don’t have to worry if you have no tenants while repairs are being carried out.
Repairs can be costly and raising the funds can be difficult and stressful. To find out how Futurerent could help you reduce that stress and make it easier to fund the repairs your apartment needs, contact the team today.
FAQs
1. What are the most common building defects in apartments?
Combustible cladding, water leaks, fire safety issues, and structural defects. Each poses serious safety risks and leads to costly repairs.
2. How can I identify building defects early?
Conduct regular inspections, hire licensed professionals for detailed assessments, and review building certifications to identify issues.
3. What can I do if I can’t afford repair costs?
Strata loans, pay upfront, or alternatives like Futurerent, which provides landlords with a lump sum of future rent to fund repairs without immediate repayments.
