Beware of flawed floor plans

PORTFOLIO POINT: Don’t leap into properties with unconventional floor plans. Buying a liveable dwelling will provide much better investment upside over time.

Investing in property is about finding quality assets. And that’s not just about the location and style of building. Regular readers will be familiar with my advice that the floor plan must be logical and conventional in order to appeal to the greatest number of renters and future buyers. That advice seems straight forward enough to follow in theory, but putting it into practice can be more challenging. I suspect most errors come down to a buyer’s emotions getting the better of logic.

It’s worth delving deeper into what I mean by a logical and conventional floor plan. I’ve tracked down some examples of good and poor floor plans for properties I’ve considered buying for clients. In each instance, the quality of the floor plan was make-or-break in determining whether I bought the property for a client, given that the locations and building styles were fine.

First off, let’s consider how to analyse a floor plan.

Conventional floor plans – houses

The quintessential residential investment property in our major cities is a freestanding or terrace, single-fronted, two-bedroom weatherboard or brick cottage. The classic layout starts with a hallway that essentially travels from the front door to the back of the house with rooms coming off it. The straight-line hallway enables easy, unbroken connection around the house.

Ideally, living spaces – lounge, dining and cooking areas – should be gathered together, as should sleeping spaces. So you don’t want the dining room to be on the other side of the house from the kitchen, or bedrooms both at the front and back.

The position of the bathroom is also important. Notwithstanding the money and attention lavished on bathrooms today to wow guests who spend a penny there, bathrooms should not, to mangle a phrase, be seen or heard from a living space. Bathrooms should be tucked discreetly away from the action. At a minimum, the door of a bathroom shouldn’t open on to another room, other than as part of an ensuite arrangement. On that note, an ensuite bathroom should not be the only bathroom in the house as residents want their privacy and guests don’t want to traipse through bedrooms either.

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Conventional floor plans – apartments

Most of the same rules apply to apartment floor plans. However, given apartments are often smaller than houses, and are usually squarish in shape, it isn’t necessary or even desirable to have a straight line hallway.

Because there is often limited accommodation in apartments, properties that use the space efficiently so that there are distinct living spaces tend to be sought after. You’ll pay a premium for an apartment that allows its occupants to avoid the feeling they are living on top of each other, no matter whether it’s a one or two-bedroom dwelling.

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Unconventional floor plans

Alas, there are many ways that a property can deviate from convention.

• Small room sizes. Even in a modest cottage or apartment, a bedroom should fit a queen size bed and have room for wardrobes, bedside tables and access from both sides of the bed. Similarly, a living room should be able to accommodate a couple of couches, a coffee table as well as the wide screen TV.
• Unbalanced. Not only should room sizes be sufficient, but they should also be proportional to one another.  A large house that has several bedrooms but a small living room, dining room and/or kitchen feels odd. Consider this three-bedroom apartment. At first blush, it might appear to deliver much the same living experience as the earlier two-bedroom apartment, and provide and extra bedroom to boot. However, the two-bedroom apartment supplies a distinct room for kitchen/meals and a dedicated living room. But in the three-bedroom apartment, to accommodate the sleeping areas, the living and dining spaces have been condensed into one corner room. Generally, a three-bedroom apartment will have more people living there than its two-bedroom counterpart, so that deficit in living space is likely to be felt by its occupants.
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• Unusual egresses. Tenants and buyers are generally put off by floor plan quirks such as outdoor toilets and bathrooms.

Here’s an example of a house that fails on a number of accounts. The living room is too small, on account of the courtyard; to reach the bathroom one has to travel via the laundry or go outside. And the galley kitchen sits awkwardly to the side of the dining room.

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In many instances, a flawed floor plan results from misjudged renovations. Owners, seeking to add value, squeeze in more rooms, thinking more is better. They fatally compromise the original design in the process. It is a myth that more accommodation always equates to higher values.

A common example is a mezzanine extension on cottages. Whilst it may allow for an extra bedroom with ensuite upstairs, the physical requirements of a bulky staircase compromises the original ground floor plan and the cost of adding a second storey doesn’t always translate to a sufficiently higher value.

Getting the floor plan right is a perfect example of focusing your energy on controlling what you can rather than obsessing about what is out of your hands. Get the fundamentals right and don’t worry about what the Reserve Bank will do with interest rates or the moment when the market picks up.

Don’t fret too much about timing property purchases to optimally co-ordinate with these external events. Instead, focus on ensuring you identify and buy the right assets. And that includes no quirky floor plans.

Property Q&A

This week:

• Will improving my rental property pay off?
• Should I let my tenant re-let my property?
• Should I be worried about investing in Richmond, Melbourne?
• How does Albury-Wodonga stack up for investing?

Will improving my rental property pay off?

My two-bedroom investment apartment in Glenelg, Adelaide is looking tired and in need of renovations. I suspect I could ask for another $30 or $40 a week once it is painted and recarpeted. Should I give my current tenants notice to vacate or just wait until they move out?

Are the current tenants happy or are they frequently in touch with the property manager requesting routine maintenance? If there are no pressing concerns from the tenants then you need to weigh up the increase in rent versus the costs of a renovation including the forgone rent during this period plus the costs of securing a new tenant. It is unlikely that the economics of an early renovation will add up. I recommend you delay upgrading the property until the current tenant vacates.

Should I let my tenant re-let my property?

I have an investment property in Five Dock, Sydney which I manage myself. One of my two tenants has moved out. The other tenant says they have another person in mind to fill the spot. Should I just let them carry on or should I market the room more widely?

I assume the original tenants were on the same lease. If so, the departure of one of the tenants essentially sees that lease broken. From a legal perspective you could ask the other tenant to leave as well and re-list the property, and you may decide that this is the best course of action.

If, however, you are relatively happy about the remaining tenant, then it is probably preferable to let them propose a fellow prospective tenant with whom they feel they can co-habit rather than a stranger. However, do interview the new applicant and ask for employment and previous rental references. Then draw up a new lease for the tenants to sign.

Should I be worried about investing in Richmond, Melbourne?

I’ve been thinking of investing in Richmond, Melbourne. Notwithstanding my intention to stick to an established apartment, should I be worried about the significant amount of off-the-plan developments in the area?

You’re correct that Richmond is a popular spot for new and often large-scale residential developments. Close to Melbourne’s CBD and with a number of tracts of former industrial land that have been re-assigned for residential use, Richmond is a developer’s dream.

You should be alert, though not alarmed, about the impact of this major pipeline of new properties; but the implications should be modest if you choose your asset correctly.

To a great extent, the established and off-the-plan markets are distinct. Those in the market for an off-the-plan property aren’t really considering an established property and vice versa. So unless your proposed established investment property is in the immediate vicinity of a major development such that it is either over shadowed or will suffer from increased congestion, then there isn’t too much to worry about. You should be able to avoid that fate if you choose a quiet street.

From a rental perspective, there is more overlap in the demand for off-the-plan and established properties. It is possible that rental growth will be held back in Richmond in certain precincts. But again, if you steer clear of the off-the-plan dominated areas it’s less of a worry. Buy and rent in precincts dominated by established homes.  Moreover, with strong population growth and the enduring appeal of inner suburban living, I’m confident that the impact of off-the-plan developments on the established market will be limited.

How does Albury-Wodonga stack up for investing?

You sometimes recommend regional towns as investment options for those with smaller budgets. Does Albury-Wodonga meet your criteria? My family is from there, so it would be convenient to invest there if the economics stacks up.

In the current market, a budget of around $350,000 will buy you an entry level, investment grade one-bedroom apartment in an inner suburb of most of our capital cities, with a little more required in Melbourne and Sydney. For those whose budgets don’t reach this threshold, an investment in a larger regional city is an option (although if your budget is between $300-350,000 then it is worth looking at one-bedroom apartments in Adelaide or Brisbane first). Focus on those regional cities that have a larger population and a diverse range of economic activity. Avoid one-industry conurbations such as mining or resort towns.

With a population of 100,000, Albury-Wodonga is Australia’s 18^th largest city, according to the ABS, slightly bigger than Ballarat and Bendigo but smaller than Newcastle (540,000), Wollongong (288,000) or Geelong (174,000). Ideally, you would consider these larger cities in preference to Albury-Wodonga. But that’s not to say Albury-Wodonga is without merit. If you are to invest there, make sure it within one kilometre of the centre.

Be aware that due to the compromise in location, you are unlikely to attain the capital growth in a regional city that you can expect from a capital. The aim should therefore be to pay off debt quickly. With the acquired equity, you can then use this first property as a stepping stone into a capital city market.

Monique Sasson Wakelin is a co-founder and director of Wakelin Property Advisory, an independent firm specialising in acquiring residential property for investors. Monique can be found on Twitter: @WakelinProperty.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Monique? Send an email to monique@eurekareport.com.au