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8 Mar 2013

FULL TITLE VERSUS SECTIONAL TITLE

My personal preference on investing in full title versus sectional title schemes. Don't worry, this is not a long lecture on the Sectional Titles Act. Its just more and more rant by myself on how investing in a sectional title scheme can be a bummer. And the few property investments we have are townhouses and flats. Meaning, I have been in a slight irritation for a while. From other occupants blocking the garage of my tenants, to penalties for my tenant's barking dogs, to levies that are sometimes out of hand... you name it. But benefits are undoubtedly there. The huge one being pooled resources for odds and ends like security.

What irritates me the most is home owners not taking care of their investments. Some tend to just collect rental income and never participate in any of the decision making, nor monitor the dealings of their tenants. This obviously leads to various problems for other owners. Overcrowding of units is but one. In one block of flats the water usage is just beyond acceptable levels. And the trustees started panicking and throwing the decision making at us as suggested by the law.

Section 39(1) of the Sectional Titles Act, 1986:
“The functions and powers of the body corporate shall, subject to the provisions of this Act, the rules and any restriction imposed or direction given at a general meeting of the owners of sections, be performed and exercised by the trustees of the body corporate holding office in terms of the rules.” 

This Section gives the members of the Body Corporate some powers to put some restrictions on the Trustees. This is especially handy on budgetary matters. So the admin company issues an email for us to vote for or against water being a responsibility of an individual owner, instead of the HOA. I must add that I'm one of a few owners with a garden and therefore my tenants could be using a tad bit more water than the rest of the people. Here is their suggestion:
"RH BODY CORPORATE – WATER USAGE TO BE BILLED AGAINST THE OWNERS ACCOUNT
The following has reference to the above mentioned and also to the instruction in terms of Section 39(1) placed on the Trustees at the Annual General Meeting held on the 21st of February 2013. Instruction was placed on the Trustees that they must implement the payments of water usages by each unit to be paid by the owner of the unit. The owners can then keep their tenants liable for this usage of water. The main reason for this instruction placed on the Trustees was to save money on the monthly Council Water Account, combat overcrowding of units and also to have a possible decrease in monthly levies. Water meters are already installed at the units, but some meters need maintenance... With reference to the above mentioned we need to have a majority vote from the owners to proceed."
The questions I'm beginning to ask myself are:
Is this whole real estate investing business worth it?
My response is always YES because I wouldn’t have managed the little I managed without property and the power of leverage. I started with NOTHING, zilch and “nothing” wouldn’t have helped me grow any other form of investment. If I were a trust baby with some small fortune stashed away by my parents and grandparents elsewhere, I may not have started with property. But at the moment, even with all the risks and hassles, I still choose to have a bit of real estate exposure in my portfolio. I think this started as a survival technique but is now some sort of passion. With the small growth I achieved over a decade plus, I feel I can enjoy looking at shaking my property portfolio by looking at options like commercial vs residential vs industrial or full title versus sectional title properties.

Should I invest in Sectional Title Schemes or just slide towards Full Title more?
My response depends on a number of variables. For starters, buying in a sectional title scheme can be money saving. That is if everyone in the Home Owners Association is responsible and the tragedy of the commons doesn't exist. Which is impossible. People like free-riding. In a perfect world, a sectional title would mean some risk diversification as one shares the risk with fellow home owners. But it also means increased risk from the decisions taken by other investors. And I have seen over the years, investors caring less and less about their property investments. Sectional title schemes that are well run and looked after seem to be the ones with the majority of occupants being the owners themselves. When the majority is tenants, owners tend to keep their distance from taking responsibility and taking decisions.

On the  other hand a multifamily investment within a full title property can be costly to buy or develop. I am a small investor in the mercies of the banks for the most part. But I am so fed up by the way landlords in some sectional title schemes behave. Failure to attend general meetings is the biggest problem. And that leads to them not filtering the decisions taken through to their tenants and failing to follow up on critical issues. This is the reason we decided to start looking at the multiple family properties that we can afford. We are looking at the student accommodation or accommodation for young professionals as investments of choice. I have identified a few possibilities already. We will also consider selling a couple of problematic townhouses/ flats soon.

That way we'll carry the full risk and deal with stuff as it happens. Its not going to be easy but life is never easy. Even with a property manager, I imagine that I will still stress. Theres security, dealing with the municipality, setting and implementing tenant rules, etc.

 Full title versus sectional title - Where would you rather invest?

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