Sinking Fund Health
A well-managed scheme will have a healthy sinking fund that aligns with a 10-year capital works plan. As a general rule, the sinking fund balance should be at least 70-80% of the projected expenditure outlined in the capital works plan for the next few years. An underfunded sinking fund almost certainly means special levies are coming.
- Is there a plan at all? Some smaller schemes operate without one, which is a yellow flag
- When was it last updated? Plans older than 5 years may not reflect current costs or building condition
- Major items upcoming: Are there large expenditures forecast in the next 2-3 years?
- Alignment with fund balance: Compare projected costs against the current sinking fund balance
Special Levy Liability
If you purchase a lot and a special levy has already been approved (even if not yet fully collected), you may be liable for your share. Large special levies ($5,000-$50,000+ per lot) for items like building defect rectification or cladding remediation are a major financial risk. Check the fine print.
- Pets: Can tenants keep pets? Restrictive pet by-laws may limit your tenant pool
- Short-term letting: Some schemes prohibit or restrict Airbnb-style short-term rentals
- Renovations: What approvals are required for internal renovations?
- Parking: Are car spaces allocated, and what are the rules around visitor parking?
- Noise and behaviour: Strict noise by-laws can be a selling point or a nuisance
- Appearance: Restrictions on balcony usage, window coverings, or external modifications
Recent By-Law Changes
By-laws that have been recently amended to restrict short-term letting or add special conditions may indicate internal disputes within the scheme.
Cladding Remediation
Following the Grenfell Tower tragedy, many Australian buildings have been subject to combustible cladding audits. Remediation costs can be enormous ($50,000-$200,000+ per lot in severe cases). Active cladding notices are a major red flag.
- Building sum insured: Is it adequate to cover full replacement cost?
- Public liability coverage: Standard is $20 million
- Premium trends: Rapidly increasing premiums may indicate a poor claims history
- Excess amounts: High excess amounts increase out-of-pocket costs for claims
- Exclusions: Any unusual exclusions that could leave the scheme exposed
Walk Away If You See These
1. Sinking fund below 50% of projected 3-year expenditure — special levies are virtually guaranteed
2. No capital works plan — the scheme is flying blind on future maintenance costs
3. Active combustible cladding notice — remediation costs can be catastrophic
4. Multiple recent special levies exceeding $5,000 per lot — indicates systemic underfunding
5. Ongoing litigation with costs exceeding $100,000 — legal fees drain the scheme's resources
6. High owner-occupier to investor ratio with restrictive by-laws — may indicate anti-investor sentiment
7. Building insurance premiums increasing more than 15% year-on-year — suggests escalating risk profile
Positive Indicators
- Healthy sinking fund aligned with an up-to-date capital works plan
- Stable or moderately increasing levies
- No history of special levies (or only minor ones)
- Professional strata management with consistent tenure
- Well-attended AGMs with constructive discussion
- Regular maintenance and proactive building management
- Adequate insurance coverage at reasonable premiums
