When doing your downsizing research, you will come across advertisements for residential communities known as “over-50’s” or “lifestyle” communities.
So what are these communities and how are they different to retirement villages?
In the industry, we refer to the over-50’s or lifestyle communities as “Land Lease Communities”, abbreviated as LLC’s. The name refers to the model of tenure, where you lease the land on which your house resides. Let me explain…
LLC’s are essentially caravan parks, and it helps to understand the land lease model if you think of them in this way. In an LLC, a resident buys the house and leases the block of land the house sits on. Not dissimilar to a caravan park, where you back your van onto a powered site and pay a weekly fee to the owner. Replace the towed caravan with a demountable home and voila, you have an LLC!
In theory, houses built in LLC’s should be demountable, or able to be loaded onto a truck and taken away by the owner when they move on. Older, original LLC’s feature cheap, demountable-style homes (also known as “dongas”!), however homes built in modern LLC’s are, for all intents and purposes, designed to stay put and no-one ever takes them away when they leave.
A resident moving into an LLC buys and owns outright the home or building. The block of land the home sits on is leased from the operator under a perpetual site lease, and the resident pays a fortnightly fee for the pleasure. The fortnightly fee covers rates and taxes paid by the LLC owner, as well as staffing, grounds and maintenance of the common areas and facilities.
One of the big selling points of LLC’s is that they do not typically charge an exit fee (some LLC’s in Victoria, such as Lifestyle Communities, do charge a small exit fee, but most do not), unlike retirement villages, which do charge exit fees on the purchase or re-sale value of the right to occupy. You can learn more about exit fees HERE. LLC’s also bang on in their advertising that residents get to “keep all the capital gains” when they sell, unlike retirement villages which typically share capital gains with the exiting resident or don’t pass them on at all.
But there are a couple of nuances here that you need to understand…
Yes, LLC residents get to keep all the capital gains when they sell. If there are capital gains! They also wear 100% of any capital losses, and remember – LLC residents only own the building, which is a depreciating asset. Because they own the building, LLC residents are responsible for all of the maintenance and upkeep, as well as any renovations or repairs required prior to selling the home. All these items are taken care of by the operator in retirement villages and recall one of the main reasons people downsize is the cost and time that goes into maintaining a large home.
Exit fees are a real sticking point for many people when considering retirement villages – they just can’t countenance forking out 30% of the property value when they leave. LLC operators know this and heavily feature the absence of exit fees in their marketing brochures. But they are not being totally honest. When you leave a retirement village you pay an exit fee from the resale proceeds. When you buy into an LLC, you overpay for the home in the first instance – in many cases, the cost of this home is more than 50% of the build cost. Remember, you only own the building and the purchase price does not include the land. So in LLC’s you aren’t paying an exit fee, but rather an entrance fee in the form of the profit margin difference between the build cost of the home and what you paid. You may get price appreciation over time, due to the escalating cost of construction, but it has nothing to do with the increasing price of land, because in an LLC you don’t own the land.
If the concept of retaining capital gains when you sell is important to you, please consider the drivers of capital gain in relation to land lease communities:
- Escalating construction costs vs building cost efficiencies through technology and modular (off-site) design;
- Demand for units, particularly if you are in a developing village and competing against newly-built properties;
- Competition – LLC’s are one of the hottest real estate sectors and there is big money behind the industry. Where there is one LLC there are likely to be others, all competing with you for buyers. This can be a significant issue in smaller regional population centres where you have a saturation of LLC’s compared with the total population – Hervey Bay and Toowoomba are great examples.
Rent Assistance payment
One of the unique advantages of a land-lease community is that you can receive the Commonwealth Rent Assistance payment against your weekly site rental fees. This is currently around $71 per week, so nothing to be sneezed at. It is also likely to be massively increased in the near future because twice-yearly increases haven’t kept pace with actual rental increases, leaving many renters living on the poverty line.
You can also claim rent assistance in retirement villages against your village fees, however you can only access this allowance if you paid less than the nominated threshold amount for your unit, which at the time of writing is around $242,000.
The last word
Notwithstanding all of the above, I guess at the end of the day you simply want me to tell you if it is a good idea to buy into an LLC, and if it is a better option than a retirement village – right?
Well, here is my answer… it depends!
I write at length HERE how retirement villages are a lifestyle choice and not an investment. LLC’s are also a lifestyle choice, but have a bit more of an investment feel to them, because you are exposed to the re-sale market when you leave. Therefore, I think there is that additional element that has to be considered if an LLC is on your list of options. Putting yourself 10 years into the future, you will need to take into account competition (within the LLC and other LLC’s in the region), the age of your home compared with other homes in the LLC, upgrade works you can do on the home to increase its attractiveness to buyers vs other homes in the LLC and finally the re-sale process.
LLC’s tend to attract a younger (and according to anecdotal evidence, a heavier drinking) resident vs retirement villages. LLC residents tend to be around 65-75 years old on average when they enter the community, compared with retirement village residents that are typically aged mid to late 70’s. If you are a fit and active late 70’s/early 80’s retiree, you may find your tribe in an LLC as opposed to a retirement village.
View Infographic – Retirement Villages vs Over-50’s Communities