Have you ever heard a friend refer to someone as high maintenance?  It’s usually said after a compliment of some sort, where the person is attractive in some way, but high maintenance.

The idea behind that sentiment is that the positives of the person are outweighed by the negatives.  While it may look good on the surface, you have to do a lot of work in order to keep it from all falling apart.

I’ve known a few high maintenance people (not you of course, you’re wonderful) and it can be a challenge.  It can get even worse over time as the positive aspects diminish and the negative aspects keep right on going.

The same holds true in real estate and it is most apparent with condo apartment buildings and maintenance fees.

In a very broad sense, maintenance fees are money collected from each unit owner to maintain the building and common areas.

They are collected monthly, adjusted (normally up) once a year after the budget is reviewed and include both funds that need to be spent in the next year, as well as funds that need to be set aside in reserve for future expenses.

Maintenance fees are calculated by taking the total required funds and dividing them up by the units in the building.  The size of each unit is considered, as are other owned or exclusive use areas such as parking spaces and lockers.  In some cases, the height of the unit is also taken into account, which seem arbitrary to me, as a higher unit doesn’t cost more to maintain than a lower unit.

The bigger your square footage, the more parking spaces or lockers, the more you contribute to the ongoing maintenance of the building and to the pool of funds for future expenses.

Maintenance fees have a huge impact on the sale prices in a building.

In general, the lower the maintenance fees, the higher the appreciation in sale prices.  In simple terms, buyers will pay more for a unit where they have to pay less on a monthly basis for maintenance fees when compared to other buildings.

Some buildings, either through inherent factors or mismanagement, end up falling into a vicious circle where prices don’t go up because maintenance fees are high and as maintenance fees go up, prices continue to lag.

When I work with investors who are looking for great investment properties, low priced units often seem very attractive.

As of March 24, 2017 there are 15 condo apartments for sale in Toronto in the $100K to $200K price point.  Seems like a hell of a deal right?  Might as well buy two or three!

Hold your horses until we look at the other costs.  The maintenance fees on these 15 units range from $428 per month to $1,123 per month.

If we look at the maintenance fees as a function of the mortgage cost, we see an interesting result.

Now, every $100,000 of mortgage results in a mortgage payment (principal and interest) of about $450 per month at current interest rates.  Let’s say an investor could buy one at 0% down and just have the tenant pay off the mortgage.

In these 15 condo apartments for sale between $100K to $200K, the maintenance fees are equal, on average, to 98% of the mortgage.  That means that every month you would pay about the same for your mortgage as your maintenance fees.  In the worst case, your maintenance fee is 34% more than your mortgage payment.   In the best case, your maintenance fee is about half of your mortgage.

This is interesting because maintenance fees rarely if ever go down.  If you are lucky they only go up by a modest amount as costs increase.  This means as time passes and owners pay off their mortgage, the ratio of maintenance fees to mortgage payments gets worse.

Buildings in bad areas, or who have had mismanagement or fraud, often end up in this situation.  Getting out of it becomes quite difficult because as maintenance fees go up, the cost to buy, and therefore mortgage payments, goes down and the ratio gets worse.

Some clients have asked me, if the monthly cost to own this unit is lower than other places and I can live there or rent it out at more than what I’m paying, why does this matter?

It matters because cost of ownership is only one factor in real estate.  The other is appreciation.

Speak with anyone who has cashed out in the last year or two, selling their home at hundreds of thousands of dollars more than they bought it.  In many cases, the appreciation ended up being $3,000 to $4,000 a month over the time they lived there.

While the cost of ownership is important, it is equally important to consider the likely appreciation in the property.  When looking at condo apartments, maintenance fees as a factor of your mortgage costs are a good proxy for seeing what the future holds for appreciation.

If you or someone you like are interested in buying a condo for either personal use or investment, it’s very important you work with a Realtor who understands maintenance fees and their impact on future value.  Give me a call and I’d love to be responsible for what comes next.

Regards,

Jeff

JL.COM-Design

DEEP REVEALS

Windows with a sharp edge where the frame meets the wall creates harsh, blinding glare, and make the rooms they serve uncomfortable.

This lesson reminds us that new building technologies can sometimes result in the removal of aspects of the build that had a positive impact on the feel of a space.  In this case, we now have floor to ceiling windows in many modern houses or condos.  There is much made about how open and bright such places feel but the counter to that is how exposed and glaring the space can feel.

How many homes have you walked into where the large window is covered in shades or curtains almost constantly? The glare from the window is like bright headlights of a car approaching your car while driving.  The fix is relatively simple during the design stage – having these large windows recessed in the wall rather than forming the wall itself. When that is done, glare is reduced and you can have the bright and open feel without the exposure.