In real estate it is sometimes surprising what attributes of a property impact its sale price as well as price appreciation over time. When it comes to condominium units with maintenance fees, many of our clients don’t realize that these aren’t just monthly costs but in fact can dramatically impact your price appreciation over time.
Let’s go through a quick review of how maintenance fees work and then talk about how if you’re (in a) high maintenance (building), it can spell bad news for the future.
I pay how much each month? For what?
Maintenance fees are money collected from each unit owner in a condominium 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 us, 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.
OK, so it’s just a fee each month. I can handle it.
While the monthly amount for maintenance fees are generally understood to be a fact of life when owning a condo unit, we find that most people fail to take into account how the maintenance fees impact sale prices.
This is simply because buyers, on aggregate, factor the maintenance fees into their overall interest in a given unit. If they’re considering two units in different buildings where the maintenance fees are both similar, it’s not a factor. However, if the buildings have far different price per sf amounts for the maintenance fees being charged, all other things being equal, the buyer will go for the unit with lower maintenance fees.
As a result of this, we see that, in general, the lower the maintenance fees in a building, 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 cycle where prices don’t go up in line with the market, because maintenance fees are high in the building. If the already high maintenance fees go up further over time (as maintenance fees tend to do), prices continue to lag and so forth and so forth.
Gather round children, it’s story time.
An example we often share with clients comes to us from way back in the spring of 2017.
On March 24, 2017 there were 15 condo apartments for sale in Toronto in the $100K to $200K price point. We know that was a while ago now, but still, quite a bargain. 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.
At the time, every $100,000 of mortgage resulted in a mortgage payment (principal and interest) of about $450 per month at the then current interest rates. Let’s say an investor managed to buy one at 0% down and just have the tenant pay off the mortgage.
In these 15 condo apartments that were for sale between $100K to $200K, the maintenance fees were 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.
We bring this up with our clients because it raises a very important question – if the monthly cost to own such a unit is lower than other places and I can live there or rent it out at more than what I’m paying, why does it matter?
It matters because cost of ownership is only one factor in real estate. The other is appreciation.
We appreciate you listening to us, so here’s another story.
While the cost of ownership on an ongoing basis 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.
We’ll continue with our time-travel trip to 2017 and talk about a building at Yonge and Bloor.
It was built in 2010, there are just under 300 units, with sizes ranging from 400 sf to over 2200 sf.
It’s in a great location, it’s got a fancy entrance, concierge and all the typical amenities.
It’s also had maintenance fees of over $1 per sf back in 2017, which made it a very bad place to own a unit.
Lets go over why.
- It takes longer to sell.
When you have a property you want to sell, the goal is to sell it quickly. The longer a property sits on the market, the more likely it is to appear stale and for buyers to question what is wrong with the property.
- In 2017, the average length of time it took for condos in the area to sell was 17 days.
- In this building, it took, on average, 41 days for a unit to sell.
Longer sale times mean lower sale prices. No buyer looks at a property that has had trouble selling and says they have to pay a premium before someone else scoops it up. They negotiate the price down – because they can, because no one else wants it.
- It sells for less money.
With any property, owners hope to benefit from market appreciation.
If you own a property that for some reason doesn’t appreciate as much as the market, then you are in effect losing money. If you had owned another property, you would have made more without doing anything different. Let’s look at how this building was doing in this regard and pick a specific example of a unit in the building that has sold a few times.
- In February, 2012, a one bedroom, one washroom unit in the building sold for $380,000. Back then, the average sale price in the area was $419,503.
- In November, 2016, the exact same unit re-sold for $430,000. In that same month, the average sale price for condos in the area was $536,749.
Let’s put that in a chart.
We can see that back in 2012, the unit sold for 10% less than the average in the area.
In 2016, in sold for 25% lower than the average sale.
While units on average went up 28% over that time period, this unit went up by 14%. That’s half of the market appreciation.
In real dollar terms, the average price increase was about $117,000. This unit’s price increase was $52,000. That’s $65K less than what the average unit owner in the area received.
If we are super fair and only use the percentage increase (28% on average), the $378,000 they invested back in 2012 should have been worth about $484K. Instead, it was worth $430K. Which is $54,000 in lost market appreciation because they bought a unit where maintenance fees went higher and higher.
Make no mistake, buyers look at maintenance fees. The higher they go, the more pressure it puts on resale prices to not go up as much as the rest of the market. Buyers have to pay those fees plus their mortgage each month and when that combination gets too high, it’s resale prices that suffer.
- It makes breaking even on rentals very difficult.
Finally, let’s talk about why units with high maintenance fees make for very bad rental properties as well.
Investors look for both market appreciation as well as for tenants to pay down their mortgage. We’ve already touched on how resale prices in this building showed half of the appreciation of what the market did in one example. That makes it a poor investment when it comes time to sell.
The other aspect is how profitable the rental is during the time the investor owns it.
If we look at the last sale in this building 2017, we see that it was an 853 sf unit with two bedrooms and two washrooms. It had maintenance fees of $940.58 per month (that’s about $1.10 per sf) and sold for $775,000.
Let’s do the math.
With 20% down, the buyer has a mortgage of $620,000. At the then current rate of 3.34% for a five year term, amortized over 25 years, that’s $3,043 per month in mortgage payments.
Add in maintenance fees of $940 and monthly property tax of $353 and the new owner is looking at monthly payments of just over $4,300. At the time, a two bedroom, two washroom unit leased in the building for $3,000. That’s a gap of $1,300 per month before an investor would break even on that unit. That means the mortgage would need to be around $1,750 in order for maintenance fees and property tax plus that mortgage payment to be under $3,000 per month.
That works out to more than $250K more in downpayment to make this unit break even as an investment property. Which means more than 50% of the purchase price would have provided, which officially makes this a bad investment property in our opinion.
The higher the maintenance fees, the harder it is for rental rates to cover all of your costs. When investors don’t look at buildings because of the maintenance fees, fewer buyers compete for the units, which pushes down prices.
When you combine a longer time to sell, lower return and unattractive rental investments, we see that buildings with high maintenance fees are definitely not where you want to buy.
We hope you enjoyed our trip back in time to 2017 to see exactly how much of an impact maintenance fees have on sale prices as well as ongoing appreciation of units in a building. We do this exact sort of analysis for our condo clients all the time, and if you’re thinking about buying a condo this year, we’d love to sit down and help make sure it’s a great home and a great investment for you. Get in touch with us so we can talk further!
