One big piece of any investment puzzle is determining the cost of overhead. In real estate investment, it boils down to one question: how much will this property cost per month to maintain?
It’s one of the more difficult questions because, unlike direct expenses, monthly fees aren’t set in stone at the time of purchase.
In the GTA, condo fees are rising steadily. The average in Toronto is 60 cents per square foot, but many luxury and high-end condos carry fees as high as double the average.
So do pools, party rooms, wine storage and concierge services add value to your investment? What should you look for when it comes to maintenance fees?
What determines a condo’s fees?
Condo fees are the same costs you would incur if you owned a home, but they’re spread out across the entire condominium building.
Instead of buying your own plants for a garden, the condo does all of the landscaping (or hires someone to do it), and then divides the cost among every unit owner in the building. It ends up being a small fraction of what you’d pay for a house - but then adds up over time and with things like building maintenance, amenity wear and tear, repairs and more.
It also covers the salaries of anybody employed by the condo. Security, building managers, concierge services, etc. are all paid through your condo fees.
The actual cost you pay per month is based on square footage. The larger your unit, the larger your fees. Fees can be anywhere from twenty-five cents to two dollars per square foot.
What can contribute to higher fees?
Individual features that come with your unit can add to your monthly fees. Parking can add an average of fifty dollars a month, or up to a hundred and fifty dollars. Storage lockers add around fifteen to fifty dollars as well.
Premium amenities contribute to building fees as well. Pool maintenance is notoriously expensive for any homeowner, but other additions like valet parking, gyms, sport courts, movie rooms, and common areas might put your fees over a dollar per square foot.
Condos are also required to have a “reserve fee” as well, which is an an insurance pool that covers any sudden and large expenses the condo may need to cover.
An aging Etobicoke condo made waves in September over fees as high as two thousand dollars a month for repair costs. Still, this is very rare and a result of negligent condo governance - definitely NOT the norm.
Who sets my fees?
Your condo’s board of directors sets your monthly fees. As a unit owner, you’re entitled to vote for your condo board’s directors, or even to be on the board yourself.
Condo governance can get pretty complicated (especially when you add renters and tenants to the mix), but by participating in your condo’s governance you might be able to lobby for fees that fit your model.
Although most owners view condo fees like income taxes, something they must pay but would rather not, not all condo fees are bad.
They’re the same as any other maintenance costs homeowners would pay out-of-pocket. For example, fixing roof leakages, broken windows, or plumbing issues are cheaper through condo fee model than the when-it-happens model of detached home ownership.
Toy Factory Lofts in Toronto’s Liberty Village made news waves for standardizing their condo fees in 2012. The board of directors capped the resident’s monthly fees at thirty-one cents a square foot, and held them there for four years.
Their model may have had more financial repercussions than you might think - the average resale price of Toy Factory units rose by ninety-nine dollars per square foot between 2013 and 2015, making lower condo fees a possible source of increased equity.
Are lower fees better over time?
It depends on what gets lost in the low fee model. If Toy Factory’s low fees mean that some costly maintenance work is left unfixed and unrepaired, this might mean they have to increase their fees by a large margin when the need becomes critical.
In this instance, responsible fees are much more desirable than artificially low fees.
Extremely low condo fees (either promised in marketing materials for a pre-construction unit or when looking at resale) need to be considered carefully.
Developers estimate condo fees during pre-construction sales, but have no contractual obligation to maintain these rates once the building is complete. Within a few years, low fee estimates can climb to average or above-average rates.
This is something to consider when purchasing a unit for investment - never purchase with the assumption of low fees.
Interestingly, the majority of maintenance costs are unrelated to the age of the building.
In February, the Toronto Star found that “heat, hydro and water account for 40 to 50 percent of costs, and are climbing 8 to 10 percent per year. Concierge, cleaning and other services can be another 25 per cent”. This means that, while high-end amenities can contribute to your fees, they’re mostly just basic costs that are incurred with any type of home.
What about poor construction?
While shoddy construction of window-walled towers made waves in 2010 for increasing local owners’ fees, the Tarion Warranty and building insurance take precedence. This means that any problems with your building’s construction shouldn’t have a life-altering effect on your fees.
If you’re concerned about building upkeep on an investment unit you’re considering, do a search on your developer’s construction history (or give me a shout).
This is why knowing the developer and builder of your pre-construction condo is extra important - so important that I wrote a whole blog post on it a while back. Poor construction impacts your investment. Know who built your condo!
What do they mean for investments?
Ultimately, condo fees are important sources of income in order to maintain buildings, and they need to be factored into any home buyer’s potential costs when looking to buy a condo.
Still, if you’re concerned about high fees, there are a number of ways to get involved in your condo's governance. Make sure you attend your condo’s annual meeting and board of director’s vote so you have a say in who manages your fees - even if it’s not your primary residence.
All unit owners are also entitled by law to look at the documents stating where their condo fees are going, so you can check the building’s financial records at any time.
Talk to a realtor about condo fees and how you can ensure your investment is still a good one. One interesting fact about renting out a condo is that when others in the building do the same, they’re often accounting for the same fees.
So while your fees might drive up the price of your rental, your competition (your neighbours who are also looking for tenants) are in the same boat.
That’s why there are other factors to consider when looking for an investment condo as well. Check out more here!