If you are a condo owner or a condo real estate investor investor, or are contemplating investing in a condo, there are a few key factors to consider in 2010.
Maintenance fee escalation on new units: In the last 5-7 years, there have been a staggering number of new condos built in many major urban areas. As recently as 2008, 100,000 condo units were being registered a year in Toronto. In the first few years, maintenance fees can be kept low but in year 2-4, they tend to escalate as reserve funds and repairs begin to occur; condos are like new cars. They run fine for the first few years then you have to start putting money into them.
How great is the maintenance fee increase? I pulled this historical data from my own condo (which is now more than 10 years old). Here are the year to year increases in condo maintenance fees for the first 5 years: 0%, 2%, 15%, 7%, 0%. The spike in year 2-4 (I did not live here then) is probably due to reserve fund contributions given there is no pool, golf simulator or other perks to maintain.
Maintenance fees are typically included as part of rent in our local condo rental market. Thus, in newer condo units, owners may find their cash flow decreasing as maintenance fees go up. It is difficult to make up these increases since: (i) it is a renters’ market in most places and tenants can vote with their feet; and (ii) in rent control jurisdictions, an owner’s ability to increase rent is limited (for example, rent caps in 2010 are 2.1% in Ontario and 3.2% in British Columbia).
HST: Related to the first issue, HST will affect both condo owners and condo investors. The Globe and Mail summarized the issue with HST and condos very well. If you have bought a new condo which has not been occupied (i.e. you bought on plans), it may be worthwhile to consult your lawyer about the “material adverse change” or “material change” clause referenced in the Globe article.
Vacancy rates. In the U.S., rental vacancy rates rose to 8% nationally in Q4 2009- the highest in 8 years. In markets where the vacancy rate fell (New York City), the average rents also fell. In Canada, the national apartment (includes condo) rental vacancy rate according to CMHC was 2.8% in October 2009 but, in terms of local effects, there were large increases in Alberta (3% increase) and B.C. (1% increase).
In other words, it is a renters’ market on the whole but all real estate is local in nature so please do investigate the local vacancy rates and average rent in your market (preferably without a real estate agent who has a bias in the outcome; CMHC stats is a good start).
The above does not mean that one should not become a condo investor. Instead, it should frame an expectation of return for 2010. The one issue which is constant in condo investing is that cost control is not completely your own. The condo board sets the annual maintenance fee.
Thus, as a few practical steps, one should consider the cost side of the condo investing equation carefully by: (i) being active on the condo board; (ii) looking at the cost of financing carefully (there may be a stronger argument for condo investors to lock in mortgage rates to give certainty of expenses especially in a rent control environment); and (iii) budget maintenance fees 5%-10% higher than they are in running your cash flow analysis.
Good luck.
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