Savings Journey posted a series of question in Monday’s post about condo fees. In particular, he wanted to know how condo fees can get so high and what to do in order to control it (note: you can’t stop the increases, just control it). Maintenance fee price increases are especially deadly to real estate investors since it is a factor that you do not have a lot of control over and it reduces your rental profit over time. I am going to try go give some real life examples I have seen in the Toronto condo market.

Firstly, condo fees can increase over time for several reason. For anyone thinking of purchasing a new condo, please be aware that condo fees are kept artificially low in order to induce you to buy. One common way of keeping maintenance fees low in new condos is for the developer to absorb some of the maintenance costs in the first couple of years. After that, condo fees go up without the subsidy. A friend of mine lives in a condo whose’s fees went up 49% after the developer stopped subsidizing fees at the end of year 2. Maintenance fees also increase as a function of age: older condos need more repairs so the reserve fund portion of the maintenance fees begins to increase (as a result of the 49% increase, the condo corp. did a fee study and found that the condo with the highest fees per sq. ft. in Toronto was directly across the street in a 1970’s era condo). Finally, fees go up if there are a lot of bells and whistles with the condo; the previous condo I lived at, the neighboring building had a virtual golf simulator; pretty nice but how many times will you use that machine? Investing in a building with a lot of amenities may make it easier to rent out but, on the back end, you may be absorbing a lot of maintenance fees.

There are several ways to avoid uncontrollable condo fees: buy or invest in mega-condos (over 250 units)- the costs can be spread out among many unit-holders, avoid small to mid-sized condos with a lot of bells and whistles (24 hour concierge, pools, state of the art gyms and multiple party rooms are expensive), don’t buy into older buildings and try to buy into a building with a lot of owner-occupied units since owners are very conscious of fee increases and they understand what the building actually needs; a renter heavy building generally experiences more wear and tear as well. You can put as a condition of purchase that you want to see the “status certificate” of the condo corporation which has the financials and owner-occupied ratio (in Toronto, any condo with over 50% owner-occupied is good).

The worse condo you could buy or invest in would be a new, “boutique” (marketing spin for small) condo with a lot of amenities and a lot of renters or an old condo (1970’s era) regardless of size. The best condo would be a large building which is neither old or new (so between 5-10 years) with a fair amount of amenities.

Savings Journey also had a good suggestion of being active on the board of directors. Costs are one of those things that spiral out of control if not checked. Because costs are spread out among many different unit holder, there is always a temptation to pay for wants and not needs in a condo. My previous condo (where I was a renter) had a strong lobby for more exercise equipment and a better games room. All fine and good but someone has to pay for it. Finally, also look for a condo where there isn’t a huge turn-over in the board of directors or the management company- this indicates stability. Good luck.