What do you need to know about condo fees before you invest in a condo unit for renting out?
Before investing in any real estate property, it is important to do your due research to determine all costs and expenses related to your investment.
Investing in condos is no different. One of the main aspects of purchasing a condo unit is the condo fees. Condo fees make up a significant percentage of the expenses associated with owning a condo. If you’re planning to own a condo and rent it out, not only will you have to plan for the costs of the down payment, property taxes, closing fees, agent fees, and inspection costs, but most importantly, you have to know exactly what condo fees to expect in order to plan your finances and your rent accordingly.
Below is a breakdown of the condo fees that you should expect upon owning a condo unit, what these condo fees cover, and who is responsible for paying these fees: the owner or the tenant renting the property.
Breaking Down Condo Fees
A condo unit is a real estate property that exists in a condominium compound; a set of separate residential units that are located in an area, share a common space and are managed by the HOA (House Owners Association) or the elected condo board.
Individual owners of condo units have to pay monthly or annual installments, also known as condo or HOA fees. These fees are typically used to cover the costs and expenses of managing and maintaining the property as well as the common areas that are shared by all owners or residents of the condominium.
Condo fees are not an added expense of owning a condo. Meaning, if you own any other type of residential property, you will still be paying these fees separately. In the case of condo fees, however, a number of different expenses are included and are paid directly to the condo board who will then use the money to pay off any expenses or costs for managing and maintaining the property.
If you’re investing in another type of residential property and not a condo, you would generally pay the same fees on hiring professional property management, maintaining the property, property insurance, and other expenses associated with owning a rental property.
So, what’s the point of paying these fees?
Condo fees go toward providing the owner with a lifestyle that they desire – a maintenance free, amenities filled, attractive home. Condo owners will pay these fees in exchange for having a minimal role in maintaining and managing their property while also enjoying the services that are provided by the condo association.
What Do Condo Fees Cover?
To get a better idea of what you would be paying for, here are the main expenses that condo fees will cover:
- Repairs (including roofs, walls, and floors)
- Managing the property
- Pool cleaning
- Garbage collection
- Water, electricity, and gas
- Access to common spaces and shared utilities and amenities
In addition to a number of other expenses that can be included, these are the main expenses that your condo fees will be used to cover.
Additionally, a portion of the condo fees that you pay will go towards a shared reserve fund to cover any unexpected costs or major repairs.
Condo fees are calculated based on the total costs and expenses for maintaining and managing the entire condominium complex, and each owner of a condo unit will pay a portion of the total amount depending on the portion that the unit makes up of the entire complex.
For example, a complex might have a total annual operating budget (including the reserve fund) of $300,000. If the condominium has 20 units in it, and you only own one, then your portion would be 5% of the total amount or $15,000 in annual condo fees.
To get a better idea of the fees that you have to pay and what expenses they cover, you should get involved with the condo board, attend their meetings, or ask for their meeting minutes to know exactly how your money is being used.
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Condo Fees – Whose Responsibility Are They?
There are many cases in which condo owners rent out their condo units and include the condo fees in the lease agreement stating that the tenant has to pay these fees. This, however, should not be the case. Condo fees are typically the responsibility of the unit owner and not the tenant, and the owner will have to pay these fees whether the unit is being rented out or not.
When investing in a condominium for renting it out, make sure to plan for the right amount of rent to cover the condo fees and generate a positive cash flow for your investment. Similar to how you would plan the rent of any other type of property, condo fees are included as an expense. When calculating the cash flow, you simply deduct the amount of fees (in addition to any other expenses) from the amount of rent on the property. To get a positive cash flow, the rent must be higher than the total costs and fees that you have to pay as the owner of the property.
Investing in condos is one of the most common and lucrative investment strategies in today’s real estate market. Condo units are typically very attractive for retirees looking to settle in a nice and comfortable residential space that they can share with other retirees.
To make the most out of a condo unit that you own, you can rent it out and enjoy the rental income that it can generate. However, make sure that you’re aware of all the costs and fees that you will have to pay when planning your investment in order to profit from it and achieve a good return on investment.
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