In addition to the monthly mortgage, insurance, and tax payments, you will also have condo association dues. Some portion of that expense is offset by the fact that your maintenance expenses will be less because the condo association will take care of all exterior maintenance and repairs. In addition, your monthly insurance premium should be lower than it would be for a house because you are insuring only the interior of your unit, instead of the entire structure.
People are more likely to invest in condos in another city than they are to invest in rental homes in another community. If that describes you, then remember that expenses can be dramatically higher than they are where you live. Condos on or near the beach, for example, might have insurance premiums five to ten times greater than the ones in your hometown. Property taxes in Florida, for example, can seem extreme to outsiders. Make no assumptions about any of the costs of ownership, but obtain quotes from locals.
Well-run condo associations increase their dues every year. That is because all the insurance, tax, and maintenance expenses also increase. The money to pay those bills must come from somewhere. A condo association that does not have annual dues increases usually trims the quality of goods and services or allows maintenance to go unattended.
The annual dues increases might not coincide with the renewal dates on your tenant leases. In other words, your rent could be calculated based on dues of US Dollars 150 per month, but those same dues might increase to US Dollars 300 per month during the middle of your tenant's term. You can either absorb the extra expense, or have a lease clause increasing the tenant's rent if the dues go up. I prefer the second option.
There are two types of surprise expenses that can alter your investment picture. One was used as an example in the previous question - monthly dues that double with little or no notice. The condo association establishes the dues each year. Depending on the mix of owner-occupants versus investors, the group with the most votes may take actions antagonistic to the interests of the other group. Owner-occupants might be willing to spend an additional US Dollars 150 per month for dues in return for a night patrol person, new landscaping plants, and free line dancing lessons on Friday nights. You, as a landlord, probably do not care one iota about those things, but you have to pay your fair share of the expenses because you were outvoted.
The other condo expense that can completely change your financial picture is a special assessment. Do not let the name fool you - condo associations can make assessments many times, for many different things. A project that does not charge enough in monthly dues to pay for routine maintenance will put off those matters until things become critical. At that point, there will be a very large bill that must be paid. It could be to replace the roof, repave the parking lot, or paint the exteriors of all buildings. All previous owners will have escaped with low monthly dues. If you are a recent purchaser, you will bear the burden of that lack of foresight and find yourself stuck with a large assessment. There is no way to pass this along to your current tenant. You will have to pay it yourself.
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Note: This article was sent to us by: Alexander McGarn at 07022010
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