The Cost Of Holding Can Be More Important Than The Cost Of Buying
I read this week about a home owner’s association in Florida foreclosing on units because owners are delinquent with their HOA fees. The article focused on a couple of condo complexes where the monthly HOA fees had been increased to the point where they were more than the mortgage payments of the owners. Units in one complex sold for US$89,000 at the height of the boom. One owner of one of these units currently has it listed for sale for US$18,500 (about what he owes in back HOA fees).
The point for you?
The cost of holding a piece of real estate can be as or more important than the cost of buying it in the first place. Give a middle-class worker a house in a high-end neighborhood and, even assuming there’s no mortgage, you’ve probably bankrupted the guy.
I knew a wealthy guy who did this for his daughter and son-in-law and unintentionally put them in the poor house, as it were. It didn’t do the young couple any good that the house from Dad was free. The cost of maintaining it and paying the associated property taxes was well beyond their means.
Overseas, property taxes, HOA fees, and other carrying costs are typically lower than for comparable properties in the United States, but you still want to consider them in total before making any purchase. This is especially true if you’re living on a fixed income.
In much of the world, when you buy a condo, you also acquire a monthly HOA fee. The building has to be maintained. Likewise when you buy into a gated community, where amenities, roads, and security have to be paid for.
When you buy pre-construction, the best the developer can do is give you an estimate of what the monthly HOA fee will be. Once everything is built and has to be maintained, the actual cost is what it is. If you don’t want to live in a building or community that is deteriorating around you, you and your neighbors have no choice but to pay your share each month.
In addition to monthly HOA fees, owning in an apartment building or a gated community, you’ll sometimes have additional capital calls to cover extraordinary repairs or improvements. When buying into an existing building or development, ask about deferred maintenance that will need to be caught up in the next couple of years. You don’t want to be hit by a special assessment for maintenance your first year in a new place. This happened to us in Paris, where the building where our apartment resides underwent a complete facelift starting shortly after we moved in.
If you do identify deferred maintenance that might lead to a special assessment early in your ownership, use this as a negotiating point when you make your offer.
The monthly HOA fee for the apartment we’re buying in Medellin is a bit higher than for other similar-sized units we’ve seen in other buildings in this city. In this case, there are no deferred maintenance issues. Still, we were able to use the higher-than-typical HOA expense as a bargaining point when negotiating the sales price.
At the same time, we don’t think the higher maintenance fee will be an issue, as we intend to rent out the apartment. The projected net yields are good even with the slightly higher HOA cost. For a retiree intending to live in the apartment on a fixed income, however, that extra US$100 a month could be a concern.
The other important carrying cost to factor into your ownership budget is property taxes. The good news is that these are typically less in much of the world than they would be for comparable properties in the United States. The better news is that some countries don’t charge property tax at all. For example, you’ll have no property tax expense as an owner in Croatia, Ireland, or Buenos Aires (though owning in elsewhere in Argentina you will be liable for property tax).
In addition to HOA fees and property taxes, you should also take a look at past utility bills when making any real estate purchase anywhere in the world. The good news here is that, in a place boasting a temperate climate (Medellin is a good example), utility expense can be negligible, as you don’t have to pay for either heating or cooling.
In Panama City, on the other hand, you have to factor in the cost of year-round air conditioning. To do this reliably, ask what the current owner is paying for electricity and how often he runs his air-conditioning units.