The Wall Street Journal

By Dan S. Barnabic, April 3, 2015

Before buying a condominium, consider that, aside from mortgage payments, you’ll be responsible for condo association maintenance fees, real estate taxes and special assessments.

For condos, make sure you can afford the carrying costs

By Dan S. Barnabic

To get a better idea of your financial exposure, obtain the status or estoppel certificate for the unit you wish to buy and the condo complex’s annual financial reports. Analyze the current, past and proposed budgets and reserve fund to make sure it’s financially stable. Make sure to set aside at least several thousand dollars as an emergency fund to pay for unexpected assessment fees.

Assessment fees are passed on to unit owners to cover unexpected repairs or replacements not included in yearly budgets or to replenish reserve funds. Think gutters that were ruined in the winter, or flooding caused by a major storm. Ask your attorney or accountant for help if you’re unable to make this analysis yourself.

To minimize the risk of frequent special assessments, seek out newer buildings, as older ones are prone to unexpected problems. (Rule No. 9 in this series, “Check the physical facts,” will go further into detail.)

Make sure a third of your monthly household income is sufficient to cover total monthly costs. Don’t allow yourself to end up strapped for cash and enslaved by financial obligations that will deprive you of the quality of life you enjoy. This is especially true for families planning to have children.

Consider the effect of changing interest rates. Many people forget that, historically, interest rates have fluctuated anywhere from 2% at the end of the World War II, all the way to 15% in the early 1980s. Since the real estate crash of the 2007, interest rates have been kept at historical lows to stimulate the economy. Ironically, the effect of low rates has resulted in the ever-greater demand for real estate, driving prices so high that ownership has become unattainable for many.

As far as rates go, we have to learn from the past. The graph below shows the historical movement of interest rates from 1790 to 2010. Today rates are at all-time lows, but they’ll eventually rise again. It’s only a matter of time before inflation drives up interest rates, making property even more expensive to carry and unaffordable to many. Factor in this possibility when assessing your ability to afford a condo.

Long-Term interest rates

Source: What Drives The Bond Market?; Chicago CFA Handout by Bianco ResearchLLC; January 18, 2011

That said, one could argue that an adventurous single person, or a couple with no immediate plans for children, might choose to make massive payments for a short period to pay off the mortgage before its maturity.

The choice is ultimately yours, but don’t forget that accelerated payments usually come with a trade-off: lower quality of life as the bulk of your income is shoveled into your residence.

In sum, the three guidelines are:

  • Analyze your annual income carefully and calculate your ability to cover the carrying costs of the property
  • Don’t get into a situation where more than a third of your income will have to go toward carrying costs
  • If the condo unit is too expensive, wait it out and buy after a correction in the real estate market