“So if you’re presently confronted with the decision to regularly put money into your children’s college savings account or max out your retirement savings accounts, which one should you prioritize?”
“A 30-year-old British woman named Natalie Wynn found a creative, if, dangerously uncomfortable, way to dodge a $85 overweight baggage fee.”
“Yes, fractionally more money has been delivered to taxpayers through April 21, almost a week after the filing deadline for most U.S taxpayers. But the average refund check remains smaller than it was last year. In 2018, the average refund was $2,780. This year, it came to $2,725.”
“Has becoming a millionaire changed you? No, can’t say it has. I should add that I’m the same old grump as I was a few days ago. The difference is that if I transfer our my old final salary pension I’ll get a large 5 figure sum for it.”
“Losing $10,000 wasn’t exactly what we had in mind for our first home, but to be honest, we were pretty fortunate. The market had tanked during the 3 years that we lived there, and many of our neighbors were in worse situations.”
“Have I done my best? Yes. Have I given it time? Yes. Is it super disappointing? Yes. Am I scared? God, yes. Even though quitting was the best option of the options available, it’s accurate to say that I was terrified to make this call and make this leap.”
“Throw it all in an economic blender and you have something that we economists like to call the “bend over and take it” special. A bunch of colleges sitting around that don’t care about cost control with lots of federal money at their disposal, a captive market, and no competitors.”
Condos are riding a wave of popularity, driven by millennials snatching up their first home and baby boomers looking to downsize. However, before you commit to buying a condo, make sure you factor in hefty condo association fees.
Condo association fees account for a noticeable portion of housing expenses. More worrisome, they’ve been rapidly rising year over year for the past decade.
This article will cover what condo HOA fees are, what they include, and why they have been on the rise.
To pay for the maintenance of common areas, amenities, landscaping, the association asks each unit owner to pay fees. These fees typically cover the maintenance of the external parts of the condo.
What is a Condo HOA Fee?
Condos are run like corporations, with the board of directors that governs the financial and administrative aspects of the building.
The association collects a fee from members to cover utilities, maintenance, and insurance. They set the budget for repairs and choose contractors for larger projects.
While it may feel like a waste of money to pay HOA fees, in reality, the fees are often necessary. Those who live in single-family homes still have to pay for things like maintenance and landscaping, just not in a tidy monthly sum.
What Do Condo Fees Cover?
Things commonly covered by a condo association fee include:
- Upkeep of the exterior of the building
- Snow removal
- Trash Removal
Do Condo Fees Cover Utilities?
Utilities like heat, water, sewage, garbage, and electricity are usually, but not always, covered.
Do Condo Fees Cover Property Tax?
No, condo fees do not cover property tax.
Do Condo Fees Cover Insurance?
Most states’ condominium acts require the association to carry property insurance on the common elements and the bare walls, floors, and ceilings of the unit. Homeowners are still required to have their own insurance covering the interior of their unit and the property inside.
You should check with the association whether they have catastrophe insurance. For example, in the Pacific Northwest, the HOA fees may include earthquake insurance. A building a FEMA-designated flood zone likely carries flood insurance.
In addition to your run of the mill, recurring expenses, condo boards also need to fund major repairs. The roof might be leaky, the elevator needs to be rewired, the pool resurfaced. Condo boards typically set one-third of your fees into their reserve fund. In fact, when you try to buy a condo unit, lenders like the FHA and Fannie & Freddie check that the association has set side enough reserves.
Average Condo Association Fees
The cost of an HOA fee will largely depend on what area you live, and what things your association offers. If you’re living in condos in America’s biggest cities, you’ll likely pay hefty fees. You’ll not only be paying for maintenance and amenities, but also for location.
Mark Uh, a data scientist at Trulia, used American Community Survey records to determine the average cost for HOA fees in America. According to Mark, HOA fees run anywhere from $200 to $600 a month (for example, $194 in Nashville, $571 in NYC).
Other cities cited in the survey include:
- Long Island, New York – $463
- Philadelphia, Pennsylvania – $449
- Miami, Florida – $415
- Charlotte, North Carolina – $218
- Warren, Michigan – $218
- Indianapolis, Indiana – $213
- Las Vegas, Nevada – $198
In an ideal world, your association can dip into the reserves to cover unexpected expenses. Unfortunately, underfunding is very common. Association Reserves found that 70% of HOAs are underfunded.
If they can’t cover it from their budget, the association will impose a special assessment on members. For example, one San Mateo, CA resident had to cough up over $50,000 for major repairs the association had deferred for years.
For large expenses, most states require approval of a majority of a quorum of association members.
Are HOA Fees Capped?
Sure you pay $400 a month now, but this can jump to $600 in a few years.
Unfortunately, there’s usually no cap to how much an association can increase fees. An HOA needs to make sure that their annual budget is being met, and this could mean increases every year (or more).
While this is generally true, there are a few exceptions that do affect the amount that fees can be raised.
HOAs That Limit Increases in the Declaration of Covenants, Conditions, Restrictions, and Easements (CC&Rs)
Occasionally a planned development will have a restriction on HOA fee increases, or a limited dollar amount for assessments, built right into their CC&R.
These developments are usually older, and they may limit the increases to no more than 2% each year.
While this does sound budget-friendly, it may end up being unfavorable to the community and individual condo owners.
If the HOA is not raising enough funds to pay for maintenance and repairs, the development might soon fall into disrepair. This reflects poorly on the community and will also affect the value of the properties.
State Laws Sometimes Limit Increases
In some instances, there are also individual state laws that limit how much HOAs can raise their fees in a given year.
For example, in Arizona, an HOA can’t increase their fees by more than 20% per year without a majority vote of HOA members.
Unlike the CC&R limitations, state laws are usually much more generous, making it less likely for development to become underfunded.
Lower Fees Aren’t Necessarily Better
One thing residents need to watch out for is the special assessments fees. This happens when the HOA collects money from residents to pay for expenses that the HOA is responsible for but aren’t included in the monthly HOA dues. This could be for routine things or emergency situations like flooding.
This can also happen if the HOA isn’t managing their funds properly. A well-managed HOA will make sure there’s sufficient funding in both the reserve account and operating account. But if they don’t, residents are legally required to foot the bill if there’s an emergency expense.
For instance, a condo association in Bellingham, Washington attempted to raise dues by 48% because their old board of directors neglected to maintain the pool and tennis court, rendering both unusable.
If you’re thinking of purchasing a condo, you need to check the association’s financials. Ask if they have a reserve fund, and when they last depleted it. It’s also very helpful to review the CC&R or to hire a lawyer to review it for you.
“Yes, I am one of those lucky few who have won some extra spending money on a game show. In my case, that show was Wheel of Fortune.”
“Despite surging 16% in 2019 while the stock market remained muted, REITs are not very well understood by the average investor. That’s a shame because they can be great investments. Legendary money manager David Swensen puts 20% of Yale’s $30 billion endowment into real estate.”
“These past 6 years I’ve worked to minimize our current and future tax burdens, legally and respectfully. Roth conversions, Capital Gain Harvesting, and zero-tax Roth contributions are all part of the tax optimization arsenal.”
“Spring is typically the most active season in real estate, however, the broader housing market showed signs of slowing in March compared to a year ago despite some unexpected hot spots.
Thinking about investing in a condo to rent out for cash flow? We don’t want to rain on your parade, but it’s probably a really bad idea. Joe, an investor from New York, was forced to sell after he relocated for work and his HOA wouldn’t let him rent out his unit.
His story is not unique. Chicago realtor, Brie Schmidt of Second City Real Estate says that in Chicago, it is very common for condos to prohibiting renters. She says it is a constant struggle for investors who bought condos as investments without looking into the guidelines.
If you’re thinking about investing in a condo that you might not live in, go through our due diligence list first.
Beware the Condo HOA
Ultimately, your condo will live and die by the quality of your HOA.
While many single-family housing communities also have HOAs, they are much less powerful than condo associations. That’s why it is an important risk factor to consider if you’re thinking about investing in condos.
Condo associations can increase your fees, issue special assessments, select contracts, etc. Most importantly, they can prohibit you from renting out your unit. These rules are laid out in legally binding documents called “CC&Rs” — Covenants, Conditions and Restrictions.
Bylaws May Prohibit Renting
The odds that you can rent out rooms on Airbnb are slim to none. Condo associations’ bylaws typically prohibit short-term rentals. This means you won’t be able to rent your place out for less than 12 months. Most bylaws explicitly state, “under no circumstances can a unit owner permit unit to be used for a hotel or transient purposes.”
Condo Associations Don’t Like Renters
Associations also don’t look kindly on long-term renters either. There’s a perception that renters won’t take care of the building the way an owner would. Some associations want to foster a close-knit community with long-term owners, not transitory renters.
But the biggest reason that condo associations often prohibit renting is, they want to stay on Fannie Mae and Freddie Mac’s good side.
After the mass defaults in 2008, lenders tightened up their standards. Condos were the highest-defaulting type of real estate in 2008, in large part due to rampant speculation. Unsurprisingly, the units that were actually owner-occupied (versus purchased for the sole purpose of being flipped) fared the best.
Buyers who purchased their condos as investment properties were 30% more likely to default than buyers who purchased a condo to live in.
Having learned their lesson the hard way, the FHA and Fannie/Freddie imposed restrictions on the number of renters that a condominium can have. For a condo to be warrantable, meaning for Fannie/Freddie to purchase the loan, no more than 50% of the tenants can be renters. This threshold was recently relaxed to 35%, provided the association meets all the other guidelines.
Buyers can still line up financing for unwarrantable condos by going to a portfolio lender. But since this shrinks the buyer pool, condo associations prefer to stay under the 50% threshold. This way, when owners list their unit, they know that their building qualifies to FHA/Fannie/Freddie loans.
If there’s a high ratio of renters in your building, you’ll have to wait until the renters are out before you’re allowed to open up your unit.
Fees, Waitlists and Other Headaches
Even if the condo board doesn’t prohibit renting outright, they can make it extremely inconvenient and cost prohibitive.
One common practice is charging the unit owner a rental fee on top of the association fees. This happened to Washington Post columnist Douglas Hsiao. Despite the fact that David rented out his Dupont Circle condo for 18 years without incident, his condo board debated banning rentals completely. After two hours of debate, the board decided to double his rental fee instead.
Hsiao writes, “The outcome was not perfect, as it will put me deeper in the hole on my cash flow, but I felt some relief that something more drastic did not pass which may have effectively required me to sell my apartment.”
12. Growing Bolder
Growing Bolder calls for its community to defy the cult of youth, live with passion and purpose. They publish profiles of people over 50 doing amazing things.
11. Women’s Older Wisdom
10. Sightings Over 60
Sightings over 60 covers health, finance, retirement and other topics for the baby boomer generation. Tom Sightings runs the site. He writes about retirement for U.S. News & World Report.
9. Better After 50
Unlike the other blogs on this list, Better After 50 focuses on lifestyle rather than finances. You’ll find articles about travel, relationships, and diet geared towards women over 50.
8. How Much Can I Afford to Spend in Retirement
Budgeting after you’ve left the steady paycheck is no easy task. Luckily, actuaries Ken Steiner and Bobbie Kalben walk you through how to build a financial model to come up with a reasonable spending budget.
7. Retirement Researcher
If you’re mainly interested in investing, look no further. Wade Pfau, the founder of Retirement Researcher, is the Professor of Retirement Income at The American College, a higher education institution for financial planners.
6. Boomer Reinvention
Who says you can’t have multiple careers? John Tarnoff gives career development advice for workers over 50 who either can’t retire or simply don’t want to.
5. Real Deal Retirement
Editor Walter Updegrave pens a weekly “Ask Real Deal” column where he answers reader questions such as “I would like to buy an immediate annuity, but I want to know that I’m getting one from a reliable company. How can I do that?.” He offers no-nonsense advice, warning of hidden fees and conflicts of interest rife in the financial advisory business.
- Do You Really Need a Financial Advisor?
- How Should I Invest My Nest Egg For Maximum Retirement Income?
4. Satisfying Retirement
While you can find plenty of resources about retirement finances, Bob Lowry focuses on topics such as relationship-strengthening, finding your passions, time management, health and healthy living, aging issues and solutions.
- Travel and Health: Balancing Our Wishes and Our Wallet
- Friendship and Retirement: Not a Simple Combination
- Working After Retirement: Not Unusual Anymore
3. Retirement Revised
- Mark Miller runs Retirement Revised. Mark is a journalist who frequently writes about retirement-related public policy issues, including reform of Social Security, Medicare and workplace retirement plans. He also wrote the book 65 Things to Do When You Retire, 65 Notable Achievers on How to Make the Most of the Rest of Your Life.
- Retirement Spending: Why Rules of Thumb Won’t Work
- How to Hire a Fee-Only Planner
2. Aging with Freedom
1. Retirement Manifesto
After 33 years in corporate America, Fritz Gilbert achieved early retirement in 2018 at the age of 55. He and his wife downsized to a cabin in the North Georgia mountains and are sharing their journey and lessons learned.
“Now that I’ve raised your heart rate, allow me to lower it again. You will almost certainly never be audited. Approximately 245,000,000 people file income taxes in America every year. In 2017, the IRS audited about 0.5% of them. That’s the lowest number in 15 years.“
“I have made an average of $44,500 a year before taxes over the past 5 years, which has ranged from salaries of $24,000 to $75,000. Despite the general high tax rate and high cost of living, I have managed to save my first $100,000 after 4 years of living and working in the Big Apple.”
“Feeding into the bullish trend is encouraging economic reports for China published April 16th, along with fresh optimism that a trade deal for the US and China may be near.“
“While negative thinking can feel completely automatic and outside our control, with the right practice and techniques, you can learn how to re-train your mind’s habitual way of thinking and free yourself from the burden of negative self-talk. In this guide, I’ll walk you through exactly what Cognitive Restructuring is and what it looks like.“
Despite surging 16% in 2019, REITs are not very well understood by the average investor. That’s a shame because they can be great investments. Legendary money manager David Swensen puts 20% of Yale’s $30 billion endowment into real estate. In Four Pillars of Investing, William Bernstein recommends allocating 15% of your portfolio to REITs.
REITs do come with a few cons: namely, tax-inefficiency and low-growth potential. But they can be a useful tool for investors who seek income or want to diversify their portfolio.
How do REITs Work?
You can buy REIT shares, the same way you buy shares in a corporation like Amazon.
Retail-focused REITs purchase malls and lease out storefronts to brands. Multi-family REITs will purchase apartments and lease them to families. Self-storage REITs will purchase storage facilities and rent the units out to people who need extra storage space.
REITs make money from collecting rent from their tenants. They then disperse this rent back to investors every year in the form of a dividend. Congress mandates that REITs distribute at least 90% of their profits back to investors, which is why REITs are great investments for people looking for income.
When it comes to REITs, one of the most important metrics is the yield. If you buy one share of Fake REIT Corp for $100 and you collect $10 in dividends in a year, then Fake REIT Corp has a 10% yield.
Net Asset Value
Dividends aren’t the only way shareholders get upside. A REIT’s share price can also increase. This brings us to the question, how are REIT shares priced?
Since the function of REITs is to own and lease properties, we value a REIT by its real estate portfolio. We estimate the market value of the properties using the NAV metric. The NAV is calculated by dividing the operating income generated by the properties by a cap rate that’s in line with the market.
Note: the share price of a REIT isn’t always equal to its NAV. REITs can trade at a premium or discount to its NAV. For the past few years, retail REITs have traded at a huge discount to their NAV because investors are afraid of the Amazon effect.
According to the FTSE US REIT Index, which tracks domestic REITs, from 1970 – 2018, REITs had 12% compounded annual returns. They outperformed the S&P by about 1% during this period. This tracks total returns, which include dividend payouts as well as stock price appreciation.
Pros of REITs
REITs Provide Income
On average, REITs have higher yields than stocks, since they are required to distribute 90% of their profits back to shareholders. While the S&P yields a paltry 1.92% (as of February 26, 2019), REITs averaged 4.03% in March 2019.
Non-traded REITs have Even Higher Yields
Non-traded REITs are REITs that aren’t listed on a public stock exchange.
One of the largest non-traded REITs, Blackstone’s BREIT yields 5.9%. Other “eREITs” like Realty Mogul and Fundrise yield between 6%-7% annually.
Before you chase high yields, you should keep in mind that non-traded REITs come with a lot of risks.
The trade-off for non-traded REITs’ higher yields is 1) lack of liquidity (there’s no market for you to sell your shares on 2) lack of transparency around corporate structure/fees 3) a history of high, hidden fees and paltry results
Improves Portfolio Returns
Imagine you have $100,000 to invest in 1994. Can you guess which of the three allocations will net you the highest return in 2018:
- Portfolio A is comprised of 100% US equities
- Portfolio B is comprised of 75% US equities and 25% REITs.
- Portfolio C is comprised of 50% US stock, 25% bonds, and 25% REITs.
After backtesting all three scenarios with Portfolio Visualizer, it turns out that Portfolio B (75% US equities and 25% US REITs) nets you the highest returns. Your assets would have grown from $100,000 to $995,000 with Portfolio B. That’s about $25,000 more than if you’d only invested in stocks.
Diversification is said to be the only free lunch in investing
By spreading your assets across different sectors and assets, you decrease the risk of any one slumping asset bringing down your whole portfolio. Better yet, you can decrease risk without lowering your expected return.
Adding exposure to real estate can help smooth your portfolio’s volatility since real estate is weakly correlated with stocks and bonds. A Wilshire report shows that from 1975 to 2017, REIT prices are 58% correlated with the US Large Cap Index.
In other words, it often happens that when stocks perform poorly, REITs perform well, and vice versa.
“Unless you have a crystal ball that tells you how the markets will move, it’s better to diversifying across different types of assets.”
For example, in the past twelves months ending January 2019, REITs way outperformed the S&P, yielding a 10.3% to the S&P’s -2.3% decline.
In the Four Pillars of Investing, William Bernstein highlights why it is important to hold US stocks and REITs by giving the following example:
In 1998, US large stocks did the best, but REITs lost a lot of money. Many investors got discouraged that year and sold their REITs. They were soon sorry because by 2000, stock returns were generally poor and REITs were the only stock asset with superlative returns. Foreign and US large stocks, which delivered excellent returns in the first two years took a nosedive in 2000.
Hedge Against Inflation
REITs are good investments during times of high inflation since they collect rent from tenants and rents rise with inflation.
Between 1974 and 1980, the average rate of inflation was 9.3%, much higher than the historical rate (1972–2017) of 4.0%. During this time, bonds yielded 8.4% from income, but prices declined by 2.7%, resulting in a total return of 5.6%—way short of inflation.
Stocks did outpace inflation during this time. They returned a total of 10%: five percent from dividend income and 4.8% from price growth.
But REITs bested both. REITs returned 17.9% for this time period.
The income return of REITs alone was 10.4%, higher than the 9.3% rate of inflation.
Cons of Investing in REITs
Leverage Can Backfire
REITs use leverage which is like gasoline, magnifying returns in both directions.
In 2008, a driving force behind the market’s dismal performance has been rising debt levels in many REITs.
Joel R. Bloomer, a senior equity analyst at Morningstar, told the NYT, “They took advantage of all the cheap credit that was once available and overextended themselves, often buying overvalued properties using excessive leverage.”
Don’t expect them to match Facebook or Google’s performance, REITs are not high growth stocks.
And that is by design.
Since they distribute 90% of the income back to investors every year, REITs trade off price appreciation for income.
“My optimistic prediction is that the better REITs and their Wall Street advisors will begin to effect an overall shift, from growth investors to value investors, who will enjoy the limited risk, steady cash flow and periodic undervaluation of REIT shares.” The Real Estate Game
And while some REITs have appreciated quickly (for example, data center REITs have been on a tear since 2008), don’t fall in love with high growth REITs. In real estate, chasing growth at all costs usually means speculating on appreciation or aggressively using leverage.
- Case Study
According to William Poorvu, author of The Real Estate Game, in the 1990s, REIT managers tried to stay competitive with growth stocks. Despite the fact that buying real estate traditionally returned 10% per annum, they set the REIT shares at a huge premium to the market value of the properties at IPO. This pressured managers running these REITs to continue to push for growth. They became more likely to buy on slimmer margins, or to go further out the risk curve in the type of quality of properties they buy. In an effort to satisfy the current Wall Street appetites and fads, they are more likely to take a short-term view.
Won’t Protect You in Times of Financial Disaster
However, REITs and stocks are not perfectly uncorrelated. In extreme recessions, they can move together.
In 2008, when the S&P 500 fell 36.6%, the index of equity REITs also fell 37.3%.
A 2012 study from Zhou and Anderson, Extreme Risk Measures for International REIT Markets, found that the timing of extreme market movements between REITs and stock indexes is almost perfectly in sync. They concluded the diversification benefits of REITs are sometimes not present when they are needed most.
How REITs are Taxed
Unlike dividend from companies AT&T, the dividends you receive from REITs are taxed at ordinary income rates, rather than capital gains rates. If you want to be precise, on average, 76% of the annual dividends paid by REITs qualify as ordinary taxable income.
There are a few exceptions:
- Return of Capital Distribution (taxed at capital gains rate): 10% of distributions will be a return of capital. This occurs when the REIT’s current distributions exceed its earnings. Most distributions in the early stages of a REIT will be a return of capital, simply because the REIT hasn’t had a change to purchase and lease properties yet.
- Long-term Capital gains: 14% of distributions qualify as long-term capital gains
The fact that REIT distributions are, for the most part, taxed at ordinary income rates means the effective return for high-wage earners will be much lower than the advertised yield.
For example, a person taxed in the top bracket in California receiving a 6% yield, actually receives an after-tax yield of 3.5%.
There are a few brights spots in the tax code for REIT investors:
- As we mentioned earlier, REITs aren’t double taxed. Unlike most corporations, REITs doesn’t pay corporate income tax as long as it distributes 90% of its taxable income.
- Depreciation is deducted from the REITs’ earnings, which shelters some income from tax.
- Trump’s 2017 Tax Cuts and Jobs Act gives REIT investors a 20% tax reduction on the pass-through income received. For an individual REIT shareholder, this 20% deduction means that the maximum effective rate on ordinary income from dividends is now 29.6% (37% x 80%).
- If you hold the REIT stock for longer than a year, the stock gains are taxed as long term capital gains.
How Much of Your Portfolio Should be in REITs?
- Bernstein (The Four Pillars of Investing) recommends a maximum of 15% of the equities portion of your portfolio be dedicated to REITs. In The Investor’s Manifesto (2010), he lowered that recommendation to 10% of the equity allocation.
- Famed institutional investor David Swensen, Chief Investment Officer at Yale, allocates at least 15% of his fund to real estate.
- Malkiel, author of A Random Walk Down Wallstreet, writes, “I think they deserve a place in all portfolios.” In the 5th edition of the book, he recommends allocating “15% to REITs to give some income growth to cope with inflation.”
- In the past decade, six major studies suggest that 20% should be allocated to REITs to best take advantage of their diversification benefits. Twenty percent is proportionate with the size of the investment real estate market.
REITs can provide income, liquidity, diversification, access to high-quality properties. If you would have diversified 25% of your portfolio into REITs in 1972 versus staying 100% stocks, you would’ve added 2% to your returns.
“You aren’t going to build wealth overnight in the stock market. Warren Buffett has averaged returns of around 20% a year over his investing career. You aren’t going to average 200% or 400% returns a year. You are not 20x or 40x better than Buffett. No one is.”
“Today as Part 1 of a two-part series on “Creative Choices in Desperate Financial Situations,” I’m going to tell you guys about the time I was semi-employed and how I funded my life primarily with credit cards because the prospect of running out of cash is scary.”
“I hope my story inspires you to make seemingly scary life decisions, and trust that your own dots will somehow connect. It takes a lot of hard work and a little dumb luck, but upfront master plan required.”
Guest Curator: Millionaire Mob is an early retirement blog where people come together to find the best travel deals and financial advice.
“I follow so much personal finance content, you guys. And what I’ve found is that a lot of personal finance followers, especially in Facebook groups and Reddit, tend to think of their retirement planning as one thing…I don’t really see a lot of people talking about how they are doing multiple things to build up their retirement portfolio.”
“New Home Sales appears to be an excellent leading indicator, and currently new home sales (and housing starts) are up solidly year-over-year, and this suggests there is no recession in sight.“
“Now, I just know: when I travel a lot, I probably won’t get much deep work done. But that doesn’t mean I’m not being productive. If anything, I’ve found myself reading/listening to more books, audiobooks, and podcasts this month—and I’m getting pickier about what I consume. I want to consume content that inspires me, or at least makes me think.”
Guest Curator: Millionaire Mob is an early retirement blog where people come together to find the best travel deals and financial advice.