Monday, March 18, 2013

The downside of property ownership

Property has been a wonderful asset class for us. Cash comes in on a regular basis. Values go up. Mortgages amortise. Of course, there is no such thing as a free lunch. In addition to the high capital cost, periodic vacancies and the regular outgoings (rates running repairs), from time to time there will more substantial outgoings either for a major interior redecoration or a levy for building upgrades.

I have recently been hit with three such bills:

1. a building upgrade levy of HK$72,000

2. a building upgrade levy of HKD221,000

3. a bill for rectifying an illegal non-compliant structure (same property as #2): HKD18,000

As far as the building levys are concerned, these are to be expected from time to time and are a necessary cost of maintaining the properties in good condition. Based on previous experience, a building levy will tend to enhance both the capital value and the rental income of a property (but will not outweigh movements in the market generally). Although I may bemoan the disruption to cash flow and the expense generally, I am fully aware that I am better off with the upgrade being done than not having an upgrade. However, I wish that building managers would add a little bit more to the monthly management fee and create a sinking fund for this type of work rather than hit us with these large one off bills.

The non-compliant structure came as a surprise. The structure concerned is the same for a number of flats in the building and pre-dates my purchase. It was discovered when the quotes for the building upgrade project were being obtained.

No comments: