Different types of compensation and their significance for real estate investors – how do they affect your investment?
It is important for real estate investors to know what costs are associated with an investment property. These are typically various types of charges. Currently, there seems to be a trend in the market to increase the number of separate charges. Housing companies may charge maintenance fees, financing fees, additional fees, or even broadband fees. This is possible and justified under Finnish law.
In this article, we will go through the most important fees for real estate investors, what they consist of, and how they should be interpreted.
Company fee
The maintenance charge refers to all of the above-mentioned charges combined. The maintenance charge is therefore the sum of various charges. Typically, the maintenance charge is determined based on the square footage of the apartment or, in the case of water charges, based on usage. However, this must be checked in the housing company's documents.
Maintenance fee
The maintenance charge is part of the company charge and indicates how much each share costs to maintain the property. In this context, a share refers to an apartment. It includes heating, electricity, water, sewage, waste management, cleaning, yard maintenance, and property management. In addition to these, some repairs or maintenance measures often need to be carried out during the year, which are not separately financed. These often minor repairs are also covered by the maintenance charge.
In summary, it should be noted that the maintenance charge must cover all property expenses incurred by the shareholder as a result of owning the apartment.
Financial compensation or capital compensation
Capital contribution is currently the most commonly used term and seems to have replaced the use of financing contribution, at least in the marketing of new properties. In practice, however, they mean the same thing.
If major renovations and refurbishments have been carried out in a housing company, they are almost always financed by a bank loan. The bank loan is taken out by the housing company, which distributes the loan to the shareholders based on the number of shares. This ensures that the loan is allocated correctly to each apartment. The loan is repaid to the housing company by paying a capital contribution. The housing company then repays the joint loan to the bank. In many cases, the capital contribution can also be paid off in a lump sum, in which case no monthly payments are required for the shares for which the payment has been made.
New developments often also have a start-up loan that works in much the same way. Each shareholder pays a capital contribution towards the housing company's joint loan, and the housing company pays the loan to the bank.
In housing companies, capital contributions can be placed in a fund or recognized as income. You can read more about this in this article.
Land rent
If a property owned by a housing company is located on leased land, land rent is paid for it. Land rent is invoiced to shareholders in the form of a land charge. This is therefore the monthly share of the land rent for a single apartment.
Repair compensation
Older housing companies may sometimes collect a separate contribution, which is referred to as a repair contribution. Repair contributions are collected for future repairs, and often the aim is to save money with a view to larger repair needs in particular. In accounting, the repair charge must always be deposited into a repair fund. In practice, this means that the charge in question is being set aside for future repairs.
The decision to collect repair fees often indicates that the property manager or shareholders of the housing company do not believe they will be able to obtain a bank loan for future major repairs. Obtaining a loan for repairs can be quite challenging if the housing company already has a lot of debt or if its financial situation is weak. In such cases, it is advisable to start saving money well in advance.
Maintenance charges and financing charges in taxation
Maintenance charges for investment properties are a significant part of the costs of real estate investment and have various effects on taxation. It is therefore a good idea to be aware of how different maintenance charges and capital charges affect taxable income.
Maintenance charges are deductible from rental income for tax purposes. This means that you can deduct the amount of maintenance charges you have paid from your rental income, thereby reducing your taxable income.
The financing charge, on the other hand, is a slightly more complicated case. The financing charge can only be deducted for tax purposes if it has been recognized as income. This means that the housing company has decided to record the financing charge as income rather than funding it. If the financial contribution has been set aside in a fund, it cannot be deducted for tax purposes and can only be deducted when the apartment is sold.
It is important to check the housing company's financial statements and the property manager's certificate to see how the financial contribution is handled. This will ensure that you make the correct deductions on your tax return.
All in all
According to Statistics Finland , the average maintenance costs were €4.92 per square meter in 2023. This may provide some guidance as to whether the costs of your own home are in line with the general level.
It may be useful for a real estate investor to look at the cost per square meter of their apartment. It is easy to calculate: the maintenance fee (€200/month) divided by the square footage (50 m2). In this example, the cost is €200/50 m2 = €4 per square meter. If you want to examine the expenses in more detail, a thorough review of the housing company's financial statements will give you a more accurate picture of where the money is being spent. For example, you can find out how much property management costs per square meter and what future expenses can be expected. If you own several apartments, you will gradually begin to understand the types of costs involved in a housing company. As a shareholder, you can influence the cost structure of the housing company by participating in its decision-making.
When investing in real estate, special attention must be paid to the relationship between rents and maintenance charges, and investors should look for properties with the highest possible rents and low maintenance charges. This will ensure that the investment generates a regular cash flow that flows into the investor's coffers every month.
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