Service charges: the number that quietly eats your yield

Ask a buyer their expected yield and they will quote a gross figure. Ask what they are paying in service charges and there is usually a pause.

Service charges are levied per square foot per year, set by the building's management and approved by the regulator. They cover maintenance, security, cleaning, insurance, chiller infrastructure and the reserve fund. They are unavoidable, they vary enormously between buildings, and they come off your rental income before you see any of it.

Why the variation matters so much

Two towers in the same community, both handsome, both well-located, can carry materially different service charges. The difference is driven by amenity load, building efficiency, the quality of the management company and how honestly the reserve fund is provisioned.

A building with extensive amenities, multiple pools, large lobbies, concierge, extensive landscaping, costs more to run. Those amenities may help you rent it. They may not help enough to cover what they cost you every year.

The reserve fund question

The reserve fund pays for major replacement: chillers, lifts, façade work. A building charging suspiciously low service fees may simply be under-provisioning its reserve, which is not a saving. It is a deferred bill that arrives as a special assessment, usually at the worst moment.

What to actually do

Get the current service charge figure per square foot, in writing, before you buy. Get the previous three years so you can see the trend. Ask whether a special assessment has been levied or is anticipated. Then recalculate your yield with that number deducted and decide whether the investment still holds.

It frequently does. But a yield calculated before service charges is not a yield, it is a marketing number, and treating it as the former is how a sound-looking purchase quietly underperforms for a decade.