The HOA is responsible for maintaining the quality of life of a community. We discuss how the HOA affects investment properties and what investors should look for.
If you are an investor purchasing property in suburban areas or within a planned development, you’ll likely encounter a property subject to a homeowners association (HOA) and their HOA fees.
Below we will discuss how the HOA affects investment properties and what investors should look out for when evaluating an HOA governed investment property.
What is a homeowner’s association?
A homeowner’s association is a private organization chartered to manage a planned community, such as a gated community or a condo building. It is established in the form of a private corporation and is subject to state Corporation laws where it was incorporated and/or where it operates.
The HOA is responsible for maintaining the uniformity and quality of life of the community. It may likewise be responsible for the maintenance of the common areas and upkeep of the building’s amenities (i.e, the pool, gym, tennis court, rooftop, etc.).
Lastly, HOA’s are responsible for enforcing certain restrictive covenants, also called covenants, conditions, and restrictions [CC&Rs]. These rules and regulations govern what the tenants may and may not do within their property.
For example, commons CC&R regulations may restrict what color residents may paint their front doors or breed and size dogs that residents may own.
What investors should know about the HOA
As an investor, you must scrutinize the HOA fees
Homeowners association fees can range anywhere from a few hundred dollars to a few thousand. You can pay well over $600 a month to own a property in an HOA community in some higher-priced areas.
Determine what the fees are
Investors must be mindful of the monthly HOA fees to determine if an investment makes financial sense. In other words, analyze the HOA fees to determine whether or not the property is a good investment for your investing strategy, etc. Specifically, you must evaluate what you are getting for the HOA fees. For example, are you getting access to valuable amenities such as the general, pool, or tennis court? Is the HOA responsible for the upkeep of the common areas?
In some situations, the HOA can lighten the burden of investors. For example, if you are a condo investor, the HOA will typically be responsible for the landscaping, pest control, and general repairs to the property.
That is a lot less work for investors. This also reduces the overhead costs for the investor in their property management firm.
On the other hand, if an HOA only exists to enforce restrictive covenants and occasionally cut the front lawn, a high HOA fee is probably not justified or warranted. Paying high HOA fees in this situation will not yield the investor any long-term return. As such, we would highly recommend against purchasing this property.
Determine how the HOA fees will cut into your profit
The major concern is how are your HOA fees going to impact your profit. This is especially true if you plan to flip the property within one or two years. Your job is to analyze the property and determine whether or not the HOA fees and dues will cut into your profit significantly to the point that the investment no longer makes financial sense for your bottom line.
If you are looking to rent out the property, you need to determine whether or not you can charge high enough rent to cover the high monthly dues. Specifically, you must perform a comprehensive market analysis to ensure that you can charge the higher rate in your market and still retain renters.
After you do the analysis, if you determine that you cannot charge high enough rent to cover the HOA fees, then this property is probably not the best investment for your situation.
Also, keep in mind that at any point it deems necessary, the HOA can charge a special assessment to cover large community-wide expenses. These special assessment fees vary from community to community.
Generally speaking, smaller HOA buildings and communities have lower special assessment fees and dues. However, depending on the age of the building and the type of work that needs to be performed, the HOA special assessment fees in a smaller building could be more than the special assessments in a larger community.
As such, before investing in an HOA property, the investor should inquire if the association has any planned special assessments or projects coming up in the near future. Additionally, investors can levy fines against the property owner for failure to comply with HOA rules. These unexpected fines need to be factored into your budget.
Admittedly, sometimes they are extra hundred or thousands of dollars in unexpected expenses.
The investor needs to determine, what the monthly HOA fees actually cover, how are HOA fee increases determined, how ofter does the HOA increase the monthly fees and how much are the increases, and how much of a reserve does the HOA have in their savings.
HOA dues are not all that bad, even those with higher monthly fee use and dues. Frequently, an HOA can add value to your property, make it more marketable, and overall lightening the burden of the investors/property owner.
However, keep in mind that a ship every HOA is different. As such, each property must be evaluated separately. Investors must have a good idea of what the HOA is responsible for and what they are responsible for. This way, the investor can do a comprehensive analysis to determine whether an investment in this particular HOA property is warranted given its fees.
Investors must learn the HOA rules
Owning an HOA-controlled property means that there are several limitations on what investors may do with their property. For example, investors probably can’t install certain structures in their yard; certain requirements may be required regarding the landscaping.
Also, there are commonly designed limitations such as paint colors that you will have to abide by. Some home improvement projects will require the approval of the HOA board. This could delay improvements to your property and affect the time it takes to see a return on your investment.
Investors should review the community’s HOA’s insurance
A careful review of the HOA’s meeting minutes will tell the investor a lot about how the building is currently managed. An investor can get an idea of past conflicts and any ongoing issues within the community.
As such, before you purchase the property in an HOA government community, you may want to consider attending an HOA meeting before committing to the purchase. Lastly, investors could speak with the board or the president of the HOA to determine if they like the way the leadership is structured.
Additionally, you will get a good idea about whether or not the property is being under-managed by meeting with the board personally. It is fairly common to come across certain buildings where management really doesn’t care how the building is run.
This could be a problem when it comes to making repairs, building complaints, and general quality of life issues.
Investors should review the HOA’s meeting minutes
As a real estate investor, it is important that you take into consideration what kind of insurance the building has. This is especially important in investments we shared walls such as cooperative apartments, condominiums, or townhouses.
You want to see how comprehensive the building insurance is in the case of natural disasters such as earthquakes, floods, fires, hurricanes, tornadoes, and any other natural disasters.
The bottom line
Homeowners associations are not always a bad thing and, in fact, can serve as allies to investors. Specifically, the HOA can ensure that each resident of the community contributes their equal share of responsibility regarding repairs and maintenance of the common areas of the building.
On the other hand, HOA can be a pain in the butt to investors if certain rules and regulations prevent the investor from enjoying a profit from their property and or implement rules which are too restrictive to the investor’s goals and purpose.
As such, before you consider purchasing a property in HO, a government building, you should be aware of the ins and outs of the building, its restrictive covenant, fees, leadership, and any other issues that ma, affect your bottom line.