Real Estate Investing Basics

6 Reasons HOAs Aren’t Necessarily Deal-Breakers

Expertise: Mortgages & Creative Financing, Business Management, Landlording & Rental Properties, Commercial Real Estate, Real Estate Deal Analysis & Advice, Real Estate Investing Basics, Personal Development
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Many think HOAs are a deal-breaker? Kevin Mercadante believes “you should avoid buying in HOA neighborhoods” because of the power that the Homeowners Association can have over you. He writes:

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“…The primary purpose of HOAs is to maintain and improve property values in the neighborhood. Before you go thinking that’s a good thing, imagine that your house is controlled by a stock broker, whose only objective is to increase the value of your property.”

That doesn’t sound particularly pleasant. But it’s a broad brush to paint all HOAs with. Many are extremely benign. Indeed, we have several houses in an HOA that do nothing more than monitor for trash in people’s yards and clean the snow off the road. The annual (!) bill is $30.

Mr. Frugalwoods, for his part, lists seven reasons condos (which always have HOA) can be a bad investment:

  1. Condo fees
  2. Condo assessments
  3. Condo association financial health
  4. Condo association rules
  5. Condo governance
  6. FHA lending rules
  7. Your neighbors are really close

My own position differs from Mr. Frugalwoods. I believe that HOAs are a detriment to purchasing a property but by no means a non-starter. In my previous article, I noted how “condos and co-ops usually make for difficult investments. But they are by no means impossible.” HOAs—whether for houses, condos, or co-ops—are a similar can of worms. They make things more difficult, but by no means impossible.

Here I will address all of Mr. Frugalwoods’ concerns and deem each one as a deal-breaker or not. Since No. 7 is a personal preference and mostly about buying a home to live in, I will skip that one. I will also discuss this in regards to HOAs in general despite Mr. Frugalwoods only discussing them in relation to condos.

Related: The Ultimate Guide to Investing in Condos and Townhomes

1. Condo (HOA) Fees

condo-HOA

We once ran across a 3-bed, 4.2-bath, 4259-square foot luxury condo near downtown Kansas City in a building where a 1-bed, 2.1-bath, 1812 square foot condo had sold the previous year for $412,500. The original listing price was $1.2 million. By the time it came to my attention, the listing price was a mere $124,200! Despite massive temptation, we didn’t buy it.

Problem was the HOA fee was $7,089 per month!

But the way to look at this is just like you would with any other expense; does it make the deal unworkable? Imagine the condo fees are instead extremely high taxes. Are those taxes too high for the property to cash flow? If so, either move on or flip it if there is a good market for homeowners in that area. (But remember, your holding costs will be higher because of the monthly HOA fee.)

Generally, our condos don’t cash flow as well as our houses, but we’ve found a few good ones that do cash flow a decent amount. The rule of thumb for us (although this will differ based on the average rent and value in a market) is that a monthly HOA fee can be no more than $250/month for the condo (or house for that matter) to have a chance at working.

2. Condo (HOA) Assessments

HOAs can charge special assessments for improvements to each homeowner in the association. (The amount is usually based on the homeowner’s percentage share of the total square footage.) These assessments can be quite arduous sometimes. We bought into one HOA that had just put on a $3,000 per condo special assessment to deal with drainage issues. That would have easily wiped away more than a year of cash flow.

You can never know for certain if a special assessment is coming down the pike, but you can protect yourself with a few steps:

  1. Evaluate the property itself, not just the unit. If the property is in bad shape, then a special assessment is likely needed.
  2. Ask the HOA while you are under contract if there have been any recent special assessments or if any are planned or likely.
  3. Make sure there’s room enough in your cash flow projections to handle a reasonably sized special assessment if need be.

I will note that most HOAs for houses are in relatively new subdivisions (or are very small like the one I mentioned above). New subdivisions have all of the necessary amenities (storm drains, sidewalks, etc.) so they rarely require special assessments. It will usually only be condominiums and co-ops that do.

3. Condo (HOA) Financial Health

A general inspection of the property itself can usually let you know if the HOA is in decent shape. If there is peeling paint everywhere or other signs of disrepair, it’s probably best to run. But remember, this is true of regular neighborhoods too (unless lower-end properties are your specialty). With HOAs, it’s the same, only more so.

You can also request financial information from the HOA to see how much money they have in the account and how much they are bringing in versus spending. They might be forthcoming. On our large purchase of 17 condos, they ponied up the documents because we demanded them. Other times, we haven’t even requested them. It never hurts to ask though.

4. Condo (HOA) Association Rules

research-reading

Always, and I mean always request the HOA bylaws before closing. Yes, it’s a pain to read them, but it’s necessary. For example, on one deal I forgot to request the bylaws and it turned out you weren’t even allowed to rent in that complex. As a guy who wrote a series on due diligence, this mistake will haunt me with everlasting shame. Luckily, we made about $2,500 on that “flip.”

A friend of mine once told me how her brother built a dog house in the backyard of his house. Unfortunately, the HOA allowed for no structures to be put up without board approval. They actually made him tear it down. Yes, HOAs can be a pain.

From my experience, bylaws rarely change drastically, so if the rules are acceptable when you purchase the property, most of the time, you will be OK. That being said, you need to know what those rules are going in, and they need to be acceptable to you.

5. Condo Governance

There is a stereotype that HOA presidents are petty and tyrannical, want-to-be dictators that would—if given the power—rule in a manner that would make Joseph Stalin blush. This stereotype is true.

That being said, most of the time you’re just not important enough to be noticed if you are paying your dues and following the rules. What helps here is if you have enough equity in the condo or house that makes selling a good escape hatch.

And again, you want to evaluate the grounds and property itself. We once looked at a condo in a really good area that was selling for really cheap. But most of the units were vacant and the grounds and property were in disrepair.

The HOA was an obvious mess and had run the building into the ground. Special assessments were likely coming and there was no way we were going to trust that HOA to manage the building that housed our investment. We passed.

Related: What Everyone Should Know About Condo Ownership (But No One Tells You)

6. FHA Lending Rules

There are several FHA rules with regards to condos, one being that, as Mr. Frugalwoods points out, “at least 50 percent of the units need to be owner-occupied.” (This is not true for houses in neighborhoods with HOAs.) However, some HOAs actually have the power to decline tenants or loans. So again, check the bylaws.

To me, this just makes the investment riskier and would thereby require a wider margin in order for me to feel comfortable investing. This is especially true if I planned to flip a condo as there might be a smaller pool of potential buyers if FHA-approved borrowers can’t buy your property. Again though, you can always ask the HOA what the breakdown of owners to tenants is. And again, they might be forthcoming.

Conclusion

So there you have it. HOAs are generally an added hindrance, although they aren’t completely useless by any means. In condos and co-ops, they usually pay the trash and often the water and sewer as well as the exterior building insurance. And they keep up the maintenance on the exterior and common areas too.

With houses, they will put plenty of pressure on your neighbors to prevent them from letting their homes fall into disrepair or yards become overgrown. With houses HOAs are something to investigate, but not hugely concerning. With condos and co-ops they definitely are a concern, but they’re also part and parcel for condos and co-ops.

Do they make the deal harder? Sure. Are they a deal-breaker? Not at all.

What is your take on investing in condos? 

Please share with a comment below! 

Andrew Syrios has been investing in real estate for over a decade and is a partner with Stewardship Investments, LLC along with his brother Phillip and father Bill. Stewardship Investments focuses on the BRRRR strategy—buying, rehabbing and renting out houses and apartments throughout the Kansas City area. Today, they have over 300 properties and just under 500 units. Stewardship Properties on the whole has just under 1,000 units in six states. Andrew received a Bachelor's degree in Business Administration from the University of Oregon with honors and his Masters in Entrepreneurial Real Estate from the University of Missouri in Kansas City. He has also obtained his CCIM designation (Certified Commercial Investment Member). Andrew has been a writer for BiggerPockets on real estate and business management since 2015. He has also contributed to Think Realty Magazine, REI Club, Elite Daily, Thought Catalog, The Data Driven Investor and Alley Watch.

    Denise Brown-Puryear from Julian, North Carolina
    Replied about 1 month ago
    Good Article. We own 9 Town Home units in a small (50 unit) development. HOA fees are low (compared to other communities) and the financial health of the HOA is very good. The prime focus with our HOA is a conservative approach to enhancing and increasing desireability and value within the community. Sales turnover is low and when there is a sale, these TH's are in contract with a week or so. Also helps that I (as an investor) am on the HOA Board. :C)
    Andrew Syrios Residential Real Estate Investor from Kansas City, Missouri
    Replied about 1 month ago
    That sounds like the kind of HOA you should be involved in. High HOA fees kill rentals (and are often meant to, more or less). But a well-run HOA with low expenses is tolerable and in some ways beneficial.
    Kevin McGuire Rental Property Investor from Seattle, WA
    Replied about 1 month ago
    Good article. I have 7 units in HOAs (one condo, 6 townhouses) and one triplex. The triplex is my most recent and preferred. In my comments below I’m talking about the HOAs that maintain the buildings, not the $50/month common maintenance types. Some of the HOAs have high fees but I factored that into cash flow, just as you noted. I also walked away from a deal where the fees were high, reserves low, and special assessments likely because of some foundations sinking due to rain water infiltration. I said to my agent, “I just feel like I’m buying someone else’s problems”. The risk/liability was too high and out of my control. And that leads to the issue which has me really dislike HOAs: the association AND management company are between you and your investment. I find most management companies a pain to work with. Although in theory you’re the customer, they have little accountability to you as fee payer, and all are based on a business model of maximizing properties managed while minimizing their efforts. Because, they get paid the same if they do something or nothing. There’s one big management company for whom I now refuse to buy a properties they manage. I hate them. Yes, hate. With the triplex, my property manager works for me, is responsive, thorough, thoughtful, and accountable to me and me alone. If you’re just getting started and you self-manage, I think condos are an ok place to start. It just doesn’t scale as a business, in my experience anyway. You may decide to live in a condo for lifestyle reasons (which I do). But as a straight investment, I’ve concluded that HOAs obstruct my ability to run my business.
    Andrew Syrios Residential Real Estate Investor from Kansas City, Missouri
    Replied about 1 month ago
    You definitely have the right approach for HOA's IMO. You also have similar experience to what I have with many of our former property managers, unfortunately... it's a tough business, but some of them are just clueless (and a few, unfortunately, unethical)
    Fred Cannon Rental Property Investor from St Augustine, FL
    Replied about 1 month ago
    I have condo’s as an investment. They are great if you are into the midterm rentals. If you have good management the HOA fees are OK. It actually cuts back on insurance and yard maintenance so for me it’s a break even deal. I have single family homes as well and the upkeep is a big hole in the cash flow. I would never ever again rent a single family home without professional lawn service as part of the rent. So there is a third or more of the HOA fee. Find a complex that is well managed and has cash reserves for repairs and you will find that the peace of mind from lack of maintenance is a blessing. Also I only buy one bedroom units. High demand and better return on money.
    Andrew Syrios Residential Real Estate Investor from Kansas City, Missouri
    Replied about 1 month ago
    If your HOA fee is a break even given what they provide, that's great! Although I don't think it's common. Usually (at least in my experience), the costs of the HOA will outweigh the benefits they provide, and usually by quite a large margin.
    Randall Prosise Rental Property Investor from Scottsdale, AZ
    Replied about 1 month ago
    I built my initial portfolio with condos downtown Seattle, and the HOAs were outrageously expensive. Along with the huge property taxes there, they were a killer to the cash flow. They ranged from $250-$775/mo(!), and they also charged move-in fees up to $1000 (!). This really became an issue when the Seattle government decided tenants shouldn't pay move in-fees, but were still applicable in the HOA. Imagine having to pay your tenant's move in fee :/ The upside was that the building and grounds were kept nice, and the amenities and 24-hour concierge were great for the tenants. I also didn't have to worry about any building issues outside the unit, which bode well for my living halfway around the world. But once the market shot up and they were flush with equity, I traded almost all of my condos for SF homes in Arizona. This is the interesting twist, because I actually welcome the HOAs now. I don't mind paying $25/month for a clean neighborhood (see trashed yards and purple houses next door) that builds a sense of community and promotes equity building. It is nice to have a few non-HOA houses in the portfolio for STR options, but to me I see value in these HOAs when it protects my investment and provides a better experience for my tenant. I think it warrants the extra $25/mo in rent price I can charge, so in my mind it is a wash.
    Steve Elling Rental Property Investor
    Replied about 1 month ago
    My wife and I own two townhouses about an hour outside Orlando. While the HOA fees are stiff at $250 per unit, the purchase price points on the units were so low, we were able to move some money around and buy them with cash. The cash-flow margins get waaaay more narrow, obviously, if you are mortgaging them, especially if a property manager is taking another 10% on top of the HOA fees. Like insurance, HOA fees almost never go down, even though the value of the townhouse might. Definitely read the HOA or COA bylaws first, and pay particular attention to any numerical figure with a dollar sign affixed. The listing agent should have a copy of them. Insist that they be provided before you potentially waste valuable time with an inspection. HOA bylaws can be punitive, petty, randomly enforced and subject to the caprices of people who are drunk with power. Avenues for protest are limited. Example: The townhome complex where we bought our two units is located across the street from a wonderful bike path that runs though the city. Yet the COA bans residents from storing/parking bikes on our screened-in back porches (these units have no garages). The bylaws require that potential renters meet with COA board members before they move in, which can slow down the approval process. Also, landlord owners are assessed a screening fee of $50 by the COA before new renters can get the keys, even though our property manager fully vets every applicant criminally and financially. He even reviews their Facebook posts. HOA rules can get downright childish at times. We had to let a guy out of his lease because he lied about the size of his dog -- the bylaws included a prescribed weight maximum and his hound was over the cap. He was a dream tenant and neighbor -- a single doctor, living alone, drove a Lexus, was almost never home. They ran him off in three months because his dog was 10 pounds over the weight limit. I've heard anecdotal stories of HOA boards with rules that became so onerous to non-resident owners, landlords were forced to seek spots on the HOA board of directors to protect the viability of their investments. Despite these hurdles, we are considering buying a third unit at the same development, as soon as I save up the dinero. But only because the cash flow makes up for the headaches.