Posted over 4 years ago

Why I Buy Rental Properties in HOA's

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This week I listened to the Bigger Pocket's Podcast #75. In it I listened to Joshua Dorkin discuss why he would never consider investing in rental real estate that was within a Home Owner's Association. His cohort, Brandon Turner, did admit that this might just provide an opportunity to those that are willing to take on rental's that other people aren't interested in.

I guess that makes me one of those people.

First a little about me. I became a Realtor in the summer of 2009 after being laid off from Microsoft where I worked for 21 years in sales. In December 2010 I bought my first rental property. I currently own 10 properties with another under contract - all of them within an HOA.

Buying properties within an HOA was actually one of my strategies. When I started my goals were -

  • Invest excess cash in real estate after the large drop in prices as a means of diversifying my investments and as a way to produce passive cash flow as I headed toward retirement
  • Use my experience as a Realtor to identify properties
  • Purchase townhouses that were relatively new (which meant less inside maintenance and better tenants) and within a HOA (which meant no outside maintenance)
  • Use tenants as a means to add real estate clients - allow tenants to cancel their lease at any time if they use me to buy a house. So far I've had 4 tenants do that which has been a very nice financial benefit.

So this was actually a strategy as it seemed to me that not having to deal with lawn care, snow removal (in MN) or outside maintenance would be a nice benefit since I planned to manage the properties myself.

Benefits of buying within HOA

In addition to not having to worry about outside maintenance there are a couple other benefits that I think come along with being in a HOA.

The biggest of which is being able to better project actual expenses & cash flow upon purchase. While we all know the 50% rule I like to look at my actual expenses and doing so is made much easier within an HOA. My investment template is made easy since the HOA fee covers such a wide range of the fees including insurance, outside maintenance, water/sewer & garbage. Therefore, I just need to project vacancy & repairs to go along with taxes & HOA fees and I have a pretty solid idea of what expenses to expect. I do build in a landlord rental insurance policy for $170 which adds $1M in liability to each property as well.

After 4+ years of owning rental properties I can tell you that this process has provided very accurate expense projections. Pretty big benefit.

In addition, while there are some negatives to HOA rules (which I'll discuss below) there are also some benefits to the Rules & Regulations that every HOA requires. These rules apply to each of your tenants which provides a layer of responsibilities and oversight to your tenants. Now it's not just my lease that holds them accountable but it's the HOA and fellow tenants that keep them in line.

Disadvantages of HOA

While there are some advantages there are also some negatives that I'm sure Joshua was referring to.

While the HOA rules may be a positive they can also be a negative. Often there are requirements that landlords provide all kinds of documentation to the HOA regarding their tenants which includes leases and tenant details. There can even be fines associated with not providing the property manager with this information on timely basis.

Another issue, I do have one HOA which has HOA board members who are overly aggressive about calling out HOA rules against other residents in the Association. Getting a $25 fine for not putting your garbage can away fast enough is a pain and makes your tenant upset when you pass that fee along to them. Hey, they were supposed to read and follow the rules right?

Finally, there is the possibility of not having total control over the financials of the HOA. While most of my HOA fees have gone up with inflation I do have one Association where fees went up a lot last year when reserves got too low and another where a special assessment had to be done when an expensive roof repair was needed.

Conclusion

I feel that the benefits of being within an HOA has been an overall positive for my investment strategy. I especially appreciate the cost certainty when projecting my returns as well as not having to worry about any outside maintenance.

So thanks Joshua - I'll leave the SF homes to you and you can leave me all of the townhouses and condos.


Comments (2)

  1. Thanks, well written piece. The conventional wisdom may be that hoa's should be avoided for rentals, but your approach shows that with the right strategy and right hoa it could work. I especially like your idea of approaching them like a lease with open option to buy, and provided the appreciation is there, you can have quick, low transaction cost sale (no marketing, vacancy time, or often any major renovations, etc).. The cash flow is an issue as mentioned above, but with a well run organization, you should be getting services in return for the dues. Assessments for capital projects (a real risk for investors) may be mitigated with newer properties. Finally, one item people forget is that in well run association, you get good enforcement of quality of life issues, whereas with sf or multiplex you really only have persuasion or authorities to use for issues from neighbors. In the end, I think you have to weigh the pros and cons and choose associations carefully (good ones helping a landlord by doing the things you mention and bad ones eating up money with dues and assessments and even time with red tape...) An investor with a niche strategy wanting to avoid hands on exterior maintenance and willing to to put up with the bureaucracy can make it work, like you have.


  2. Curious how the special assessments and increases in HOAs are impacting you?  Does that disrupt the predictability of the financials (or is it negligible)?  I'm also wondering about your take home after expenses, it seems like the HOA fees can kill your cash flow - especially if they go up year after year.

    Interesting idea about letting your tenants break the lease - that is a smart way to manage vacancies and generate leads / new sales