Is high HOA fees a good idea for rental property?

Question

Hi BP community! I’m making my first rental property investment in a market different than where I live. All condos seem to have high HOA fees which upon analysis decreases my cash flow monthly. Should I instead consider town houses with lower fees? I have never lived in a town house and am anxious about managing one.

Theresa Harris · Answer

I'd avoid a condo.  Can you buy a single family home?  run the numbers for your options (condo, townhouse and house).  Then look at home much of that money is going to you vs others.  The HOA fees don't go to pay down your mortgage.

It really depends on your market.  I looked at a higher end townhouse style condo and a newer starter home type house (4 beds, 2 baths) earlier this year.  The cash flow would have been comparable along with the rent, but the big difference was a slightly lower entry point for the condo (~$30K), but condo fees.  In the end, I went with the house because that $200+/month in condo fees went towards paying down my mortgage instead.  Now in your market the price difference may mean the numbers are different.

Deepika S. · Answer

Thanks all for your responses and different points of view! To answer your question, Cameron, I see what you mean, however, the HOA in this market offers little benefits for the price. Mostly only including heat and water. And James, to your point, there are definitely more competitive rates if items covered under the HOA are outsourced to local services

Cameron Braig · Answer

@Deepika Namboothiri

Depending on location and rent projections, if rents are projected to grow that can help in offsetting HOA fees. Would the townhome rent projections continue to outpace the condo could be another factor to consider. HOAs can provide other services that offset other costs too. Another question to consider is how well funded is the HOA? Also when was the last HOA assessment? How much was it? What was it for? If the HOA is an effective group it can be well worth it.

Chrissy Severance · Answer

Living in a College town, some condo's are great for cash flow. There are a good handful that were popular 30 years ago when I was a student that still thrive today.   I am fortunate to be in this area.

Bud Gaffney · Answer

My first property was a condo. I will never purchase a condo again.

Bud Gaffney · Answer

RUN AWAY!

James Mc Ree · Answer

The HOA will provide services for those fees that you need to consider. For example, suppose the HOA provides trash service. A property without an HOA won't have the HOA fee, but will have a separate trash expense. It might be baked into your municipal taxes. That fee might be a wash. Likewise, there may be recreation club, pool, tennis court, etc benefits that may support a higher rent. The HOA may include snow shoveling, but you would require your tenant to do that at another property, so that's a loss for you. You need to consider the whole package.

Personally, I avoid properties with HOA fees to minimize my expenses.

Eric Kump · Answer

If the numbers make sense then why not go for it and vice-versa. If you want a 15% return for example and the HOA fee eats away at that and gives you a number below your goal, I would consider investing else where. HOA is not a fixed amount and can go up over time as well (You can raise your rents to offset this but it is another thing to consider that is outside of your control).