Buy and Hold with a $235/mo HOA fee?

Question

I'm still looking for my first rental.  About 30 offers so far and none have worked out.  I don't know how people are making money with the prices these places are selling for.

I have stayed away from anything with a HOA but this town home has me intrigued.  It is in an awesome area and is rental ready.  I would have loved to live there a few years ago.  I'll probably set aside a few grand for painting the white walls and any unknowns but it looks like it would rent as is. I talked to a few neighbors who pay $1130, have been there for 4 years and absolutely love it.

It is on the market for 60K - previously sold for 170 (as did most others at the peak)
20% down - 12k
Rentals are 1000-1150 for the same type unit.
HOA is 235/mo - lawn and trash included(Complex has brand new roof)
most likely a 15yr mortgage ~4.25%
1100/yr taxes

The HOA is steep but it still looks attractive and would be a piece of cake to rent.  Is there anything I am missing here?  There are a few foreclosures in the complex from those that bought at the peak, I may try to buy a few if this works out at these prices.

Callum K. · Answer

Josh W., you must realize that when you up the payments, you are exchanging cashflow for equity buildup.  By going with a 15yr note, you are making larger payments versus a 30yr note (if you are able to get it) and in turn are sacrificing cashflow.  Personally, the spread between 15yr and 30yr is too small to justify to warrant the mandatory higher minimum payment.  I would rather have cash in the bank than equity.  For me, borrow more at longer terms while you can as rates are bouncing around generational lows.

We have a few condos and there are pros and cons with them but then again there are pros and cons with SFR's.  Here is my view.

Pros:
Insurance - Significantly less than SFR's (ours is about 20% of that of SFR's)
Responsibility - You are not 100% responsible for roofs, exterior walls, etc
Ammenities - Typically you share the cost for pools, fitness centers, etc
Repair Expenses - Typically smaller units and easier to maintain
Economies of Scale - It can be helpful to be able to acquire multiple units in a facility.  You get more votes on the HOA, plus you can do referrals to other units

Cons:
HOA Fees are mandatory
HOA requirements - You might be accountable for strict HOA covenants (I know we are)
Influence - Those who own more units yield more influence on key decisions
Assessments - This is the big one to me.  If you are not actively involved with HOA, you might not be aware that discussion to replace the entire parking lot or repaint the complex is about to happen.  When looking at the condos due diligence on this is a MUST.  Look around, is the community pool closed due to problems, do the roofs look to be in bad shape, there there old access gates that break.  Talk to the neighbors, talk to the HOA, check meeting minutes.  I have seen $2500 per unit assessments and that will absolutely KILL all profit for several years.

Overall, I prefer SFR's, but I got into condo's and they provide value to some of the things I dont get with the SFR's.

Hope that helps

Lynn McGeein · Answer

You also have to consider that if there are many other foreclosures in that complex, those homes are not paying the HOA fees, so the other owners are likely to have to absorb the costs not being covered by those fees, meaning higher fees for everyone in the future.  Also, make certain it doesn't have a special assessment attached to it if they just put a roof on.  The last one we purchased, the owner had recently paid a $16,000 special assessment to cover siding and roof.  I'm not sure how it works if the previous owner didn't pay a special assessment and it went to foreclosure, but make sure you cover any issues with the HOA before making an offer, and make certain the HOA has enough reserves and no plans for special assessments in the near future.

James Hiddle · Answer

HOA=Headaches Ocurred Always

Josh W. · Answer

With 12k down and a 15 year note I'm estimating ~340/month cash flow after paying mortgage/taxes, insurance, hoa fees. Vacancy and repairs would come from that. I may opt for a 30yr if I can get one.

Scott W. · Answer

what are the insurance & what would your mortgage payment be?

Josh W. · Answer

I looked at two of the units yesterday.  One two bedroom 2.5 bath is completely move in ready for 60k short sale, recently renovated, decent fixtures etc.  It backs up to some thin trees and then another complex, somewhat close to the main road.  The other needs about 5k in work to get it up to the 2 bed unit standards, but it is a 3 bedroom and backs up to a lake.  Beautiful view.  It is a Short sale at 85k.  The selling agents on both did not know the status on assessments.  My agent says these are a piece of cake to rent.  Currently in the complex there are two up for rent, the one I called on was for a May rental.  I'm putting in an offer on both, contingent on assessments.

These were built in 82'.  The roof is brand new, I'd estimate the siding at 10-15 years old.  It is wood and is showing age on a few of the units but these are good.  It will probably be replaced in the next 10 years.  I'm curious how much the HOA has in the kitty set aside for the siding but other than that I should easily cover expenses and I'll set the rest aside for future assessments.

Fran Flanagan · Answer

I have friends with a townhouse with a HOA, disaster for them. They have water issues and siding issues, that they're not allowed to fix on their own. The HOA has them on the bottom of the list as other units have worse issues. Their association paid a lawyer 5 figures to do very little / no results. The builder declared bankruptcy. Development was on a do not lend list.  It's a huge mess.

So they can't fix their problems, can't sell or refinance, but have paid like a 5k special assessment to fix the other houses.

I'm not sure how common this is but it's made me swear off HOAs.

Wayne Brooks · Answer

Your state might be different, but here the new owner is responsible for any and all outstanding dues and special assessments.  If it's a normal sale, these need to be paid out of the seller's proceeds, and delivered to you free and clear.  If these past dues can't be paid out of closing proceeds, then either you'll be responsible for them, or sounds like it's a short sale.

Shari Posey · Answer

You will probably have high lending costs (closing costs) with such a low loan amount. Can you pay cash for it? That would be best, in my opinion.

Personally, I think a $60k condo that can rent for $1100 is pretty good. $235 isn't too much as long as it looks like they are taking care of the place. I don't really like HOAs either but you will pay a lot more for an SFR and the numbers may not be better. Personally, I would consider buying it with cash.

Like others have said, check the financials of the HOA and how many owners are delinquent, etc.

Josh W. · Answer

"I'm not sure how it works if the previous owner didn't pay a special assessment and it went to foreclosure, "

Can anyone address this?  What about regular HOA dues that haven't been paid in the last several months.  Is the bank responsible, the previous owner or me?

I know HOA's can foreclose on properties with delinquent dues, what is the process to collect dues of foreclosed properties or properties which have sold but are still past due?

HOA issues aside, how do the numbers look?  How much should I try to make to offset the pain of the HOA?  The area is awesome, I would have no problem renting there myself.  As far as the 15yr note, that is what my bank is offering.  Are people getting 30 yr notes for investments with 20% or less down?

Buy and Hold with a $235/mo HOA fee?

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