Should rental amount include HOA
Hello everyone! I know that HOA fees are ultimately due by the property owner, but my question is:
Should the rental amount include HOA fees or should HOA fees be an addition to the rental amount?
My thought process is.... if the average rent in an area is $1000 and HOA fees are $300 should I charge $1300 and be at the high end of the rent curve or should I charge less and have the HOA fees come out of the cash flow in order to keep rent near the middle of the rent curve?
Thank you in advance for your help!
All of my properties have HOA fees. I don't know why you would want to try to tell a prospective tenant that they are responsible for the HOA fee. Why stop there, tell them they also have to pay your property taxes and owners insurance. Obviously this would not be received well, you'd probably never rent the place out, at least not to a quality tenant.
So, I don't think you're asking an HOA question, I think you're asking what you should market the property for.
For a vacant property, I market the property right at the average rent that comparable properties are getting leases for.
For an occupied property with a good tenant, I will temper rent increases to not drive the tenant to non-renew. So this may mean a slight rent increase, but pointing out to the tenant that they are below market. This often works and it's win-win as moving is disruptive and expensive for the tenant. Tenant turnover is expensive for an investor as it comes with maintenance and vacancy expenses. The only thing I hate more than vacancies is evictions.
When analyzing a potential rental property you must take into account all cost which includes HOA fees. If the market rent is $1000 then your analysis will need to include all expenses. This could be electricity, gas, water, maintenance, property management, Mortgage, taxes HOA etc. I have looked at many properties with HOA's but the HOA cost seems to just kill the cash flow. It does in general reduce property taxes and maintenance but not enough in my mind. You always need to evaluate capital projects that the HOA may be planning which could increase your cost.
#4 General Landlording & Rental Properties Contributor
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#4 General Landlording & Rental Properties Contributor
- Rental Property Investor
- Los Angeles, CA
Originally posted by @Patrick Stuckwish:My thought process is.... if the average rent in an area is $1000 and HOA fees are $300 should I charge $1300 and be at the high end of the rent curve or should I charge less and have the HOA fees come out of the cash flow in order to keep rent near the middle of the rent curve?
Based on this, I think that you may have unrealistic expectations of what you can charge and what the market range actually is. I find it hard to believe that there is that much of a price swing for comparable units.
@Dave G. Thank you for your explanation.
I may have not written out the question well.... I would not let the tenant know the HOA fees are in the rental amount, I am trying to figure out pricing for a condo with a HOA where all utilities are covered.
@Kenneth Garrett the HOA is definitely a cash flow killer. Any idea on how to set pricing when the HOA covers all utilities? I'm finding that, for the most part, I can do 1.2% rule and make $50 - $100 per door where there is an HOA.
I know that the cash flow would be very low, but this property’s asking price is $20k under appraised value and I’m sure it can be lowered even further. This would be a deal for equity, not cash flow, but I done want to be paying out of pocket monthly either.
@Greg M. Hi Greg! Thank you for your comment. I live in Houston and there is no zoning here. Depending on the part of the city, there can be very big ranges for rent in the same area. If you have any tips for narrowing down for comparable units in areas with no zoning laws I am eager to know them. I’m new to RE and can use all the help I can get!
Thank you
#3 Managing Your Property Contributor
Your HOA fees are part of the costs, same as property taxes. Just because HOA are $300 a month, doesn't mean the house is worth $300 more in rent. Now if there is a pool and other amenities, that will increase the rent price.
As it is a condo with all utilities included, I would write it up as $1000 with no utilities and then have them pay you for the utilities separately. I have a place where I have base amount of water included in the rent and they pay for overages. If there are no overages, they don't see the bill. You could try something similar.
I would look at other rentals within the HOA and see what there getting. No utilities is a big plus. Make sure there is no restriction on the number of rentals. In my area, we have some HOA's restrict the number of rentals.
Cash flow of $50-$100 is very low. Are maintenance,repairs, pm, capex included in your cash flow. The equity is nice, but if any repair is required it will put your cash flow in the negative. I always look for minimum cash flow in the $300 +- range.
@Kenneth Garrett great tips on how hat to check for within the HOA
THE $50 - $100 is after 5% maintenance fee, 5% vacancy fee, and $1200 yearly insurance and $1000 yearly CapX.
If I do a SFH I could have a much larger cash flow, as long as there is not HOA. I work just down from this area and it has the equity, I a feel that balances out the low cash flow.... is there anything else I should consider?
@Theresa Harris the utilities are all included in the HOA, I won't see those expenses, is there a way to add the average electric cost for the community to the monthly rent? Or should I leave it off as to be more of a draw to renters?
#3 Managing Your Property Contributor
@Patrick Stuckwish Say that rent is $1000 and utilities are $100 a month, you will get more traction than saying rent is $1100 including utilities. It is the same amount to you, but some tenants won't see that it is the same.
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"Should the rental amount include HOA fees or should HOA fees be an addition to the rental amount?"
Like any 3rd party pmt with any kind of real liability (like HOA or mortgages) tenant pays YOU and YOU pay the 3rd part.
Since tenant doesn't suffer (unlike a utility bill) if he doesn't pay, you need to protect your interests and avoid default.
The HOA fee is irrelevant to the discussion. Your rental gets priced at the rental amount that makes sense, given the rental price on comparable units. The fact that you have an HOA fee has no bearing on what you charge, it only effects your expenses.