Leveraging HOA Experience for Multifamily Investing

Successful multifamily investors often recommend for newer investors to have business and/or real estate experience before tackling larger multifamily properties. However, I think there is another way to gain some experience needed for managing larger deals. You could participate on the board of an HOA.

Many investors and homeowners shy away from HOAs and participating on the board, but the board for a townhome or condo HOA has similar roles to the asset manager of a multifamily property. The board oversees the collection of dues, enforces rules, manages a community manager, reviews rehab projects, communicates with homeowners, and audits finances. An asset manager has to make sure tenants are paying rent and following their leases, manage a property management company, oversee renovation projects, communicate with investors and tenants, and ensure the deal is following the financial projections. Being on the board of an HOA is not a lot of fun, but it does provide great experience.

I have been the treasurer for one of my HOAs for over a year, and I have gotten a first-hand look at many of the financial aspects of running a community. Many of these translate well to managing the financials of an apartment complex as an asset manager. I will review three of these in this article.

Annual Budget

An HOA has an annual budget for operating expenses and rehabs that the board creates each year, like the pro forma that a general partner of a large multifamily deal would create. At the end of the year, the board has to estimate the next year’s budget for certain types of expenses, such as landscaping, administrative fees, and building maintenance. Going through the budget process has helped me to learn different types of expenses that a community has, and roughly how much each item costs. This experience will be useful when I have to create a pro forma during the underwriting of a large multifamily deal.

As the treasurer, you might also learn of ways to reduce expenses. For instance, my HOA reduced pest control costs 3x by contracting pest removal as needed instead of through a monthly subscription contract. We reduced our water bill by $8,000 by switching our irrigation to gray water that the county provides. We made these decisions when evaluating the previous year’s budget, which is a good annual routine to follow with the property manager of apartments to identify new opportunities to reduce expenses that you missed during the initial underwriting.

Expense Reports

After the budget is done, it is necessary to review how well the HOA or apartment complex is performing to that budget. My HOA’s management company sends out monthly financials for me and the rest of the board to review. It shows a summary of the amount of money in each of our accounts, our income, our expenses per category for the previous month and year-to-date, the variances from the budget, and a detail of each individual expense. It is valuable to have experience reading these reports to audit them for errors and to understand where there are variances from the budget. The variances are especially important on a real estate investment as they can highlight unexpected problems that may affect your returns to investors. In an apartment deal, the variances may also show you where your underwriting was incorrect, so you can work to fix those mistakes and avoid them on future deals.

Receiving these reports has also taught me about timely communication with a management company. My HOA’s management company delivers the reports a month after the end of the reporting month, so October’s financials arrive at the end of November. This delay might be okay for an HOA, but it is far too long for a real estate investment. I’ve learned to make sure any property management company I work with provides timely reports, and to review those reports as soon as possible to catch issues.

Project Bids

A mistake many investors make on renovation or maintenance projects is to not get multiple bids from contractors. After some time as the treasurer of an HOA, you will understand the importance of receiving bids, or if your HOA does not get bids, you may wonder why certain projects cost so much. My HOA has many maintenance projects each year, and for any project over $1,000, we have our community manager get bids from at least three different companies. We saved thousands on one project by bidding the project and choosing a small company with significantly fewer overhead costs.

Choosing the lowest bid is not always the right option, but with three bids you will get an idea of whether a company is either too high or lowballing or they are all about equal. As an asset manager, it is important to make sure your property management company gets bids to make sure you and your investors do not overpay. Over time you may develop a relationship with one or two contractors to perform most of the work, but you should still review their costs every year or two against bids from other companies.

Conclusion

I have many experiences as the treasurer of my HOA that translate will into asset management for multifamily properties. If you live in or rent a condo or townhouse with an HOA, you should find out if there is an open position on the board. Although the work can be dull or frustrating at times, it can provide valuable experience to use in your real estate investments. If you are still not convinced, I will detail other HOA experiences that can help with real estate investing in a future article.