Investing in a condo with an HOA?

Question

I'm looking at buying a single condo, not the building. The numbers all run great with a CoC ROI of 14%. I'm a first timer and don't know if there's any risk in having to pay a $200 HOA--that includes lawn and snow removal. Also I would not need to worry about replacing roof or exterior of building. Does anyone have any experience or cautions about buying a condo like this? Thanks :)

Tchaka Owen · Answer

Often you do not know when a special assessment is coming. That often happens when a condo has no or low reserves and the project to be done requires more money than is in the accounts. It's less likely with fully-funded reserves (unless something major is going on). Since we're talking condos, the CapEx can help cover that. Also, maintenance fees cover insurance on the building(s) and common areas, but not "walls in".....that means anything inside the walls (ie, the portion of the building that's entirely yours) needs coverage. That's called an HO-6 policy. Not very expensive, maybe $50-80/month. So you'll want to add that to the calculations.

Kevin Coleman · Answer

Also be mindful of rental caps.  I had to pull out of a contract for a condo because they had a cap on the number of rentals in the complex.  Even if there isn't one now, doesn't mean that a cap cant be introduced later.

Paul Reynolds · Answer

Hey @Elena Nelson,

If you move forward, I highly recommend you be on the condo board or at least attend the meetings.  My first property was a condo with a $176 HOA.  It included all exterior of the building, club house, pool, and most importantly water/sewer which in Birmingham runs about $60 a month.  This was a very fair amount, however after 1 year the HOA went up to $190, and no longer included the water/sewer expense.  If I had been on the board, I would have had an opportunity to be a louder voice on this or enough heads up to have the tenant pay the water/sewer amount on the next lease agreement.

Best of luck,

Jamison Conti · Answer

I work with landlords all over the country and majority of them have a few condos in their portfolio. Most of them love the limited exterior maintenance to worry about. I would just recommend walking the complex and make sure the association is doing a good job. It sounds like the number work!

Elena Nelson · Answer

Thanks @Ryan Daigle the more information and opinions I have the better! I was worried about being able to profit with an HOA but I'm lucky my area has high rent.

Ryan Daigle · Answer

Hey @Elena Nelson. I don't like HOAs because that's less control you have over how you operate the property. However, that's just a risk you have to factor in. If the numbers look great and you're willing to accept good returns for lack of control, then it might work for you.

One good aspect of HOAs is that if they cover exterior items like you say, then that's less repairs and capex that you have to account for. I wouldn't necessarily reduce your assumptions, but it's a potential good thing to come of it.

Hope that helps and good luck!

Elena Nelson · Answer

Thanks for your reply John! I did use the rental property calculator on here and that number includes putting 5% in repairs, vacancy and capital expenditures. I didn't know about this special assessment. That is something to take into consideration. Thanks again!

John Blanton · Answer

@Elena Nelson I have a few condos that have an HOA monthly fee. One of the risks of condo ownership is they can implement a 'special assessment' which is an additional payment on top of your monthly HOA dues. This could be due to large scale Capex needing to be done on the property or in the current environment if their reserves start to run low. It can be as low as a few hundred dollars, but can at times run up to be much more. There isn't a guarantee of a special assessment annually, but it is always a potential risk.

As you stated, there are some perks of maintenance issues you won't need to be responsible for.

Just make sure you are really tight on your numbers as a mortgage payment plus an HOA fee can easily turn your solid return into a negative cash flow if it sits vacant or you have to perform any interior rehab at tenant turn.

Investing in a condo with an HOA?

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