Investing in HOA-managed properties offers upkeep benefits but requires diligence. Pros include community upkeep, while cons involve fees and strict regulations. Investors should scrutinize HOA rules, financial health, and resale trends before buying. Understanding these factors ensures informed decisions and optimal returns in HOA neighborhoods.
Homeowners associations or HOAs are present in many neighborhoods as a way to create community standards, as well as maintain the appearance and appeal of the neighborhood.
Because HOA communities are usually well maintained, they hold attractive options for real estate investors. However, there are pros and cons to consider before investing in a property that requires you to pay HOA fees.
Here are some tips you should know before investing in a property that is part of an HOA.
Things to know before investing in an HOA property
The Main Benefits And Drawbacks
First and foremost, it’s a good idea for investors to understand the general pros and cons of purchasing a home in an HOA neighborhood. For example, a pro is that the HOA might take care of landscaping, snow removal, and the maintenance of shared community spaces, like a pool or tennis courts. The main drawback is that you’ll have to pay HOA fees.
Another drawback is that some HOAs have extensive rules about maintaining your own property. For example, they might regulate the paint color of your front door and even the types of pets you have.
A pro is that if an HOA has reasonable requests that are easy to follow, it creates a community that is visually appealing and well-maintained, which will be good for resale value.
Short- and long-term rental guidelines
If an investor is interested in a home in an HOA community, they should make sure they are allowed to rent out their properties to tenants.
If an investor plans to transform their home into an Airbnb rental, for example, it’s important to confirm whether or not short-term rentals are allowed in the neighborhood. The same is true for long-term rentals.
How a specific HOA operates
Investors should familiarize themselves with how a specific HOA operates before buying a house in an HOA community.
Not all homeowners associations run the same way. So, if an investor is interested in a particular community, they should learn as much as possible about the homeowners association in that area.
For example, investors should ask to see a copy of all HOA documents before putting in an offer. These might include HOA bylaws, common restrictions, monthly costs, and upcoming extra expenses like special assessments.
This will help prevent financial surprises, like a bill for a portion of a new community house roof right after purchasing a property.
Reviewing the rules and guidelines ahead of time can also show an investor whether or not the HOA rules are easy to follow. Some associations have reasonable requests like picking up trash and keeping lawns mowed. Others might have much more stringent requirements, like a dress code for garage sales or specific color requirements for mulch.
A very strict HOA might not be a good fit for an investor who can’t frequently be on-site to comply with small maintenance issues and resolve HOA violations.
Reserve Funds And Special Assessments
Prior to buying, investors should research how much an HOA has in reserve funds. This shows whether or not an HOA has an adequate amount of money to pay for future maintenance issues.
Additionally, research how many times the HOA charged residents for special assessments. Special assessments are costs above and beyond regular monthly dues that typically occur due to unforeseen circumstances like emergency repairs.
If an HOA calls for special assessments frequently or if they don’t have enough funds in reserve, it could be a sign that the HOA is in poor financial health.
The goal for an investor is to earn money on their purchase over time, and an HOA that frequently bills their homeowners above what is expected can cut into an investor’s profits.
If an investor is serious about purchasing a property in an HOA neighborhood, it might benefit them to be more involved in the community by attending HOA meetings. This is different from investing in other types of properties because buying in an HOA community might mean more time spent maintaining the home and staying up to date on property guidelines.
This is something to consider, especially if a real estate investor has a busy schedule where they might not have time to devote to extra meetings.
Architectural Guidelines
If the house an investor wants to purchase needs renovations, check the HOA architectural guidelines before putting in an offer. An HOA might have requirements on the types of renovations allowed, the style of home you can create, and even the materials you have to use.
Investors should take this into consideration to make sure the home renovations they want to make can produce a good return on investment.
HOA Policy Enforcements
Every homeowners association should clearly explain how they enforce their policies. For example, they typically issue fees for various offenses with fees increasing for first offenses, second offenses, and up. Look to see how much these fees range so you understand the cost of not following guidelines.
Also, decide ahead of time whether you will pay for any potential violations or if you want to write into your lease that your tenant is responsible for any violations they might make.
Regular Tenant Communication
When you own a home in an HOA community and rent it out, it’s important to have open lines of communication with your tenant.
If you have a tenant who doesn’t follow the rules, their negligence could cost you money in fees. Also, it’s possible HOA correspondence will be delivered to your tenant’s house. If you miss a notification or your tenants don’t tell you about updated rules or fines, that could be costly.
As an investor, decide if you’re willing to entrust your tenants with following your guidelines as well as HOA rules while they’re living there.
Resale Considerations
Finally, consider asking a real estate agent to research recently sold homes in the area. Take note of how long homes stayed on the market before selling. Are they actually being bought up quickly, or just getting attention online?
Research home value trends in the area to see if the neighborhood you want to invest in is on the upswing or if home prices are declining. That can help you decide whether or not investing in a property with an HOA is worthwhile.
Making the Right Decision
Investing in an HOA property has its pros and cons. On one hand, HOA communities are typically well maintained, which makes them a desirable place to live. On the other, sometimes HOA practices can be a burden depending on how strict the rules are.
As an investor, it’s important to carefully research the neighborhood you’re considering, including HOA activity. A homeowners association can greatly impact the quality of life in a neighborhood, so take your time to understand the HOA bylaws before investing in a rental property.