If you invest in suburban properties, then there's a good chance you'll encounter an HOA along the way -- as well as the fees they come with. Homeowners associations typically charge anywhere from a few hundred dollars per year to a few thousand. And in some communities? You'll pay as much as $575 a month to own a property in an HOA-controlled area.
Obviously, these aren't small numbers -- and they might even turn you off from a property entirely. But should they? Let's look at it from both sides.
There could be benefits
You need to know what the HOA fees pay for to properly analyze whether the property's worth it. What does the HOA offer for those dues? Do they operate amenities like a pool, gym, or tennis court? Do they keep up common areas and playgrounds? Do they host neighborhood events or decorate the community for the holidays? These are all perks that improve your home's value and make it more marketable, whatever you intend to do with it.
In some cases, HOAs can also lighten your load as an investor. If it's a condo, for example, and the HOA handles pest control, general repairs, and landscaping, then that's a lot less work for you. It may reduce your overhead costs as well.
These are best-case scenarios, though. In truth, some HOAs do very little. If the HOA only exists to enforce deed restrictions and mow the grass in shared spaces, a high fee probably isn't justified -- nor will it help your long-term returns.
High fees, slimmer margins?
In a place with high HOA fees, the real concern is how your profits will be impacted. For this reason, you'll want to be extra careful with your calculations. If you're planning to flip the property, make sure those dues aren't going to eat into your profits too much. How long will the flip take? How much will you have paid in dues (at closing and each month) by the time you sell? Those costs need to be a major factor in your analysis.
If you're looking to rent out the home, then determine what rent you'd need to charge to account for the high fees. Then, do a detailed market analysis and make sure that higher rent will actually fly with local renters. If you're not sure you'd be able to command a high enough price to cover the HOA costs, then it's probably not a smart investment.
There are other things to think about, too. First, HOAs could limit what you can do with the property. There might be limitations on paint colors, landscaping, and certain structures and additions, and it could make it difficult to fix up the property the way you want to. You also might need approval for some of the projects. This could delay your renovations and the time it takes to see returns.
Finally, there are also sudden HOA-related expenses to think about. For one, HOAs can levy fines. If you fail to follow their rules, you could get hit with a hefty fee you weren't budgeting for.
On top of this, there can be community-wide fees you're not prepared for either. For example, the HOA board could decide that all original fencing in the neighborhood needs to be replaced. As a property owner in the area, you'd need to comply -- and foot your part of the bill as well. Depending on what the demand is, it could mean hundreds or even thousands in unexpected costs.
The bottom line
HOAs -- even those with high fees -- aren't all bad. Many times, they can boost your property value, make your home more marketable, and lighten your workload a bit. But every HOA is different. If you're considering an investment property in an HOA-run area, make sure you have a good handle on what that organization is actually responsible for. Then, do some careful calculations and protect those margins.