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HOA stands for homeowners association, a legal entity that sets and enforces the bylaws of a planned community or condo building. The bylaws are written in a governing document known as the Covenants, Conditions & Restrictions (CC&Rs) -- rules that apply to residents and owners. If you buy in a community governed by an HOA, you must join the HOA and pay monthly or yearly dues.
Why the need for an HOA?
HOAs are set up by real estate developers to be the managing arm for sales of homes in a community or for condominium units in a building. HOAs are structured as private corporations and must abide by state corporation laws.
Once all homes are sold, the real estate developer turns over the management of the HOA to the homeowners, who elect an HOA board to run the operations, typically as volunteers, or to be the contact for a third party, usually a property manager or an HOA management company that takes over HOA duties.
What investors should know about HOAs for buildings
When you buy a condo, your HOA costs will likely be high, as you'll share in building costs: All the owners share in the cost of maintaining the common areas. This includes the parking lot, the roof over the entire building, and the landscaping. The HOA fee also includes amenities like a swimming pool, weight room, and tennis courts. Association fees for maintenance, utilities, capital improvements, security, and insurance could also be included in HOA dues.
HOAs for buildings might place restrictions on residents. The most important consideration for investors is whether the HOA has renter restrictions, meaning it doesn't allow renters or limits the number of renters in the building.
There might also be rules all residents must follow, such as no pets or no smoking in common areas. Some buildings might even try to restrict smoking inside individual units. The more restrictions a building puts on residents, the more restrictive you'll need to be when trying to rent the place.
What investors should know about HOAs for planned communities
Planned communities, often gated communities, have yearly or monthly dues that owners must pay. The dues are typically less than what owners pay for a condo in a building. Dues for planned communities cover common areas, like the pool, tennis courts, and parking lots. But homeowners are responsible for taking care of their own home, with the exception of the lawn; that varies by community.
HOAs for planned communities can also have renter restrictions, such as whether they allow renters and if so, how many. They often have rules regarding what sort of modifications owners can and cannot do to their homes, what they can and cannot put in their yards, where they need to keep their garbage cans, and whether they can park on the street. Investors need to be aware of all the HOA rules to decide whether those rules are too restrictive, and if not, to alert tenants of them.
What investors should know about HOAs for investing
Real estate investors need to know several things before investing in an HOA community.
Are there rental restrictions?
Investors must determine whether renters are allowed in the building or community if they plan to rent the property. If renters are allowed, short-term (less than 30-day) rentals might not be. This is to discourage using the home as an Airbnb (NASDAQ: ABNB), for example.
What are the rules for residents?
Investors need to know the rules of the building or community so they can include those rules in their lease. If a tenant breaks the rules, the landlord pays whatever fines might be imposed. The landlord can then charge the tenant for that fine, but only if that clause is in the lease. Also, by putting HOA rules in the lease, if the tenant is noncompliant, the landlord can evict.
What are the HOA fees?
Investors need to know what the HOA fees are. If the fees are too high, it might make the deal unprofitable.
Is there enough money in a reserve fund?
Investors should look at the solvency of the HOA. If there aren't enough reserves to maintain the community or building, owners can expect to receive a special assessment at some point, which is paying a lump sum to pay for a needed repair. A well-run HOA keeps enough money in reserves to plan for big expenses. Being hit with a special assessment eats into your bottom line.
How HOAs impact a property's value
There are two main ways an HOA can improve a property's value.
Many HOA planned communities and condo buildings offer shared amenities for residents, amenities that most people can't put in individually. These amenities include rooftop recreation features (for condo buildings), swimming pools, grills or outdoor kitchens, fire pits, cabanas, a clubhouse for social events, tennis courts, playground, amphitheater, fitness center, walking trails (for planned communities) and a yoga lawn. Landlords can get more for rent and can compete with apartment complexes if they can offer amenities.
Upkeep and maintenance
In the case of a building, fees go toward keeping the building maintained. For a planned community, the CC&Rs usually list the upkeep and maintenance responsibilities of the homeowner. If owners or residents don't keep the house pressure-washed or the lawn mowed, for example, the HOA can ask the homeowner to take care of those types of issues. If they don't, a fine is assessed and if not paid, an HOA lien is placed on the home. This helps ensure homes in the neighborhood don't become neglected eyesores that could chase buyers away.
Who pays HOA fees?
The investor/owner of the property pays HOA fees. But most owners include those fees as part of the rent. Most renters understand that a luxury condo or upscale gated community with lots of amenities costs more to rent than comparable homes without amenities.
Investors need to figure the cost of the HOA fees in the monthly rent to determine whether the HOA fees would make the rent too high compared with nearby rentals. Just because the investor needs to charge a certain amount for rent to earn a profit doesn't mean there's a market of people willing to pay that rent. HOA fees can make the difference between a good or bad investment property.
Pros and cons of investing in an HOA neighborhood
People and investors typically love or hate HOAs. Here are the main reasons.
- Cons: HOAs take some control from the investor. This happens for two reasons. One is because of fees and possible future special assessments owners must pay. Two is because of the rules and regulations owners and their tenants must follow.
- Pros: HOAs are beneficial in that they help keep up property values in many cases. Also, amenities usually associated with HOAs are necessary in certain markets.
Does the HOA need to approve your tenants?
Some HOAs require approval of a tenant. If that's the case, the investor must provide the HOA with the tenant application and abide by the HOA's decision. This practice isn't allowed in some states and jurisdictions.
The Millionacres bottom line
HOAs have a significant impact on homeownership. They're legal entities that wield a lot of power over private property ownership with the goal of promoting the greater good of the community. They could make an investment more or less attractive for you, so carefully look into the HOA while doing your due diligence before acquiring a property governed by one.
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