Should I Invest in an HOA Neighborhood? Pros & Cons
When investors set out to find a new investment, they’ll likely come across an HOA property. Unless you know exactly what an HOA property entails, you may be left asking yourself, “Should I invest in a property with an HOA?”
Investing in a homeowners association property requires significant effort because of the many oversights and restrictions. It’s a challenge, but it has benefits if you’re willing to do the work.
From fees to rental restrictions, we’ll dive into what to expect when investing in a property under a homeowners association.
What Is a Homeowners Association (HOA)?
A homeowners association, or HOA, is a self-governing organization in a “common-interest” community. When part of an HOA, homeowners pay fees to maintain the look and feel of a neighborhood. A resident runs a homeowners association within a community or a volunteer elected to a board of directors that oversees the whole association.
HOA Fees and Rules
Investing in an HOA neighborhood comes at a price. But, on the flip side, you also get to own property in a community where everything looks in tip-top shape. Why? The rules and regulations set by an HOA. Can you say Desperate Housewives style?
Although every community is unique, here are some rules that you’ll see in most communities:
- Landscaping control
- Decor for holidays
- Standards for property maintenance
- Noise complaint policies
- Home occupancy limitations
- Parking rules
- Pet size and amount limits
- Short-term rental restrictions
Wait, so let’s say you invest in an HOA and want to rebel against the rules. What happens? Not following HOA rules can carry legal and financial consequences. Enforcement policies may include warnings or fines. If you don’t pay the penalties, an HOA may place a lien on your home. However, most homeowners are quick to fix any penalty.
Each property owner has to pay a set amount of fees that cover the maintenance throughout the community of common areas. Typically in an HOA, you’ll see a community playground or picnic area, maybe even a swimming pool; whatever it is, HOA fees cover the maintenance.
Here are a few other examples of what HOA fees typically cover:
- Pickup of garbage
- Parking areas
- Shared utilities in common areas
- Security of community
So, what do typical HOA fees look like? Homeowners should expect to pay anywhere from $200 to $2,500 annually, but the total amount depends on the community’s offerings. Typically a property owner will pay monthly HOA fees or quarterly, depending on the homeowners association rules. So, if there is a community with all the fixings, there will be a higher fee.
Wait, there’s more? You bet. Aside from typical maintenance fees, homeowner association property owners must pay for assessments. Let’s say a tornado rolls through the neighborhood and does a lot of damage. It’s in an HOA’s power to impose a one-time fee to cover expenses.
HOA Rental Restrictions
There are several different forms of rental restrictions. For an HOA community, one of the primary goals is to protect property values, and part of that protection includes rental conditions.
Considering the overall picture, a renter will likely violate a community rule because they don’t have a vested interest in the property. The two most popular HOA rental restrictions include rental caps and lease restrictions.
Rental properties continue to be all the rage. Who doesn’t want passive income? For an HOA, a rental cap limits the number of homes rented within a development in a certain period. The HOA board members usually approve rentals as they come along and have a waiting list if a certain percentage of homes are already rented.
For those looking to invest in an HOA, don’t be surprised if you must reside in the investment home for at least one year before renting. An HOA board sets the ground rules, which are often very strict for rental restrictions.
So, if you’re in the rental space, you’ll be familiar with this term, as imposing lease restrictions is popular amongst landlords. Lease restrictions are a set of rules included within a lease agreement. For example, one common lease restriction rule could be a minimum lease period where someone must rent the property for at least 60 days. Why? The HOA doesn’t want the community to look like party central.
Within these leases, it’s typical to see a renter’s compliance section allowing a landlord the authority to evict a tenant if they are not complying with the lease.
Benefits of Investing in an HOA Neighborhood
HOAs are strict. Homeowner associations are known for enforcing many rules, from parking to noise regulations to housing structure limitations. But, for those living within the community, it does come with its benefits.
Let’s explore a few benefits of investing in neighborhoods with homeowners associations.
Okay, yes, an HOA doesn’t clean your house, but imagine a world where a shingle falls off your roof, pipes leak in the basement, or landscaping needs upkeep. Depending on your agreement, an HOA may cover those repairs. Sure, some enjoy the everyday maintenance tasks of owning a home, but let’s be honest; there are a few that don’t.
Clubhouse? Check. Sauna? Check. Golf course? Check. HOAs are a breeding ground for awesome amenities to ensure residents live their best lives.
Other amenities include a pool, a hiking trail, and a skate park, to name a few. If you want it, an HOA can likely make it happen. The icing on the cake? These common areas are maintained thanks to the HOA fees that residents pay.
Do you have a neighbor obsessively watching you near the property line, or do they call the cops on you just because they feel like it? An HOA helps mediate problems between neighbors to help maintain peace throughout the neighborhood.
If you don’t want tension between you and a neighbor, contact the homeowners association and ask them to resolve the issue.
High property values
Don’t expect any old 1940s broken-down vehicles to pile up in an HOA community, that’s for sure. The appearance and maintenance of these properties is essential. HOA bylaws help prevent property values from going down, so upkeep is necessary. Overgrown lawn? Nope, you typically won’t see this in an HOA whatsoever.
Cons of Investing in an HOA Neighborhood
There are indeed some great reasons to invest in an HOA. However, there are also a few downfalls. For example, HOA fees can cut into income, and strict rules and regulations may disrupt your everyday goals.
The grass isn’t always greener on the other side, so here are a few cons when investing in an HOA neighborhood.
Cash flow losses
There are two options for a house project outside of an HOA community. Either you do it yourself, or you hire a contractor. Some people aren’t handy, so hiring a contractor is the best option. Let’s think about that, most of the time, people will get multiple quotes from different contractors.
So, now think of an HOA. Property owners pay out a flat maintenance fee every month. But what if you never have a leaky sink or a roof that needs repairing? By fronting all that money, you can experience a significant loss in cash flow. It’s like paying for something that you don’t need.
Most often, investors will do their due diligence on a property, including whether or not the home they are investing in is in an HOA. HOA rental restrictions vary, but it’s not uncommon for the purchaser to have to live in the residence before renting out the property or to have a set number of rental restrictions, like the length of a tenancy.
With so many restrictions at play, it’s not uncommon for an HOA investor to see gaps in residency.
No one likes a random bill, yet, an HOA can send community members one. Why? The HOA may decide that, as a whole, the driveways all need redoing. To help fund the project, the HOA dishes out $8k bills. With an HOA, what they say goes, so congrats, you’re getting a new driveway, and you may not even need one. Oh, and if you don’t pay up, you’ll be penalized.
FAQs on HOA Investments
Here are the most frequently asked questions when investing in homeowner association properties.
How do I find out the rules for my HOA?
Your association’s governing documents should have been provided when closing on the property. However, you can also obtain them by referencing the association’s website or public record.
Do associations have to disclose HOA rental restrictions?
Mostly, rental restrictions must be adopted in an association’s recorded declaration. The legality behind purchasing a property in the community is that the property owner has accepted the covenants in the declaration. A purchaser will find that many transfer deeds state restrictions, including rental restrictions.
Can an HOA restrict rentals?
Most of the time, homeowners associations will limit the number of rentals based on a certain rental cap. Once the community reaches a rental cap, no more rentals are allowed, and yes, including vacation rentals!
Will You Invest in an HOA Property?
The call is all yours! If you’re willing to accept the challenge of having multiple rules and regulations while enjoying the benefits of a maintenance-free, well-kept community, go for it! As with anything, it’s all in what you want.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.