By Emily Koelsch 

Investing in Rentals in HOAs

Homeowners Associations (HOAs) are becoming increasingly popular across the country. Fifty years ago, less than 5% of people lived in communities governed by HOAs. In contrast, around 25% of Americans are currently part of HOAs. Once thought of only in the context of condominiums, there are now homeowners’ associations for townhomes and single-family home communities too. 

Given their growing popularity, more real estate investors are faced with the question of whether or not to buy rental properties in HOAs. To help you answer this question, here’s an overview of HOAs, the pros and cons of owning rentals in HOAs, and tips for anyone considering investing in real estate governed by an HOA.

What is a Homeowner’s Association? 

A homeowner’s association is a governing body that manages and regulates a residential community. The purpose of HOAs is to set rules that all members must follow to maintain established standards that benefit the whole community. Generally, HOAs are run by a board of directors elected by the HOA members.  

When purchasing a property, the agent or property manager should disclose if it’s part of an HOA. You need to have this information from the outset because if you buy a property in an HOA, you are automatically part of the community and bound by its rules. You cannot opt-out. 

Each HOA must outline all rules, regulations, and fees in their Covenants, Conditions, and Restrictions (CC&R). This is a public document that HOAs must file with the local county assessor’s office. 

Benefits of Buying Rentals in HOAs

There are some distinct reasons that HOAs are becoming increasingly popular. Perhaps the most compelling, properties in HOAs maintain their value well and often appreciate at above-average levels. 

HOAs also offer some distinct advantages for real estate investors: 

1. Amenities that help attract Tenants. Communities with HOAs usually have more amenities than other properties, like a gym, swimming pool, playground, or tennis court. These amenities help Landlords attract Tenants while also increasing rental values for units in the community. 
2. Fewer maintenance responsibilities. Owning a property in an HOA means less maintenance for Landlords and Tenants. HOAs usually handle landscaping, snow removal, and trash services. The result is less work for Landlords and the peace of mind that the property is well maintained. 
3. The Property and neighborhood stay in good condition. HOAs set specific standards for all properties and outdoor spaces. In addition, they have systems in place to ensure that all members comply with these standards. For Landlords, this is good for both property values and attracting Tenants. 
4. Mediation of disputes with neighbors. When conflicts arise in HOAs, the board helps to mediate and resolve disputes. This resource helps alleviate Landlord headaches that can come with difficult neighbors. 

Disadvantages of Owning Rental Units in HOAs

As you might imagine, HOAs also have some substantial disadvantages for Landlords. Here are the most significant challenges investors should consider before purchasing a rental in an HOA.

1. Rental restrictions. HOAs can set limits and regulations for renting properties in the community. Common Lease restrictions include limiting the number of Leases per year, establishing a minimum lease period for short-term rentals, requiring owners to live in the unit for a certain period, and capping the number of units in the community that can be rentals. Investors should always read the CC&Rs before purchasing a rental unit to be familiar with applicable restrictions. Also, it’s important to realize that HOA rules can change, so even if there aren’t currently restrictions, there’s always the risk that the board will add new restrictions. 
2. Management expenses. HOAs assess monthly, quarterly, or annual fees to cover the cost of maintenance and amenities. These fees vary widely based on the services and amenities provided, and this fee cuts into a Landlord’s monthly cash flow and annual returns. It’s vital to include this expense when running the numbers on a property, and it’s also worth noting that fees are regularly reassessed and generally increase over time. 
3. Special Assessments. When an HOA board determines significant repairs or upgrades are needed, they’ll require a special assessment from all members to cover the expense. Special assessments are unpredictable costs for Landlords that directly cut into cash flow and returns. 
4. Interference with property management. HOAs can set rules and restrictions that interfere with a Landlord’s management of their property. For example, banning certain types of pets, setting specific Tenant Screening criteria, requiring Tenants to review and sign by-laws, and having strict requirements for upgrading or repairing your property. These regulations can increase management costs and Landlord headaches while also making it harder to find Tenants. 
5. More Landlord liability. When you own a property in an HOA, you’re responsible for complying with all rules and fees. If your Tenant violates rules, you’re ultimately the one who will have to deal with the HOA, resolve the issue, and pay any fines. Additionally, if you pass on HOA fees to a Tenant and the Tenant doesn’t pay, you’ll be responsible for this fee and any late charges. 

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Tips for Investing in Rental Units in HOAs

There is no blanket answer to whether investors should buy rentals in HOAs. Instead, it’s an issue to address on a case-by-case basis. Here are some tips to help with this analysis: 

• Always review the CC&R and be familiar with any rental restrictions that will impact your business. 
• Analyze monthly fees to determine whether you can recoup these costs. For example, can you increase rent to cover the cost of amenities, and are the maintenance expenses comparable to the amount you would have to spend to keep the property in good condition?
• Consider the potential for a special assessment and have an emergency fund to cover this expense. 
• Think through the risks associated with HOAs – for example, changes in rental restrictions or fees – and determine whether this is a risk you’re comfortable with. 

Thinking through these tips will help you make an informed decision about rental properties in HOA. As you expand your portfolio, visit ezLandlordForms.com for investing tips, Tenant Screening Services, and state-specific Lease Agreements. 

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