Should Landlords Invest in Rental Properties with an HOA?
More and more property investors find themselves dealing with HOAs but is the added effort even worth it. Their added restrictions, oversight, and hoops to jump through are sometimes both a blessing and a curse. Before buying a property protected under an HOA, landlords must understand the full reach they have. Below, we look at some key points to consider and essential questions to have answered before you invest in rental properties with an HOA.
What is an HOA?
Before we begin, let’s cover a few basics. HOA is the acronym for a Home Owners Association. Their primary goals are to manage a residential community through a small governing body. They ensure each homeowner maintains certain standards within the community for the benefit of all.
When you purchase a property that is overseen by an HOA, you are automatically a member. Therefore, you are held to their standard of conduct. Generally, these bodies can be found within the condo, townhome, and single-family communities, which covers a lot of territory for investors.
The HOA will have all rules and requirements laid out for homeowners in a CC&R. Otherwise known as covenants, conditions, and restrictions of the community. Additionally, all property owners are charged HOA dues that contribute towards the care of common areas and any community amenities. These are typically charges on a monthly, quarterly, or yearly basis.
Potential Benefits of Rental Property Protected by an HOA
There are always good and bad things to be said about any option available to landlords and investors. However, before you invest in rental properties, let’s look at some advantages of owning a rental property with an HOA attached.
Appealing Community Amenities – One benefit to an HOA is the likelihood of community amenities such as a private pool, playgrounds, tennis court, dog park, or community center with a gym. These conveniences can go a long way in attracting potential renters. The more amenities offered, the more rent a landlord can charge, which could aid in profitability.
Reduce Upkeep Responsibilities – An HOA fee typically covers maintenance of common area landscaping, trash services, and snow removal. This is very convenient for landlords as they do not have to secure individual vendors for these items or rely on the tenant.
Overall Community Condition – HOA bylaws dictate a standard that every property must maintain. So, by enforcing this with warnings and fines, an HOA keeps the neighborhood looking its best year after year. Therefore, this can both increase property value and attract quality tenants.
Disadvantages of Owning a Rental Property Attached to an HOA
While the strict aesthetic rules and community amenities can attract tenants, there are a few disadvantages to an HOA. Before purchasing an HOA property for a rental investment, the buyer must weigh both the advantages and the downsides below as dealing with an HOA can sometimes be difficult for investors.
Meddling in the Rental Process – It is not unheard of for an HOA to not allow properties to be used as short or even long-term rentals. Keep in mind that rules and bylaws can change or be amended, even years after purchasing the property. Additionally, some bylaws will require owners to occupy the property for a certain amount of time themselves before renting it out. Almost all HOAs request a copy of the lease and expect the tenant to sign an acknowledgment of their bylaws. So, read the CC&R documents very carefully.
HOA Fees Diminish Cash Flow – HOA fees serve an important purpose. However, these added fees do cut into your monthly bottom line. Depending on the community, these fees can range from $50 to a few hundred or even thousands. Additionally, these fees are periodically reassessed and almost always increase over time. Therefore, investors must examine the costs versus what is being provided.
Unexpected Assessment Costs – Every landlord should have an emergency fund set aside for unexpected or major repairs. If your property is part of an HOA, assessments are just another thing to plan for or risk serious trouble. HOAs will periodically perform assessments and will give notice of something they deem needs repair or replacement. This can lead to potentially high costs for a landlord. They also can dictate exterior color choices, lighting, and even what type of front door you can have. Some landlords may find this environment too unpredictable and overbearing.
How Can a Community HOA Restrict Rentals?
The biggest consideration for investors is if an HOA can restrict rental, and if so, how. The answer is, yes, they can, and in several ways. Therefore, this can lead to a contentious relationship between the property owner and the HOA.
A Homeowners Association Can –
Create lease restrictions
Limiting the number of leases allowed per year
Disallow certain pets
Perform additional tenant screening
Common HOA Lease Restrictions and Requirements
While an HOA may seem overbearing, keep in mind they have the community’s best interest in mind. So, with that in mind, check out the examples below of common HOA restrictions. However, these do vary from neighborhood to neighborhood, so be sure to read all documents carefully.
An HOA May Stipulate Any of the Following
Restricting how many times owners can rent their unit during a calendar year.
Setting a minimum lease period to prevent short-term rentals or Airbnb.
Implementing a waiting period in which an owner must occupy the home before renting it out.
Enforcing a rental cap that sets a maximum percentage or number of rental units within the community at any given time.
Requiring prospective renters to provide proof of income and credit rating.
Asking for previous landlord references to ensure potential tenants maintained prior homes satisfactorily.
An HOA may require renters to agree to a standard background check.
Renters must interview in person with the whole or part of the HOA board.
Tenants must review and complete an HOA mandated application.
Requiring renters to acknowledge and sign HOA bylaws and pay any associated application or move-in fees direct to the HOA.
Can an HOA prohibit rentals altogether?
Technically, yes, they can. It is important to note that HOA bylaws are created through due process. The members of the association vote on any restriction before they can become enforceable. The goal of these restrictions is to provide a stable living situation for the community. That said, many times, these restrictions pertain to short term rental as opposed to long term. Especially with the rise in popularity of sites such as Vrbo, HomeAway, and Airbnb.
Is it Worth it to Invest in Rental Properties with an HOA?
Extra restrictions aside, it all comes back to return on investment. Landlords must evaluate each property and what the HOA provides versus how that translates to extra rental income. Many tenants are willing to pay more for amenities like community centers or a private pool but within reason. If HOA fees are exorbitant, landlords will not be able to recoup that cost. This means those HOA fees will cut into your monthly profits.
Local market research is key. For example, if the rent is $1200 and the HOA fee is $100 per month, ensure the local market supports listing at $1300 to recoup that cost. If not, that property might not be the best choice for your portfolio.
The real estate market for 2021 is shaping up to be very competitive thanks to a short supply of listings. Investors may need to consider properties they otherwise would not in a more buyer-friendly market. Many of those listings will likely come with an HOA. So, before you invest in rental properties, carefully run the numbers, and read all restrictions and specific requirements. If you are looking for a stress-free way to navigate leasing and managing a property under an HOA, turn to the experts. Overland Management can ensure a smooth move-in process where all HOA requirements are met. Give us a call today to learn more about our full-service property management services.