How Important Are HOA Dues in Rental Properties?

Question

My wife and I are house hunting for our primary residence, but we eventually see it becoming a rental.

Around here (Northern VA), pretty much any decent place you find is going to be tied to an HOA, a condo association, or sometimes even both. So since it's pretty much unavoidable that we'll end up with a place that has a monthly maintenance fee, how big of a deal should I be making about it? I've told our Realtor to only send us listings with management fees below $150/mo., but it looks like we're missing out on some otherwise promising properties that don't meet that threshold.

I know those fees are tax deductible for rental properties, but in the long term (ie., when the mortgage is gone and we're paying this fee every month for the remainder of eternity) how big of a difference does that make as far as cash flow is concerned? Anyone have any personal experiences to share?

Patrick L. · Answer

Another big factor is how they're budgeting for capital expenses.  Some COAs will have budgets for every big ticket item that's going to wear out and can pay them out of the monthly fees while others will hit the owners with a special assessment.  Be sure to look over the COA's financials prior to buying anything.  I have seen some condo owners with lower COA fees get hit with major assessments they weren't expecting (think $8k for a roof, $2k for painting, $3k for elevators, $2k for paving, etc). The COA is responsible for a lot of things that you'd be paying for otherwise and while they may not be able to manage their money as carefully as an individual owner and have more overhead they are still covering a lot of maintenance and insurance expenses so it's not entirely throwing your money away.

As an investment it's something you'll have to evaluate.  For me I don't buy condos as rentals here in FL because the fees just eat you up ($300/month is low where I'm at).  I'm also not a big rules and red tape fan either, many COAs I've seen require their own application from the tenant which can really slow down my rentals.  I manage my wife's former primary residence (a condo) as a rental, and it costs $100/adult for the COA's application to rent it out (after I've already screened them) a cost so unreasonable that if I tried to pass it along I'd never rent the place out.  Look at all the rental rules and restrictions prior to buying, they can be even worse than the fees.  As an owner occupant you may prefer to have fewer renters in the community (hence many of the restrictions) but if you find yourself in a position of wanting to rent it you'll think very differently.

Jared Anderson · Answer

A condo can be a pretty turn-key rental.  You don't have to worry about exterior maintenance, mowing, exterior insurance, roofs, and possibly utilities.  Here are some things you will want to know about the HOA you are buying into:

1. Does the HOA restrict to a certain percentage of rental units? or require permits? (They do this to maintain FHA approval)

2. What does the HOA fee cover?  Water? Cable? Garbage? Gym? Pool?

3. What type of ownership is the property?  Is the project a PUD or a Condo? (This may have implications on your financing)

4. Is the project FHA approved?   (Because Condo's tend to be a first-time buyer property, a lot of the buyers use FHA financing. This could potentially limit your buying pool when you go to sell the property, if it's not FHA approved.)

If you want to know about cash flow, find units renting in the same or nearby projects and work backwards with the financing or funds you are using and the HOA fee. Check with the HOA and see if there are any upcoming or recent assessments for repairs; such as resurfacing parking lots, fixing the pool, roofs etc.

Wayne Brooks · Answer

They are not totally just money thrown away.  In COA's/some HOA's you'll get building insurance, water, cable, common area maintenance, etc.

Jon K. · Answer

Agree with those saying: make sure to know if those monthly fees are always the same, or if owners ever have to pay for the roof/etc. or other costs. See what the fees include. Make sure that building even allows rental properties, and that it will allow one more rental property (not above rental quota). Condos can be easy rentals, but you can also get more complaints from neighbor noise, parking, and insurance issues (say some neighbor above floods your condo if their water heater leaks).

Jay Staudt · Answer

So it seems the general consensus is that it depends more on what the fees cover and what financial standing the association is in than any specific dollar amount. I'm still thinking fee simple ownership would be favorable to a condo, but people have their differences of opinion there. Very good responses all! Thanks for the feedback.

Xing Zhu · Answer

You really need to know what are included. For example, a condo I own has a monthly HOA due over $1000. It includes:

Water, electricity, cable, domestic phone calls,  internet, and  a master condo insurance policy.

Since this is an oceanfront property, the master policy includes a flood insurance, which is expensive if you buy on your own. The monthly HOA  of course also takes care maintenance of the common area, the building cleaning, the elevators, the swimming pool, the hot tub etc.

Eric Belgau · Answer

If you're looking at turning a primary residence into a rental, there's the additional advantage of having a community "on the ground" at your unit.

As an example, our unit in Burbank, CA, is in a condo community, and the online community forum has helped us greatly:  when another owner rented to a bad tenant, we knew about it before our tenant complained and could handle the situation proactively.  We also got involved with the HOA while we were living there, which enabled us to become friends with the more engaged members of the community.  They've gone out of their way to welcome our tenants and get acquainted with them, which benefits them and us.

I suspect that HOAs' online presence is only going to grow and become more beneficial as time goes by.

At the end of the day, an association dues payment is just another expense, which has to be incorporated into the calculations.

How Important Are HOA Dues in Rental Properties?

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