Go through with rental house in HOA or back out?

[Jack B.]

Summary:

My current single family home in an HOA which I live in has left a bad taste in my mouth. I have another under contract in another community (that I put under contract before I had an issue with my current HOA) that I plan on turning into a rental but the HOA and potential changes in rental restrictions worry me. I'm still considering going through with it as a 2-5 year or so hold since appreciation in the zip code and development is 14% in the last year (greater Seattle area) so long as the market doesn't turn, with the money invested, I'm getting 60% cash on cash return on my money just from appreciation alone. Cash flow and principal pay down are 11%. Though they say not to buy for appreciation, only cash flow...


Details:

I live in a single family home in a deed restricted neighborhood( HOA) now, and have one under contract for a rental in another HOA, but my recent experience with my own HOA has left a bad taste in my mouth and am starting to regret buying in an HOA. Neighbor disputes were more easily resolved with the police and code enforcement before (and in this case really, since the HOA is not doing anything about it). Seems like they really don't protect my property value but are a risk to my property in that they can take it away from me.

Conversely, I was looking through the bylaws of the house under contract and they say in there they require board approval and could implement or outright ban rentals. I spoke with the property manager about this, and she said the board doesn't enforce it, it's unenforceable (apparently the development period has passed so it's no longer a valid rule since it said DURING the development period specifically; she said it was requested by the developer to prevent investors from buying the homes and renting them out initially which would decrease resale value) and they have no intention of enforcing it, in fact, they want to take it out because they'd rather have the houses occupied than empty, which causes other problems.

But she also said that they will actually be meeting with several home owners to discuss as some want cap or outright ban. I know HOA's have a lot of power on choosing what they enforce and let pass, as well as what rules they adopt, but it still makes me uneasy, as I could and up sitting on a house that I have to sell with high transaction costs if they adopt such a ban or cap. Even in that case though, it's likely a ways out, and I could at least cash out and make some money, assuming the 98042 market in the greater Seattle area stays hot. The houses in this zip code where I am buying increased 14% last year and unlike other zip codes I own in, sales are increasing super fast.

That said I don't like the idea of owning a property in an HOA anymore, at least not in the long run. It seems that they are either too lax or too strict with no middle ground in between,and really they have the advantage since they can take your home; what can you do to them? If you sue and lose, you have to pay their attorneys fees as well. I had planned on turning my current property that is in an HOA into a rental at least for 5 years or so, but now I'm thinking once I've lived in it for 2 years and rented it out for 3 years, I will likely sell it. Depends on the kinds of problems I experience with the HOA at that point. May sell it sooner or later.

So why consider going through with this other property if I don't like HOA's anymore? Because I will gain about 30K in equity on closing, and appreciation in that neighborhood, if it keeps up, will give me 60% returns on my money invested alone, not counting principal pay down and cash flow, which are roughly 11% after expenses.

I have two rental properties currently that are not in deed restricted neighborhoods, and man, much better. No one to tell me whether I can rent my property out or not. Neighbor issues were easily dealt with using police and code enforcement. One thing is for sure, I will not LIVE in a HOA community again after this house is converted to a rental. But it is hard to give up the prospect of such high gains right now. Then again, the market can cool down as interest rates rise, I wish I had a crystal ball. Maybe I'm better off just pooling money until another downturn.

I could just buy a house in a non deed restricted neighborhood, but the returns won't be as high. Though they will be safer and as long as I pay the taxes, I'm golden...