In real estate investing, there are a number of real estate investment property types to choose from. When real estate investors decide to purchase a condominium, a townhouse, or a similar type of real estate investment property in a planned community, they should be aware that they are obligated to join that community’s homeowners association (HOA) and pay monthly or annual HOAs fees. So, what is a homeowners association and what does a real estate investor have to know before joining one?
Related: Here Is What You Should Take Into Consideration Before Buying a Condo for Rent
What Is a Homeowners Association?
A homeowners association is a private association established by a real estate developer for the purpose of selling and managing homes in a planned community (like gated communities). It’s structured like a private corporation and is subject to the state’s corporation laws.
Purpose of Homeowners Associations
In a planned community, all residents must be equally responsible for maintaining common areas like swimming pools, parking garages, sidewalks, roofs, etc. A homeowners association is the best arrangement to ensure that the community functions smoothly and to maintain the expected quality of life for all residents. For example, if the pump in the community’s swimming pool stops working, the homeowners association is responsible for fixing the problem rather than having one individual volunteer his/her time and money to do so.
In addition, homeowners associations also set certain regulations that all residents of the community must follow. These are called Covenants, Conditions, and Restrictions (CC&Rs) and they include the color you can paint your home, the exterior landscaping you can do, the types of vehicles you can park on the street (for example, no RVs), etc.
Homeowners Associations Fees
These fees typically range from $200 to $400 per month depending on the size of the units and the amenities. The more upscale the building and the more amenities it has, the higher the homeowners association fees will be.
Usually, homeowners associations fees are divided into two parts: a portion covers monthly maintenance costs, and the remaining money goes into a reserve fund. Reserve funds are used to save for long-term repairs and replacements such as roofs, plumbing, and exterior paint. They also cover special assessments and emergency expenses due to unavoidable or unexpected circumstances such as natural disasters.
Related: 11 Costs First Time Real Estate Investors Should Consider
What Real Estate Investors Need To Know About Homeowners Associations
Before buying a real estate investment property in a planned community that has a homeowners association, the real estate investor should:
Learn the HOA’s rules.
The real estate investor might find a homeowners association’s CC&Rs online as well as information about what happens if he/she violates a rule. If this information isn’t available online, real estate investors should ask their real estate agent to acquire them or contact the homeowners association themselves.
Real estate investors should learn about the process of changing or adding rules, whether HOA meetings are held at a time they will be able to attend, and whether or not these rules comply with the investment property they want to buy. This would also be the best time to check into any restrictions that prevent renting out the real estate investment property.
Find out the HOA’s fees.
Homeowners associations fees differ from one planned community to another. The real estate investor should ask the homeowners association:
- What do the monthly fees cover?
- How are HOAs fee increases set?
- How often do increases occur and by how much?
- How large is the reserve fund?
Moreover, ask if any special assessments are planned for the community in the near future and for a record of special assessments that have been made in the past. Remember, special assessments fees differ depending on the size of the planned community: they are smaller in large HOAs communities and higher in smaller HOAs communities.
Real estate investors should also compare the homeowners associations fees in the community they’re considering to the average fees in the area. Also, find out the hours for amenities like pools and tennis courts. This is important to know whether you’ll you be around during those hours, or you will be paying for facilities you’ll never use.
The impact of homeowners associations fees on the real estate investor’s short-term and long-term finances should also be taken into consideration. A condo with high homeowners associations fees might actually cost you as much as the house you can’t afford.
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Get a copy of the last HOA’S meeting minutes.
Meeting minutes can tell a real estate investor a lot about the policies of the homeowners association in the community. They allow you to discover current and past conflicts, the process for resolving conflicts, and whether or not the HOA had sued anyone. Also, attending an HOA meeting before you buy the real estate investment property is a good idea to consider.
Real estate investors should always be alert for potential drama. If possible, talk to some of the community’s current owners – preferably those who are not on the homeowners association’s board and who have lived in the community for several years. Moreover, talk to the president of the homeowners association to determine whether or not you want this person to make decisions about what you can and can’t do with your real estate investment property.
Be aware of under-management.
Not all homeowners associations are properly managed. A real estate investor might come across a homeowners association where no one really cares or is interested in maintaining the community, making repairs, hearing all residents’ complaints, or being a member of the board. There even might not be a president for the homeowners association; residents may randomly appoint someone or they simply take turns serving as president.
Find out the type of insurance the HOA has.
This is particularly important for a real estate investor who is considering buying a condo or a townhouse in an area that is likely to experience floods, earthquakes, blizzards, fires, tornadoes, hurricanes, or any other type of potential natural disasters.
Related: Condo Insurance: What Every Condo Owner Needs to Know
The Bottom Line
A homeowners association can be the best friend of real estate investors. It makes sure all residents of the community share equal responsibilities regarding maintenance and repairs of common areas. Nevertheless, it could also be your worst enemy as it might have certain rules that prevent you, as a real estate investor, from making certain decisions concerning your investment property, or impose rules that you find too restrictive.
Therefore, before buying a real estate investment property subject to homeowners associations fees and rules, real estate investors have to be aware of the ins and outs of the planned community and know exactly what they’re getting into.
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