Real estate investors searching for investment properties are likely to come across at least a few properties that are part of homeowners associations (HOA). Some real estate investors cringe when they hear “homeowners association” because living within the HOA boundaries often means more work and monthly fees. However, HOAs aren’t nearly as bad as they’re often portrayed, and there are generally as many advantaged as disadvantages.
A Brief Look at Homeowners Associations
Essentially, homeowners associations are private associations founded by a real estate developer for the purpose of selling and managing real estate properties within planned communities – such as condos and townhouses. The whole purpose of a homeowners association is to maintain a higher quality of life for tenants and homeowners within its community and to ensure that the community functions smoothly.
For real estate investors owning an investment property within HOA limits, membership and paying homeowners associations’ fees are mandatory. In return, a homeowners association will provide certain services and amenities, like clubhouses, private parks, a community pool, and also handle the maintenance of common areas. For example, if the pump in the community’s swimming pool stops working, the homeowners association will fix the problem.
In addition, homeowners associations also set certain rules and regulations that all residents of the community are required to follow. These are called Covenants, Conditions, and Restrictions (CC&Rs), and they include the color of your home, the exterior landscaping, the car parking, etc. Overall, these rules exist for the benefit of the community, since they help in keeping the area looking clean and well preserved.
Related: Here Is What You Should Take Into Consideration Before Buying a Condo for Rent
For some real estate investors, this way of investing sounds like a dream. For others, on the other hand, the hassle is simply too much. If you’re not sure whether to buy real estate properties and join an HOA community or pass, consider the following list of pros and cons of homeowners associations.
Advantages of Homeowners Associations
An HOA establishes strict rules mainly to ensure that the neighborhood looks sharp. These include guidelines about keeping lawns trimmed, restrictions on parking large vehicles on the street (no RVs, for example), and limitations on exterior paint colors. This type of oversight ensures that all real estate properties within the community look more upscale and thus eliminates the possibility that one or two properties weigh down all property values due to an unpleasant exterior.
Moreover, some homeowners associations facilitate a neighborhood watch, as well as put up a gate around the community, and hire security to monitor the area. Overall, this makes the community safer, which is definitely a plus for real estate investors.
Access to Free Community Amenities
Homeowners associations collect fees on a monthly basis from all residents for the purpose of building common areas in the community such as parks, pools, fitness centers, and recreational facilities. In addition, homeowners associations will maintain them to perfection. Since the cost of these amenities is included in the monthly payment, real estate investors owning investment properties within the community will have free access to these amenities, which they might not be able to afford or enjoy them otherwise.
Related: Buying and Owning Investment Properties Is the Best Real Estate Investment. Here Is Why
Shared Maintenance Costs
The best benefit of planned communities is the fact that the basic maintenance (such as plumbing, landscaping, lawn care, snow removal, and upkeep of common shared areas) will be the HOA’s responsibility. Homeowners associations’ fees cover these maintenance costs, and since all residents pay these fees, this results in lowering your expenses and reducing your responsibility. Real estate investors owning investment properties within an HOA community don’t have to hire a third party to take care of repairs or do them themselves, which gives them a peace of mind.
Mediator for Disputes
If for whatever reason real estate investors and/or homeowners within the HOA community have arguments, the homeowners association will address these arguments in its meetings and work on settling confrontations. In any case, you probably won’t even have any problem anyway because homeowners associations have penalties for breaking rules. This proves that real estate investors owning investment properties within homeowners associations communities have more peaceful lives because of these rules.
Disadvantages of Homeowners Associations
Big Brother Is Watching You
It feels as if “Big Brother” is always watching to ensure that everyone is following the rules. When living or investing in a community governed by a homeowners association, real estate investors owning investment properties within this community will have to follow the rules, even if they think they’re ridiculous.
If a real estate investor wants to make changes to an investment property in an HOA community, he/she must get approval from the HOA’s board, which could prevent certain changes. There is the option of petitioning the HOA to change a rule you don’t agree with. However, if you lose, you’ll have to live with it.
Homeowners associations’ fees differ from one community to another based on the amenities and services provided. Some associations’ fees are pretty extreme and will be as high as $600 per month, which is significantly more than what many homeowners and real estate investors are able to afford. As a result, real estate investors have to be aware of homeowners associations’ fees before buying an investment property within an HOA community.
Related: Do Not Fall for These Pitfalls When Buying an Investment Property
Furthermore, there may be circumstances in which the HOA intends to do something for the benefit of the community; however, it doesn’t have the required funds to do so. In this case, homeowners associations can actually impose an assessment or an extra fee on each homeowner in order to come up with the money.
Foreclosure Is Possible
If a real estate investor or homeowner is behind on his/her homeowners’ associations fees within a set time frame, a homeowners association may actually be able to foreclose or put a lien on his/her real estate properties. Additionally, if the real estate investor decides to fight the HOA in court and loses, he/she will more likely have to cover the HOA’s legal bills. Although this only happens in rare cases, it’s still something for real estate investors owning investment properties within such communities to think about.
Homeowners associations often have restrictions on renting as well. For example, a real estate investor looking to rent out or sell real estate properties might need to get the HOA board’s approval on the new potential tenant. Some homeowners associations only allow renting 15% of the real estate properties within the community, while the rest must be occupied by owners. These restrictions make it difficult for real estate investors owning investment properties to turn a profit on an investment property within an HOA.
[Note: Are you a real estate investor looking for the best real estate calculator to determine which investment property is the best one and generates higher returns? Look no further: Mashvisor’s Investment Property Calculator is the best one in town. Actual and future real estate investors use it when searching for the best real estate properties of all types throughout the United States. Not only that, but this tools also allows you to analyze each property’s rate of return using a number of metrics such as cash flow, cap rate, and cash on cash return.]
Not all homeowners associations are properly managed. A real estate investor might be a victim of a homeowners association in which no one really cares about maintaining the community, making repairs, hearing all residents’ complaints, or being a member of the board. Furthermore, problems arise when homeowners stop attending the HOA meetings, and a small group of people make all the decisions.
The Bottom Line
So, should you invest in an investment property within homeowners associations communities? The answer depends on what you personally look for and want out of the community. For some real estate investors, a homeowners association makes perfect sense and might be the best option for them. However, others can never live or invest in this type of environment and think of them as risky.
Are you a real estate investor searching for an investment property? We’ve got you covered. Mashvisor’s Property Finder provides actual and future real estate investors with the ability to search for and find the best real estate properties of any type (single-family houses, multi-family houses, condos, townhomes, and Airbnb rentals) in the US market with a click of a button. Sign up with Mashvisor and start your real estate investing career successfully.