How Homeowners’ Associations Can Impact Your Rental Property Investments
By Kerry Curry, Contributing Writer
Homeowners’ associations, commonly called HOAs, have proliferated in the United States in recent years — a phenomenon that has a direct impact on rental property investors.
It’s important for real estate investors to clearly understand all the implications of buying property in an HOA, because it could impact their bottom line.
“For an investor, the HOA piece is a large portion of the due diligence, much more so than it used to be,” says Duke Odom, senior vice president of operations at Chronos Solutions, which tracks HOA data for mortgage servicers and other clients.
Besides monthly or annual dues that pay for the upkeep of common areas (such as parking lots and sidewalks), an HOA board establishes covenants, conditions and restrictions known as CC&Rs.
CC&Rs typically set acceptable exterior paint colors, fence types and heights, and lawn and landscape requirements, among other items. Think of the CC&Rs as a list of do’s and don’ts for your property.
Beware of Rental Property Limitations
Some HOAs limit the percentage of rental properties that are allowed in the subdivision, while others may require a new owner to live in the house for a year before it becomes eligible to be rented out. This requirement may impact which lending partner you choose, as many investment property lenders won’t lend on owner-occupied properties.
HOA boards are concerned that tenants may not feel the same sense of connection to the neighborhood as an owner does or the same commitment toward the property, Odom says. “They may not be as friendly to the neighbors because they have no sense of community,” he says. “They won’t be on the HOA board or come to the cookouts.”
Once you determine there is an HOA, here are a few things you should know or ask about:
- What are the dues and the frequency of dues? “That enters into your overall costs of holding a property as an investor,” Odom says. Be aware that the HOA board can vote to raise the dues.
- Are there HOA liens on the property? If so, how much is owed? You may have to pay those in order to buy it.
- Review the CC&Rs. “You may be eyeing an improvement that would make your property more attractive, but that is not allowed,” Odom says. “You may be able to do it in Community A, but not in Community B.”
- Is your project subject to multiple HOAs? If it’s on a golf course or on a lakefront, there may be a master HOA and several sub HOAs.
- What percentage of residents are delinquent on HOA dues? If you are seeking a mortgage, some lenders won’t lend on a property if there is a certain rate of delinquency on HOA dues in the community.
- Is the HOA professionally managed? If the property is part of a large development, an investor may have more peace of mind with professional management. This helps eliminate the problem of cronyism while providing a professional who tracks and manages thousands of dollars in dues.
- Is the HOA solvent? If the subdivision shows signs of neglect, then it’s time to look closer.
- Will your tenant follow the CC&Rs? As the owner, you will be responsible, so if you don’t think the tenant will edge the lawn — if that’s required — you may need to factor in the cost of lawn service into your rental fee. “The property’s owner is responsible for the property, regardless of who lives there,” says Odom. HOA CC&R violations can result in hefty fines. “If I’m going to rent out my property for income, I would make sure there is some level of vetting,” he says.
- Is your property in a super lien state? In super lien states, HOAs can foreclose on a property ahead of the mortgage company for nonpayment of dues.
- Request to speak to an HOA board member and seek copies of the recent minutes. Says Odom, “As an investor, I’d certainly want the answers that have been voted upon by the board.”
So before you purchase your next rental investment property that’s part of a local homeowners’ association, do that extra layer of due diligence, and protect your bottom line.
B2R Finance offers rental investors innovative lending products to help unlock equity from existing portfolios and provide the cash needed to build rental portfolios nationwide. For more information about how B2R can help you obtain rental property financing, just call 800-227-8107 or visit http://www.b2rfinance.com/apply-now and follow us on Twitter @B2RFinance.
The information on this page is provided for informational purposes only and does not constitute investment, real estate, or legal advice. This information should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. No representations or warranties whatsoever, express or implied, are given as to the accuracy or applicability of the information contained herein. The information may be modified or rendered incorrect by changes in the marketplace or developments in the law, or for any other reason, and may not be applicable to any individual reader’s facts and circumstances.