Access to Shared Amenities
Another benefit of buying an HOA-managed property is having access to shared amenities. For example, properties with private swimming pools command higher rental rates because of the added convenience. However, installing one and maintaining it is an expensive endeavor that most landlords shy away from, because building it from scratch often has a low ROI. On the other hand, a community pool is significantly less expensive to maintain for each homeowner, while still making your property more attractive in a competitive rental market. The same logic also applies to other high-quality amenities such as gyms, clubhouses, parks, and playgrounds.
Possible Risk to Consider in an HOA-Managed Property
HOA Fees and Assessments
The most significant drawback of investing in a neighborhood with an active HOA is the fees, especially if it’s a high-end community. To put it simply, higher rental values and more community amenities demand more fees. Thus, for some property owners, the mandatory fees can be substantial, especially if it’s a newly acquired property that’s yet to pay itself off. As a result, tacking on exorbitant HOA fees to other costs, such as renovation can quickly become a major financial burden.
Limitations on Rentals
Living harmoniously in a community with an active HOA means following the rules, and some associations are notorious for enforcing strict policies that clash with some residents’ lifestyles. Many HOAs often have stringent rules on maintaining exterior spaces and common areas, which is beneficial for everyone in the long run. However, others take it a step further by setting strict rules on noise levels, use of amenities, and even the rental duration of your lease. Hence, these restrictions can narrow your tenant pool if renters are turned off by the strict regulations, or become fodder for neighborhood conflict. Besides that, policies on occupancy limit, rental duration, or limiting the number of rental units per time can also affect how you manage your business. Investors also need to understand that there is a difference between HOA vs POA.
Why Due Diligence is Important Before Buying an HOA-Managed Property?
Assess HOA’s Financial Health
One of the most significant risks in an HOA is financial mismanagement. Due diligence allows you to review the association’s financial documents, including the budget, reserve fund, and past special assessments. An underfunded reserve, for example, is a major red flag, as it can indicate that the HOA does not have enough money set aside for major capital improvements such as roof replacements or road repairs. That means a sudden and unexpected financial burden could mean passing down a hefty special assessment or repair fine to you.
Understand HOA Rules
Before buying, it’s advisable to obtain and meticulously read the HOA’s Covenants, Conditions, and Restrictions (CC&Rs) and bylaws. These documents are the rulebook for the community and can contain limitations on everything from pet ownership and exterior paint colors to landscaping and vehicle parking. Due diligence is essential to ensure that you are comfortable with and willing to abide by these rules. After all, failing to do so could result in fines, legal action, and a constant state of conflict with the association.
Conclusion
There’s no denying that there are multiple advantages and risks of buying an HOA-managed property. On one hand, through a collective effort, HOAs are able to help investors preserve their properties’ value by enforcing rules on maintenance and taking charge of general repairs. They also make access to shared amenities easier and cheaper for individual owners. However, these services come at a cost that can be expensive, and living within a community also means following its rules. Even if it directly influences how you run your business.
That’s why it’s essential to assess the HOA’s financial health and understand its policies before committing to a purchase. By taking the time to do the necessary research, you can ensure your investment in an HOA-managed community is a net positive.
