Real estate investors will inevitably arrive at the question - should I invest in a property that has an HOA fee?
There's a lot to consider when it comes to HOA fees. Because the fees continue to roll in even when your property sits vacant, they can't be added computed in the same way as utilities. For the same reason, they also can't be simply subtracted from rents.
When comparing non-HOA properties vs HOA properties, you need to factor your HOA into your vacancy rate in order to accurately compute returns.
If you conservatively expect to have a 20% vacancy rate, then multiply your annual HOA fee by 0.2 to determine your annual expense due to HOA regardless of occupancy. Subtract that cash from your total, and you'll get a better idea of how a property will perform vs. non-HOA alternatives.
There are, of course, benefits to belonging to a home owner's association.
- Exterior maintenance is covered. No need to save for roof or siding repair.
- Most have some kind of amenities that are attractive to renters like a pool, tennis court, or basketball court. Repairs for these are the HOA's problem.
- The fees can include other necessary expenses like garbage collection, so it's not really an added cost.
- Includes property insurance
So yes, there are obvious benefits to home owner's associations, but let's not get to hasty.
- A tragic fact of life: Fees only ever go up, never down. I look at every HOA as a minimum monthly cost.
- Extra assessments are unpredictable and possibly high.
- Fees accrue regardless of occpancy
- The associations come with their own CC&R (conditions, covenants and restrictions). This can include anything from how quickly you need to take out your trash to how long your grass has to be kept. This part deeply bothers the libertarian side of me. If I want to paint a mural on my rental I don't want an HOA standing in my way.
Here's an analysis of two properties (or portfolios) I was comparing. We'd be paying cash for both properties, hence no debt service is included. We will also be self-managing the properties, so no property managment is included.
Property group 1: Condotown.
Condotown is composed of three disconnected individual condo units in the same complex. Each is for sale for $110,000. Rents in the area for condos of the same size and quality are in the $900/month range. The HOA fee is $230, and all of the units are move-in ready and will have low expected repair costs.
Total rents: $2,700
Vacancy: $540 plus $138 for HOA during vacancy
Insurance: $0 (HOA included)
CoC = Cap Rate: 3.9%
Please note: That is a pretty crap cap rate, even with optimistic repair bill and forwarding all utilities to the tenant.
Property 2: Apartmentville.
Apartmentville is a single 4-plex. It was built in the 1980s and is in "original condition". The current owner claims rents of $1,100/month per unit, but I don't buy it due to the condition and area. Realistic rents here are in the $900 range. List price of Apartmentville: $415,000.
Total rents: $3,600
Utilities: $650 (from seller)
CoC = Cap Rate: 4.1%
That is also a crap cap rate.
In conclusion, both of the properties we're looking at here are pretty crap.
But more to the point, do you see how badly the HOA fee kills you? HOA fees and savings for vacancy based fees adds up to 31% of monthly rents. Utilities and insurance in Apartmentville add up to 21% of monthly rents.
Apartmentville definitely needs some exterior maintenance, and that'll come out of the repair budget.
Based on this small comparison, the HOA does pay for itself, at least roughly. It's not enough of a difference for me to justify ruling them out of my comparisons in the future.