While paying HOA fees means having access to amenities and property maintenance (both of which can help to increase the value of your investment), it is also an added expense that can eat into your bottom line. How can you tell if a property with HOA fees is the right choice for you? Here’s what you need to know.
What Are HOA Fees?
HOA fees are payments that many property owners must make on a regular basis. This money goes directly to a homeowners association (HOA) that maintains and improves the common areas of a neighborhood or condo complex.
What gets covered?
Everything from the landscaping, pools, and gyms to security, streetlights, and even community events.
Basically, anything that contributes to the atmosphere and functionality of a neighborhood falls under this umbrella.
But here’s the rub—HOA fees aren’t uniform. They can vary widely, depending on the area, the size of the community, and the amenities offered.
A small suburban neighborhood with a few services can cost $100 a month.
A luxury condo complex in a hot urban neighborhood might be charging $1,000 or more a month in HOA fees.
You want to know what you’re paying for and how it fits into your investment strategy.
Advantages of HOA Fees for Investors
Now the good news. HOA fees may be expensive, but they bring with them a number of perks that any real estate investor could appreciate. Here are some of the advantages:
Property Maintenance
This is probably one of the best benefits of having an HOA: they take care of a lot of the maintenance work that makes the area look good. Everything from lawn maintenance on public spaces to repairing sidewalks is taken care of by the HOA, which helps to keep the area looks nice and property values over time.
Amenities
HOA-governed communities often have amenities such as pools, gyms, clubhouses, or other perks that are desirable to prospective renters or buyers. This may make your property more attractive, and even allow you to charge higher rents.
Curb Appeal
HOAs also dictate how properties must look—you’ll be required to keep your lawn mowed and your home’s exterior maintained. The result is great curb appeal that will help your property to stand out for potential buyers, and that can increase its overall value.
Security
Additional security features, such as gates, surveillance cameras, or even security patrols, are often provided as an amenity by HOAs. For tenants, a secure community is a major benefit—and potentially a justification for higher rent.
Community Enforcement
HOAs require all residents to maintain the quality of their homes and keep them in good condition, thereby ensuring that a neighbor’s bad decision doesn’t bring down property values across the neighborhood.
You won’t have to worry that your investment property is next to a property with a jungle for a front lawn or half of a car sitting in the side yard.
Disadvantages of HOA Fees for Investors
HOA fees aren’t without their drawbacks, of course. It’s smart to give some thought to the following disadvantages before committing:
Extra Expense
HOA fees are an extra expense that you pay every month and that directly eats into your rental income or your home appreciation. Often, these fees can be substantial, and you’ll need to make sure your rental income will pay for them without cutting too much into your profits.
Restrictions
Most HOAs have restrictions and guidelines for what property owners can and can’t do. The neighborhood might have rules about renting your unit, whether or not you can have pets, or even the color you can paint the front door. These restrictions can limit the flexibility of the investor to manage the property.
Special Assessments
The deal-breaker—HOAs can demand special assessments when major repairs or upgrades are needed. Sometimes, these special assessments are above and beyond the regular HOA dues, and you might not see them coming.
Bad Board Management
Whether it’s a hands-off HOA board that refuses to take action when needed or a heavy-handed board that micromanages your community and leaves you paying for their mistakes, an unresponsive or overly controlling HOA board can be a major pain in your neighborhood. If the board is not well-managed, you could end up with needless restrictions and/or costly decisions that have been forced upon you.
When You Should Buy an Investment Property with HOA Fees
Paying HOA fees can be worth it at times. Below are some cases where it may be worth it:
High Demand Areas
If you’re buying in a market where tenants want single-family homes with amenities—say, a gym, pool, or well-manicured community—an HOA fee won’t be a deal-breaker. In fact, such features could help you command higher rents and keep occupancy rates high.
Well-Managed HOA
If the HOA is well-run and transparent, the fees are often a great investment in the long-term value of your property. Check their track record: do they keep up the community and not blow out owners with unexpected fees?
Amenities Add Value
If amenities such as a fitness center or other appealing features are in high demand with your target market, you might consider it a good deal due to HOA fees.
Security Need
Want to invest in an area that offers a lot of security? HOA-provided security can be the difference-maker that makes your property more valuable, and possibly merit higher rents.
When You Shouldn’t Buy an Investment Property with HOA Fees
But sometimes, those add-on costs simply aren’t worth it. Here’s when to say no:
High HOA Fees
If the fees are so high that they eat into your profit margin, it’s not worth it. Run the numbers and ensure you’re still making a good return on your investment after accounting for these extra costs.
Too Many Rules
An overly restrictive HOA could prevent you from making the renovations or updates you might want to make or renting out the unit, which in turn could devalue your investment. Be sure to read the rules and regulations closely before buying.
Rocky or Poorly Run HOA
If the HOA has been chaotic or has a history of conflict with homeowners, that’s a no-go.
Hidden Fees
If the community has an infamous history of sending out special assessment packages, this may not be the investment for you. Hidden costs can whittle away at your profit margins quickly, so make sure that the HOA’s finances are in good order.
Are HOA Fees Tax Deductible?
Now let’s talk about taxes—your taxes, that is, and how those HOA fees are going to affect you.
An Investment Property Only
This is great news if you’re renting out the property as you can deduct the additional fees. Not only will you be able to deduct the HOA fees as a rental expense, you can also include them as part of the general expenses required to keep the property in good condition.
Personal Use Properties
If you are living in the property full-time, you will not be able to deduct the HOA fees from your taxes.
Mixed-Use Properties
If you own the property as your residence but rent it out the rest of the time, then the portion of the HOA fees that you deduct is based on the percentage of time the property is rented out.
The Bottom Line: HOA Fees
Should you buy an HOA property? The short answer is it depends.
It might be a good deal for some investors, given the costs, benefits, risks, and rewards of HOAs.
For others, the fees, restrictions, and risks will simply be a deal-killer.
The challenge is to determine whether or not the HOA’s rules, fees, and financial condition are a good match for your investment strategy and your tenant quality requirements.
If the fees work for you, they could represent an honorary cost of doing business. If they’re too high or the rules too onerous, then it’s time to move on.
