Buying an investment property, whether it be a fix and flip or a rental property, is a lucrative way to make additional income. Before you get swept away in buying your next investment property you may want to double check if the property will be held up to the standards of a Home Owners Association (HOA). Choosing to invest in a property within an HOA can make your return on investment harder to achieve. To help you have a successful investment in an HOA, here are a few tips to get you started:
1. Find the Rules:
HOA rules can include how tall the grass can be, what color your home needs to be painted, if you’re allowed to park on the street, among many other things. For fix and flips, this may make the demolition part of a flip difficult as you’ll need to find out where you can keep your dumpster rental and for how long. As for rental properties, you will have to see if renting your home out is allowed in the first place, and if so what restrictions are there to renting it out? Many HOA’s do not approve of short-term (2 weeks or less) vacation rentals and will penalize you with a fine.
You can find the rules in the CC&R’s and Bylaws of that HOA by working with a realtor that knows the community very well, if buying directly from the seller have them provide you their HOA contacts and call them directly to ask questions, and if you have a title agent you work with frequently they can help you receive them. If there are agents involved, include that you will need a copy of the CC&R’s to read before the inspection period is over.
2. How Frequent are Member Fees:
Finding out the annual, bi-annual, quarterly or monthly fee of an HOA can help you figure out your budget and where to price monthly rent to be cash flow positive. With a fix and flip, you’ll need to include the HOA costs into your budget among your other usual costs (closing costs, utilities, insurance, and rehab costs for example). For your rental property, you’ll need to know the frequency and cost of member fees so you can include it in your budget along with other maintenance costs. HOA fees can also help you cover some costs, such as some city services, exterior maintenance (yard care and building repairs), and in some cases insurance.
You can find the HOA costs on the MLS (if the property is listed there), looking at similar properties in the community, asking the seller, and going directly to the HOA to inquire.
3. Is the Home up to Compliance:
Within HOA’s there are standards that a home must be up to, and if they fall out of compliance fines, community resources, and, in some cases, lawsuits can be followed. If you are purchasing a home that is not up to the community’s standards you could be inheriting problems that the previous owner was trying to avoid. This can turn into an expensive and time-consuming fight for both fix and flip and buy and hold real estate investors.
To verify a home is in compliance, check with the HOA rules and regulations. If a home is not in compliance with the bylaws make it a contingency on your offer that prior to closing the property must be brought up to standards.
Additionally, you’ll need to maintain compliance with the community’s standards, so learn them well before you go in and repaint a home.