Owner-occupants have a range of opinions about living in an HOA (Homeowners Association) community, but what are the pros and cons for landlords?
A Homeowners Association (HOA) is a governing body that manages a community—subdivisions, townhouses, or condominiums—and pays for the upkeep of amenities and services. Amenities such as communal pools, tennis courts, and clubhouses are appealing, so they could attract prospective tenants and earn you extra rental income. Right?
Maybe. There are restrictions on renting, which we’ll go over, but don’t let that discourage you from managing an HOA rental property. HOAs exist to impose reasonable rental restrictions that benefit the community as a whole—and that includes you and your investment. Let’s take a look at four tips to help you decide if renting out an HOA property is right for you.
1. Include HOA Fees in your analysis
What are HOA fees? They are recurring fees, averaging about $200–$300 a month, used to cover the costs of maintaining and improving the community. HOA fees can increase annually if they do not meet the annual budget requirements or if the HOA needs to replenish the reserve fund (an account for costly repairs and replacements). These fees will affect your rental property’s cash flow. Thus, it is critical to run a rental property analysis beforehand to determine the viability and profitability of the deal.
You could require your tenants to pay HOA fees in addition to the rent and include an amendment making them responsible for new fee structures midway through the lease. However, this language may repel or confuse quality tenants. Other options you can consider are to pay the HOA fees yourself and then treat it as an expense, or to roll the fees into the rent amount (assuming the total does not exceed market rent by too much).
What happens if you don’t pay your HOA fees?
You should never avoid paying HOA fees. If you fall behind on dues and assessment fees, the HOA can get a lien on your home. You cannot refinance or sell your house until the lien is paid. Generally, the HOA first sends a notice of delinquent fees and different ways to resolve the debt before it exercises its right to foreclose a lien.
2. Ask about the HOA's rental caps
An HOA can have a rental cap, which limits the number of homes in a community that can be rental properties. The limit is placed because a higher ratio of owner-occupied homes than rental homes can protect property values—and that’s good news for a homeowner! Getting approval to rent a property is another hurdle. Approval may be a first-come, first-served basis, or it may have a one-year owner-occupancy condition. In either case, you will pay all of the costs of ownership until you are permitted to rent the property out.
3. Prepare for tenants who break HOA rules
When you purchase a home that is bound by an HOA, you agree to follow their rules. The HOA can control where you park your car, how well you maintain your yard, and what color you paint your house. Now, imagine having a negligent tenant. Your first line of defense is the lease. If the tenant violates the HOA’s governing documents, the HOA will take action against you, the landlord. To protect yourself, include in the lease any non-compliance with HOA rules is grounds for terminating the lease and puts the responsibility of fines on the tenant.
You can avoid situations like these by including tenant screening in your application process. Tellus offers a free and thorough tenant screening feature that helps you find high-quality tenants.
4. Plan for complications down the road
The purpose of an HOA is to protect and enhance a community’s property values, and it does so by establishing Declarations of Covenants, Conditions, and Restrictions, Bylaws, and Rules & Regulations. These governing documents are subject to change, so you should prepare yourself for a situation that could undermine your rental business. Landlords have been negatively impacted by updates to rental restrictions and fees (specifically when amendments omitted a grandfather clause). For this reason, it’s important to have a small reserve fund to cover new fees and to plan an exit strategy.
Final Word on HOA Rental Restrictions
An HOA has plenty of benefits that can attract high-quality tenants. On the downside, changes to covenants and bylaws can tighten rental caps or ban rentals entirely. Fortunately, not all HOAs are the same, and one is bound to be the best choice for you. Perform your due diligence, analyze the deal, talk with current HOA members, and maintain a safety net. By being prepared, you’ll be better informed and likely to enjoy a long-term investment from your HOA rental.