HOA Fee: What It Costs a Rental Property Investor

An HOA fee is a recurring charge paid to a homeowners association for shared maintenance, amenities and insurance on common areas. For a rental investor it is both a cost and, more importantly, a source of rules.

What it typically covers

• Common-area maintenance: landscaping, roads, lighting
• Shared amenities: pool, gym, clubhouse
• Master insurance on common elements
• Sometimes exterior maintenance and roofs, chiefly on condos and townhouses
• Occasionally water, trash or basic cable

Fees run from US$25 a month on a light single-family association to US$400+ on a condo covering exterior maintenance and amenities.

Why it's a cash-flow risk

An HOA fee is a fixed cost that does not flex with vacancy. It comes out of cash flow and NOI directly, and unlike most expenses you cannot manage it down.

Worse, it can rise, and it can be supplemented. A special assessment is a one-off charge levied on every owner for a major project (a roof, a parking lot, a failed retaining wall) and can run into thousands of dollars with little notice. An association with low reserves is effectively carrying deferred liabilities that will become your bill.

Rental restrictions are the real issue

Many associations restrict renting, and this can make a property unusable as an investment regardless of the numbers:

• Rental caps: a maximum percentage of units that may be rented, often already met, with a waiting list
• Minimum lease terms, commonly 6 or 12 months, which rules out short-term letting
• Owner-occupancy waiting periods: no renting for the first 1 or 2 years of ownership
• Tenant approval requirements, and application fees
• Outright prohibition in some associations

Check this before making an offer. A rental cap that is already full is the one that catches people out, because the property is perfectly lettable in principle and not in practice.

What to request in diligence

• The CC&Rs, bylaws and current rules
• The last 2 years of financial statements and the current reserve study
• Minutes from the last 6 – 12 months, where upcoming assessments are discussed
• Current fee, its increase history, and any assessment already approved
• Written confirmation of the rental cap, current rented percentage, and any waiting list

A management company will usually provide these; the cost is small and the information decides the deal.

Lender implications

Condos in particular face extra scrutiny. Non-warrantable condos (high investor concentration, inadequate reserves, pending litigation) are hard to finance conventionally and may require a DSCR loan at a worse rate.

Related reading

The property walkthrough checklist covers on-site diligence, and the deal analysis checklist covers the numbers. Enter the fee in the calculator so it lands in your cash-flow figure.