A Homeowners Association (HOA) is a governing body that establishes restrictive covenants designed to maintain property value and keep a neighborhood attractive. It’s run by a board elected by members of the community and is supposed to serve those within the HOA.
Anyone who owns a home controlled by an HOA must abide by a set of Common Restrictive Covenants (CC&Rs) and pay monthly or quarterly fees to the association. These fees are used to maintain common areas like tennis courts, elevators, swimming pools, and recreation areas.
Although it adds to your investment expenses, sometimes it’s worth buying a home governed by an HOA in Houston, provided you can find good tenants who will follow the rules.
If you’re a property investor considering buying a home inside of an HOA, here are some important considerations.
Con: You can’t read the CC&Rs before your offer is accepted
You won’t know what rules your HOA has before submitting an offer. You are only entitled to read the CC&Rs once your offer is accepted. From there, you’ll get around 3-10 days to review the covenant and bring issues up with the board for resolution, but if you can’t follow the covenant, you can back out of the contract and still keep your deposit.
Not knowing the rules in advance has the potential to waste your time if the covenant ends up being too strict. However, some rules may not be an issue for your tenants.
Con: HOA fees can be quite large
Each member of an HOA is required to pay regular dues, usually monthly, quarterly, or yearly. Sometimes there are annual fees plus quarterly fees, and additional expenses that can arise out of nowhere.
For example, if your community uses a well for water, everyone will be required to pay their fair share to have it repaired when it breaks or needs to be cleaned. Sometimes this type of expense will be covered by existing dues, but not always. Well repair can cost upwards of $30,000 or more and these types of expenses often require an additional contribution through a special assessment.
Although HOA fees can add up fast, some communities are less expensive than others. For instance, homeowners in a beachside luxury high rise community will pay higher fees than those in a gated community with simple two-bedroom condos.
Con: HOA boards can put a lien on your property
Perhaps the biggest concern regarding owning property governed by an HOA in Houston is the fact that the board can put a lien on your property if you fail to pay your dues. They can also start the foreclosure process.
Con: Most HOAs are underfunded
According to Reuters, 70% of HOAs are underfunded. This increases the chance of being issued a surprise assessment. You have to be ready to pay hundreds or even thousands of dollars unexpectedly. This will definitely disrupt your profitability compared to owning other homes.
Con: Some HOAs ban rentals
It’s unfortunate, but some HOAs strictly prohibit renting out your home. It’s worth asking if this stipulation is included in the CC&Rs before you make an offer to buy. If you can’t get an answer from the seller, you may have to wait until your offer is accepted to get access to the by-laws to know.
Sometimes HOAs only restrict how you may rent your property. For example, they might require you to live in the home for a certain period of time before you can rent it to someone else. Other types of rental restrictions include:
- Rental caps for the neighborhood. The HOA sets a percentage of homes that can be rented, and once that’s maxed out, there can be no more rentals.
- Time limits for renting. Some CC&Rs stipulate that you may rent your property for two years, but you must live in the home for three years before you can rent it again for another two years.
- No room rentals. If you wanted to simply rent a spare bedroom to someone, some HOAs prohibit this.
- No Airbnb or vacation rentals. Many HOAs strictly forbid using your property for vacation rentals or Airbnb because it gives strangers access to gate codes. A home that turns into a hotel can devalue the whole neighborhood.
- The HOA must screen your tenants. Some CC&Rs require your tenants to pass a special screening set by the board.
In addition to the possible restrictions, you might get charged a higher maintenance fee, which you can pass on to the tenant in the form of higher rent (if it makes sense).
Are there any pros to owning rental property governed by an HOA?
As you can see, there are quite a few cons, but there are positive aspects as well. Since CC&Rs are so strict, you know your home will retain its value over time and you don’t have to worry about careless people moving in and destroying the neighborhood.
Another great thing about an HOA is that these communities usually offer amenities, which makes them attractive to tenants. The board also takes care of some responsibilities, like snow removal and landscaping, which means you don’t have to manage everything.
Should you buy a Houston property inside an HOA?
Only you can know if owning a home governed by an HOA is the right move. If your main goal is to buy real estate properties and rent them out, then an HOA might slow you down. However, if you want to live in the home, but only rent it out short-term, it could work.
Generally, the fees associated with an HOA can make turning a profit difficult. There are plenty of other ways to secure rental property that will turn a profit without all the added fees. On top of added expenses, it can be difficult to manage tenants who don’t want to follow the rules. Unfortunately, you will be held responsible when your tenants break the CC&Rs, so you have to be ready to evict a non-compliant tenant.
Looking for an easy way to own rental property? We can help!
If an HOA appeals to you because the board will handle maintenance tasks, you don’t have to settle for such a restrictive situation to have your needs met. If you want to avoid hefty fees that can cut into your profitability, buy property elsewhere and hire a property management company instead.
For one flat fee, our property managers at Green Residential will handle all of your landlord duties, including tenant screening, showings, rent collection, serving notices, maintenance, repairs, and more.
Whatever you need, we’ve got you covered. We’ll take care of your property and tenants like they’re part of an HOA – minus the excessive rules and fees. Contact us today to learn more about our services.