SS49: What You Need To Be Aware Of When Investing In a HOA

Charles discusses what investors need to be aware of when they are planning on investing into a property that has a homeowner’s association (HOA).

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Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing what you need to be aware of when investing into a property that’s in an HOA. So when you’re purchasing a unit in an HOA, you need to perform due diligence, not only on a property, but also the homeowner’s association. And there’s a few things you’re gonna notice from the beginning when you’re looking at the a homeowner’s association. And there’s a few things that you’re gonna have to look into in depth and ask for before you make an offer. So, first off is the association and good condition. Is there any visible, deferred maintenance? So are the exteriors, the siding, the roofs, walkways driveways, parking gates, amenities, hallways stairs, land, escaping lighting. If you see a lot of these have issues or in disarray, and these are things that have to be addressed.

Charles:
And when you’re reviewing through the budget, you’re gonna wonder why they haven’t been, if you see a really well run HOA, you’re gonna see a thing as imaculate, it’s like a resort that you go into and you’ve probably been in them before. And if you go into one, that’s not as well, you’re gonna see that they’ve been cutting corners and they haven’t been managing it correctly. And it’s most likely cuz they don’t have enough funds. So what are you looking at when you’re reviewing the HOA financials? Well, number one is do the dues cover the operating expenses of the HOA. So very simply how many units are paying the dues? How much are the monthly dues are the monthly operating expenses below this total amount? So if you’ve got a hundred units you know, paying $200 a month are your, the monthly operating expenses of the HOA under the $20,000 per month.

Charles:
So that’s number one and that’s a pretty easy calculation to make. The second one’s gonna be a little bit more difficult because you’re gonna have to look into reserves and stuff like this, but do the HOA dues cover capital expend expenses and you’ll know this number one, by what condition the HOA is in. If there’s not that much deferred maintenance or none at all. And it’s, it looks like I said, like a resort or it’s very nicely taken care of. Then you’re gonna see that they have the money or they maybe had an assessment place. But what you’re trying to avoid is buying a unit and you know, months down the road or a year or two down the road, getting hit with a huge assessment because they haven’t been running the HOA like a business. They’ve just been running, operating expenses and not doing any upkeep on the property, any CapEx upgrades on the property.

Charles:
So capital expense expenses are parking, lots, roads, roofs, painting, clubhouse, renovations, balconies, et cetera. Are they funding a reserve account monthly? You know, does the HOA have a healthy reserve? These are things you can look for and you can see the balance if there is not a reserve and there’s much deferred maintenance. This is where a large, special assessment might be very likely in the future. So just keep that in mind. You know, my thoughts are there are different levels of HOAs, so single family home HOAs, they may have a very simple associations where it’s just, you know, 50, 75, a hundred dollars a month because they take care of maybe someone’s people’s front yard and they water ’em and they take care of some flowers. And the sign in front where some condo HOAs may handle nearly all aspects of the property and of the owner’s unit.

Charles:
When I moved to Florida originally, initially I was living in an ocean front and condo and the HOA in this building was literally eight or $900. And this was like in 2012, it was completely nuts. And, but the HOA literally took care of everything they had. Full-Time two full-time people in the building. They were taking care of everything. If you had a, if you had an issue like a CLO drain or something, you could call the HOA and they’d call a contractor that would come out and actually clear that drain. Right. if you had an issue with your AC they would have a contractor that came out that took care of it, right? So it was completely nuts because usually that’s all taken care of by the actual owner of the unit not taking care of by the HOA.

Charles:
I’d rather take care of those things myself and handle ’em myself and find my own contractors to handle ’em, but some HOAs and some, you know, HOAs and some owners don’t want to handle that. So it’s very important to know kind of what you’re getting yourself into. I’ve also been into some nice single family HOAs in south Florida where it’s really like living in a resort as well, where they have swim up bar and they have pools and they have all these other amenities like you are living in a very, very nice condo, but single family houses. So you’re paying a HOA fee for all these additional amenities that could be comparable to a very nice condo. Now I personally avoid investing in HOAs, whether it is one unit or a portfolio of many units, which I’ve been asked before to invest into.

Charles:
And it’s like a split condo purchases and stuff. And I, I just avoid it all. I mean, non HOA properties are much easier to work with. There’s less unknowns. There’s less surprises if you do your homework. Of course. And I’m able to change management if the current management is not properly managing the property and I can do it right away. It’s very difficult when you have to deal with a board and have to change management. And you know, you’re, you’re just purchase bought into an HOA or bought into a property in an HOA. And now you have to go there and people that have a relationship with this management company and with contractors and you’re trying to cut people and change people, it doesn’t go over that. Well, now there’s restrictions as well. Who can I rent to how long I can rent for it limits my abilities with the property, right?

Charles:
I mean, if I want to, if I, if it says you can only do 12 month leases and I, you know, the property’s not performing well, or I hit got hit with a huge assessment. I’m like, listen, I wanna change this to to monthly, you know, Airbnb or something like this. And I wanna charge more for it. You might not be able allow to, right. And that’s something that you can do. If you have a personal property, you can make those decisions. Now, the thing too, is that you’re not dealing with you’re, you’re, you’re dealing with non-business people and most HOAs and HOAs are notorious for having people run, run these in a, you know, and sense their million multimillion dollar businesses that previously were in an unrelated profession with no financial expertise, construction experience or business experience. You know, so it just in every HOA is different.

Charles:
I don’t like when people are just using you know, they’re just, it’s a broad brush and stroke and it’s just, oh, you know, all HOAs are bad. Well, when you’re investing in a property, that’s gonna be a hundred percent for rental. I would really avoid an HOA if you want to use it personally, and then also rent it out. That’s different and that’s more of a hybrid model, but you have to know all the parts of the HOA and you have to do a lot of due diligence on the HOA, which is gonna be even more time consuming than purchasing a house, purchasing a house, purchasing small apartment complex, you’re doing the due diligence, you know, a little bit on the market and on the neighborhood. You’ve already done that and you can kind of check that box off. It doesn’t really matter too much what your neighbors three blocks down are doing, but when you’re you just do the due diligence on that actual property, and that’s different with an HOA, cuz you’re doing really twice the due diligence. So I hope you enjoy please remember to rate review, subscribe, submit comments, and potential show topics at global investors, podcast.com. Look forward to two more episodes next week. See you then

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Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

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