Should I Buy an Indianapolis Rental Property Governed by an HOA?

Nov 17, 2019 10:00:00 AM

Working with Investors purchasing single family homes in the Indianapolis market, we are often asked some variation of the question, "should I stay away from HOAs"?

As with many real estate investing topics, the answer is, it just depends. 

Home Owner's Associations have certainly amassed an unfavorable reputation among property owners all around the country, and it's not unwarranted. 

They're often hard to deal with AND cost you money. 

But should you completely rule out any and all properties that have an HOA?

Let's discuss, and you can be the judge. 

Should I Buy an Indianapolis Rental Property Governed by an HOA?

Before we get into some of the risks and disadvantages of HOAs, here are a few advantages to think about. 

  • HOA Popularity

According to iPropertyManagement, as of last year, there were 347,000 HOAs in the United States comprised of 26.6 million units and there are roughly 8,000 new HOAs established board-3772063_1280every year. 

As of 2016, Indiana alone was estimated to have 4,800 associations. 

24% of the U.S. population lives under an HOA, that's roughly 73 million people. 

It's calculated that just over 50% of households in the Midwest are governed by a Home Owner's Association. 

All this to say that HOAs are rampant. 

If you refuse to purchase a rental home governed by an HOA, you're essentially cutting your options in half. 

With the extreme competition we're seeing in the market today, you're going to have an even more uphill battle trying to add properties to your portfolio.

You have to ask yourself, is it worth missing out on great opportunities just because you have to jump through a few more hoops?

  • HOAs' Impacts on Property Values

    For as big of a pain as they can be, Home Owner's Associations can also provide value to you as a property owner. 

    On average, homes governed by HOAs sell for an average of 4% more than non-HOA regulated properties. 

    Associations that properly enforce their regulations can directly help retain and add to your property's value by ensuring a certain standard of care is taken for the community.

    If the roads, common areas, and homes in a neighborhood are well taken care of, that will only bode well for your property's value. 

  • HOAs' Impacts on Tenants

    Another area that HOAs can come in handy, is with your Tenants. 

    An HOA provides another set of eyes on how your Tenants are taking care of the property. We often get notices in the mail from HOAs stating that the grass has gotten too long or there is excessive trash sitting out. 

    When we take over management of a home in an HOA, we provide a copy of the Covenants, Rules, and Restrictions to the Tenants who are required to adhere to all regulations. 

    Having an HOA can be like having an additional set of eyes on your property to help ensure that it is being taken care of properly. 

    On another note, many HOAs offer amenities such as pools, recreational areas, parks, snow removal, etc. 

    This can be great for marketing your property and is a sure fire way to draw in potential renters. 

Risks and Disadvantages of Buying an Indianapolis Rental Property Governed by an HOA

  • HOA Fees

    Typically one of the main reasons Landlords want to stay away from HOAs, are the fees.

    Most single-family Home Owner's Associations in Indianapolis charge somewhere between $200-$350 per year. While this isn't a staggering amount, it does eat in to your cash flow. 

    There can also be special assessments and other fees charged throughout the year, and yearly dues generally increase at one point or another over the term of ownership. 

  • Covenants, Rules, and Restrictions

    The dreaded CCRs.

    An HOA's CCRs are the, usually rather lengthy, rules and regulations of the community. They spell out everything from how voting rights work, to the fee structure, to architectural contract-1481587_1280stipulations. 

    As a Landlord, the most important thing you need to be aware of, are any rental restrictions stated in the CCRs. Before you buy a property you will want to do your due diligence to ensure that you're able to use the property for its intended purpose. 

    We unfortunately had a previous client who had to learn this the hard way. You can read about the nightmare at the link below:

    Renting in a Rent Restricted HOA

    While they can be a blessing as we discussed earlier, CCRs can also be a curse. 

    Another thing to keep in mind, is that HOAs often change management or update their CCRs. So, everything could be fine when you purchase the property, and 3 years later a new HOA takes over establishing that no properties may be leased. 

    When dealing who HOAs, this is a definite risk. 

  • Process Delays

    One of the more frustrating aspects of HOAs, is the lack of urgency they have about, well, just about everything. 

    In our experience, we've seen this most commonly take place in 2 major areas:

    • Buying/Selling Process - 

      When you buy or sell an HOA governed property, there's a whole additional set of steps that have to be taken on top of the already meticulous process. 

      Most HOA offices we have worked with are not too quick to provide needed information or documents, and more often than no end up delaying closing.

    • Maintenance/Repair Process - 

      This is more common with condos as opposed to single-family homes, but in communities where the HOA is responsible for certain maintenance issues, getting  things facilitated can be a drag. 

      When you do get a hold of someone in the HOA office, the amount of time it typically takes to get something done is absurd. 

      There's a definite lack of communication in most cases and in general it just leads to a lot of unnecessarily wasted time. 

An Indianapolis Property Management Company's Take on HOAs

While there are absolutely downsides to purchasing rental properties governed by HOAs, we certainly don't feel that they are great enough to stay away from them all together. 

With so many Indianapolis homes being governed by them, it's hard to avoid. 

As long as you understand the risks, and do your due diligence, buying a property in an HOA can be just as good of an investment as the alternative. 

Your Indianapolis Real Estate Agent should be knowledgeable about these things as well and should be able to advise you accordingly. 

 

Get expert REI advice

 

Devon L. Hicks

Written by Devon L. Hicks

As well as being a licensed Realtor, Devon has her Bachelors in Marketing from Missouri State University and utilizes her skills in a variety of ways to educate and advise real estate investors in the Central Indiana region.