Back out of buying rental in HOA?

[Bearded Man]

Actually a two part question. I have a short sale under contract that I stand to profit about 30K from through equity gain on closing and appreciation is crazy in the area greater Seattle area right now. It is a prize property, Class A and I planned on renting it out eventually, but after my current experience in an HOA (also another Class A), my gf and I are both of the opinion NO HOA is good.

We miss a lot of the things we were enjoying at my old houses and the HOA has proven to be useless anyways against nuisances, and doesn't seem to be interested in protecting our property values by enforcing the rules. Blatant violations exist and even when brought to their attention they cower and look for excuses. I had better luck with city code enforcement and the cops before buying into an HOA.

Anyways, I only bought the HOA owned home I live in now about a year ago, so if I sell now I will only break even after transaction costs (it has gone up in value about 25K in a year). I could and will likely let it fatten up and sell it after 5 years of ownership (2 living in it, 3 renting it out) to pass muster for capital gains exclusion with the IRS. That money can go into index funds or a REIT, OR...I could use the funds from that to pay off other rentals that are class C and not in HOA's. That would increase my cash flow drastically too and reduce my risk as well.

That brings me to my next situation. I have a short sale under contract and am considering whether I want to move through with it or not. My HOA has no rental cap for single family homes, but I've read online that others do, and they can vote to limit rentals. Right now, they don't allow rentals less than 6 months, that's the only restriction. In any case, I liked it better when I did not have yet another useless governing body watching over me and selectively enforcing rules.

At the end of the day, I've learned from other investors that class A properties are poor rentals, and anything in an HOA is just plain risky. This one cash flows well because I put 20% down but it's an expensive house. I does have huge depreciation benefits, as would the other prize property if I went through with it.

Basically, it's a matter of whether to go through with the other one and keep both forever, go through with the other house and keep both for a limited time, or cancel the other one and bail out on this one as soon as I can. The HOA makes me nervous as hell.

At the end of the day, I could put the money I'd be putting down on the new Class A to finance TWO Class C properties and have the same profit, and easily pay those loans down once I sell this place, thus doubling my cash flow once I do and again, reducing my risk. I only have one paid off property right now but love having paid off real estate.

[OneDollarAtATime]

No HOA is a big deal.  I went through something very similar in a Portland suburb (bought a condo via short sale, rode it up about 140k in 3 years -- over 100% appreciation) and started debating if I wanted to deal with the HOA for renting or just sell it outright.  I, too, have a great location and other condos in my complex sell pretty quick, partially for their large size, great schools and great neighborhood setup (parks, trails, safe, etc.).

My HOA rules are: Can be rented out for 1 year, then needs HOA board approval / rejection for year 2 (basically unless it's a medical / family reason, they reject).  Not allowed to rent for year 3+. 

I'm choosing to sell (in early Spring 2016) for the following reason:

1)  Lock in gains.  If 2008 hits again, those gains (while you're renting it out) can be toast.  Then it becomes a buyers market again for a few years.  Who's to say how long the next 'recession' would last (and will they keep printing money to prop things up?)

2)  No more HOA.  My HOA Chairman is a nice guy, but these rules...I mean, they're everywhere and cover everything!  Basically, if you're looking for a retirement community or you travel a lot for work, my complex is the way to go.  Otherwise, get a house and avoid HOA.

3)  My complex has HOA, but the full neighborhood area has another HOA-type due.  There's an assessment placed on each type of residence, whether a home, apartment, condo, etc. and those dues get paid monthly or bi-annually.  This is for use of all the local trails, maintenance, huge (nice) Rec Center, etc.  But...it's basically a HOA on top of an HOA.  If I hadn't been so comfortable knowing the neighborhood I'm in now (grew up in the city I bought in), I likely wouldn't have done it.  At the same time, the lack of yardwork effort / tools, roofing repairs, new siding costs basically let me use the HOA funds to repair my unit to gain value, so it's been money well spent.

If you feel you can flip it (after fees, capital gains, etc.) then go for it -- there's some risk involved (a la 2008), but with 30k equity, you'll have a bit of a buffer.  Plus, if you're comfortable with the spread for what you pay vs. income, then that takes the risk level down accordingly.

I'm not sure you want to do something similar, but as long as you go in there with eyes wide open you should be fine no matter which decision you make.  Nothing is risk-free.

Would be interested in an update when you make your final decision, and how that plays out.

[Bearded Man]

Thanks for your view. It is a house in a development, both are pretty new houses. I reviewed my contract and between the financing and the short sale approval contingency, I have a way out and can bet my earnest money back. Home inspection fee of $400 is gone, but small potatoes in the overall picture.

The short sale contingency allows me to walk any time before the banks approval and get my EM back so at least I know I can walk without much lost.

I'm still looking for other opinions. I thought an HOA was the solution to my neighborhood problems, but in reality they are really useless and more of a risk to me especially as a rental.

Then there is the fact that most investors shout from the roof tops how class A properties are not really that good for rentals. So true. Hey, one way I can get back at my jerk of a neighbor is to rent out the house; most people don't like renters in communities such as this.

Also, I've noticed in my 10 year old development, more and more houses are turning into rentals. There are three known/visible rentals within a few houses from me, and this is in a city with a 93% ownership rate, far above the state average. I think as communities get older this sort of thing happens and things start going down hill.

[Bearded Man]

Looks like it might be best to back out. Rentals must be approved by the Board, and they may place rental caps and other restrictions including not allowing any rentals or lease to own, etc. Basically, they covered their bases. It actually sounds like the kind of place I would want to live they are so strict, but alas, this is not an ER house, just for accumulation of wealth for ER.

[yeahgofigure]

At first I despised HOAs however I quickly got used to them and learned to appreciate most as I keep all my rentals very nice however one loser neighbor in a non-HOA neighborhood can ruin your rental appeal and resale value. I steer clear of any communities that have rental restrictions.

The large master planned community level HOAs seem to be a breeze while the smaller HOAs or sub-HOAs are the most nit-picky and give the most hassle. Again it's upped my game and have learned to deal with it.

[NoNonsenseLandlord]

I own many in an HOA.  It works good, you have to know the rules and follow them.  Buy enough and become the majority owner, like I did...;-)

[OneDollarAtATime]

Also, I've noticed in my 10 year old development, more and more houses are turning into rentals. There are three known/visible rentals within a few houses from me, and this is in a city with a 93% ownership rate, far above the state average. I think as communities get older this sort of thing happens and things start going down hill.

This brings up a good point.  My experience living in the Seattle area, and having friends in the surrounding suburbs, is that Seattle is a thriving area.  Between Amazon, Boeing, Nordstroms, Microsoft and many other big name firms, there are lots of people coming and going: either high-volume business travelers, contract workers (work visas, too), college age kids fresh out of school, etc. 

I suspect there is a good level of demand in this area that would aid in you having a low vacancy rate.  If the HOA rate is low enough, it might be something you can pass off in the rental costs, even partially (bake things like pool access, scenic rooftop access, in-unit laundry, lots of restaurants nearby that might suit your target market, etc. into the rent). 

I'd be more inclined to study the local numbers (6-10 block radius should work for Seattle) and see what you can get for rent, figure out your expenses and then determine if the ROI is good enough for you.  In short, I wouldn't look at the HOA as a deal-breaker.  It sounds like you're doing your due diligence so you've probably run through this already, but for all the dislike of HOA, if you can make the numbers work, that's all that matters.

Seattle isn't Detroit, it's not going to turn into a slum overnight.  If you buy now and hold for 10-15 years and continue to raise rents in the process, you should be in great shape in the long run.  Yes, that's 10-15 years of HOA dues, but that's also 10-15 years you don't have to pay to replace roofing, siding, maintenance, etc.

[Bearded Man]

Also, I've noticed in my 10 year old development, more and more houses are turning into rentals. There are three known/visible rentals within a few houses from me, and this is in a city with a 93% ownership rate, far above the state average. I think as communities get older this sort of thing happens and things start going down hill.

This brings up a good point.  My experience living in the Seattle area, and having friends in the surrounding suburbs, is that Seattle is a thriving area.  Between Amazon, Boeing, Nordstroms, Microsoft and many other big name firms, there are lots of people coming and going: either high-volume business travelers, contract workers (work visas, too), college age kids fresh out of school, etc. 

I suspect there is a good level of demand in this area that would aid in you having a low vacancy rate.  If the HOA rate is low enough, it might be something you can pass off in the rental costs, even partially (bake things like pool access, scenic rooftop access, in-unit laundry, lots of restaurants nearby that might suit your target market, etc. into the rent). 

I'd be more inclined to study the local numbers (6-10 block radius should work for Seattle) and see what you can get for rent, figure out your expenses and then determine if the ROI is good enough for you.  In short, I wouldn't look at the HOA as a deal-breaker.  It sounds like you're doing your due diligence so you've probably run through this already, but for all the dislike of HOA, if you can make the numbers work, that's all that matters.

Seattle isn't Detroit, it's not going to turn into a slum overnight.  If you buy now and hold for 10-15 years and continue to raise rents in the process, you should be in great shape in the long run.  Yes, that's 10-15 years of HOA dues, but that's also 10-15 years you don't have to pay to replace roofing, siding, maintenance, etc.

Yeah, but the HOA rental policies are what concern me...sooner or later enough people will complain and they will enact the rental cap or outright ban. I regret my current HOA purchase, and it doesn't even have a rental restriction other than no rentals less than 6 months (no abnb for example). Not to say that they won't eventually enact a similar policy, but  in general, a high ratio of renters is not favorable for property values; I've seen this in condos, the more renters move in, the more ghetto it becomes and the lower the resale value. Now that doesn't mean that all renters are ghetto, but you get what I'm saying. Most owners don't want to live next to renters.

[Bearded Man]

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