Are Condos with High HOAs Bad Investments?

Some investors may have a hard time finding condo tenants.

Some investors may have a hard time finding condo tenants.

Though condos do offer a seemingly luxurious and maintenance-free investment vehicle, condo homeowners' associations, or HOAs, typically charge monthly fees to pay for the services they provide. Investors considering a condo as an investment should be wary of monthly HOA fees, special assessments and other factors that may not make the condo a profitable investment.

Benefits

Many investors find condos attractive because they often carry a lower initial purchase price than comparable single-family homes. In addition to a lower cost of entry, condos typically offer a number of amenities that make the properties ideal rental facilities. Many condo associations handle landscaping and yard work, leaving tenants free to spend leisure time on more desirable pursuits. In addition, many condo facilities offer posh amenities like swimming pools, hot tubs, saunas, gyms, playgrounds, tennis courts and clubhouses. Some condo buildings even staff doormen, concierges and security guards. Offsite investors may find condos beneficial, as condo associations typically handle all exterior maintenance and upkeep of common areas.

Costs

Condo homeowners’ associations, usually known as HOAs, must generate revenue to pay for the amenities and services they provide. In a typical HOA arrangement, the association assesses monthly dues payable by the owner of each unit. The cost of these monthly fees can vary significantly depending on factors like the number and type of services the association provides and the financial management skills of association leaders, and typical monthly fees can reach into the hundreds of dollars. Depending on the local rental market, some investors may experience difficulty renting a condo at a rate high enough to cover both the mortgage payment and a high HOA fee.

Assessments

In some cases, associations also assess quarterly fees to pay for large expenses; common triggers for special assessments include roof repairs, parking lot repaving and major property upgrades. In addition, associations sometimes levy special assessments on condo owners to pay for unexpected expenses. Some real estate professionals, like those at Mortgage Saver, assert that these recurring and occasional expenses more than offset the lower cost of entry that attracts some buyers to condominiums.

Appreciation

Prospective investors looking for a property that will increase in value over time and allow them to sell at a profit may prefer to purchase a single-family home rather than a condo, according to the financial website Mortgage Saver. Because many urban areas sport large numbers of condo developments and often have greater supply than demand, condos tend to appreciate more slowly than comparable single-family homes. In some cases, condos may actually decline in value during the time an owner occupies the unit. In a 2011 article, The Washington Post described how some condo owners had lost tens of thousands of dollars as the properties depreciated.

Considerations

As the cost of services and amenities increases, condo associations often have no choice but to raise HOA rates. Investors who purchase condos with high HOA rates may find themselves paying even higher monthly and quarterly fees only a few years into the investment. Investors should also carefully evaluate the association's finances before buying a unit, according to the real estate website Real Savvy Real Estate, as high HOA fees could signal poor financial oversight within the association.

 

About the Author

Photo Credits

  • Hemera Technologies/PhotoObjects.net/Getty Images