For many landlords today, passive income seems like the key to financial freedom. The reality of money coming in while you sleep has become appealing to a lot of homeowners. However, the truth is a bit more nuanced when it comes to selecting the right properties for this. Renting out a property can undoubtedly provide you with significant passive income, but the kind of property you choose also matters a lot.
Making property choices like ones governed by an HOA for passive income offers landlords a number of advantages, including attractive facilities, well-kept neighborhoods, and a sustainable way to make money passively. Continue reading to discover other reasons and other important information.
What is the Amenity Advantage in HOA Properties?
The facilities and services offered to members of a homeowners’ association are referred to as HOA amenities. These can include services such as security patrols and landscaping, as well as actual buildings like parks, gyms, and swimming pools. Each of these facilities, such as a community clubhouse, gym, or swimming pool, offers unique value and can increase a property’s appeal to potential purchasers.
Neighborhoods also become more appealing as a result of these facilities, which improve living conditions generally and foster a sense of community. Improving the standard of living for locals is the main objective of these facilities. They enhance the quality of life and foster a feeling of community.
Furthermore, homes in neighborhoods with lots of amenities typically sell more quickly. The tax implications of investing in rentals with an HOA can be favorable, as the association fees are typically deductible expenses that can reduce taxable rental income. Also, buyers are more likely to select these residences over others due to the appeal of move-in-ready features. Property values can rise as a result of this rapid turnover, fostering a seller’s market in the neighborhood. Properties also stand out when they have appealing facilities, which increases their perceived worth and potential for resale.
Understanding Rental Restrictions
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Rental Caps
All homeowner’s associations (HOAs) have limits on how many or what percentage of their properties may be rented at the same time. These limitations, called rental caps, typically exist in the range of 20-30%, exist to maintain the homeownership character of the community and protect property values.
To monitor and enforce rental restrictions, an HOA board will require owners to submit occupancy forms and lease agreements. The board will approve and verify these documents and may approve rentals on a first-come, first-served basis. If the rental limit is already met, a new applicant will be on a waiting list for a vacancy created by an owner selling their property to an occupant. Here, a knowledgeable HOA property manager is important for an accurate forecasting of budget changes from potential assessments or fee hikes.
When an HOA adopts a cap on rentals, the cap must be approved by the board of directors and the majority of the owners through a super-majority vote, like two-thirds of the owners. In addition, the amendment must be reviewed for legal compliance with state law. New caps will apply to properties that were purchased post-amendment and will not apply to prior owners. California law prohibits the enforcement of caps over 25% for HOA properties.
Homeowners who violate rental caps may be subject to fines, suspension of privileges, and/or filing of liens or placing properties into mediation. The HOA board will maintain a list of owners who may have rental violations in order to assist lenders with inquiries about sales or refinances.
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Lease Term Minimums
Many community homeowners’ associations (HOAs) require minimum lease terms in order to create a stable environment and prevent short-term rentals such as those associated with Airbnb. Restricting tenant turnover prevents unwanted maintenance and noise issues, as well as reducing parking spot disruptions. Additionally, maintaining an owner-occupied community is a key goal of most HOAs, and short-term rentals create transient rentals.
When owners sign leases, they are required to provide their HOA with a copy of the lease, which must include meeting minimum lease length requirements and whether or not they will acknowledge all HOA rules pertaining to the lease. Should there be any violations of these rules, consequences may include monetary fines, eviction notices filed against the tenant, or liens placed against the owner’s property for noncompliance.
All of the HOA rules regarding leasing must exist within the CC&Rs or bylaws, though state legislation differs as to whether or not these rules may be applied retroactively. Owners should review this documentation before closing to ensure compliance. If a community has both a minimum lease length requirement and either a cap or waiting period during which time the homeowner must reside in said community, then in order to challenge either of these requirements legally, they must demonstrate that the rules in question were properly adopted.
Impact of a Poorly Managed HOA
The consequences of a poorly managed HOA can manifest in financial hardships, depressed property values, and community strife caused by issues such as a lack of reserves and a lack of maintenance.
One of the results of an HOA’s poor management practices can include payments on dues at unexpected rates and reserve accounts that have been depleted. It could also include assessment fees for additional services due to unexpected shortfalls from financial mismanagement. Property owners may find themselves involved in litigation against their board due to inaction or negligence, sometimes resulting in forced sale, by way of liens or foreclosures.
When residents become frustrated, a toxic atmosphere forms from many arguments and poor morale, leading to a bad reputation for the neighborhood. This could lead to a subsequent reduction in prospective interest in buying properties within that neighborhood due to the perceived risk associated with the HOA.
Final Thoughts
Investing in an HOA property is a great way to create passive income as the landlord of an investment property. The reliability, resale value, and low cost of owning property in an HOA community can provide a steady profit from renting out the property. To take full advantage of the benefits of owning rental property in an HOA community for financial gain, you need to understand all of the ways that HOA amenities can help you. Remember that you need to maintain a good relationship with tenants so that you can continue to make a profit on your investments.
