Investors seek the highest returns and sometimes condos, townhomes, or other properties with HOA fees show as possible prospects. The challenge then arises as to how to account for the true cost of HOA fees.
The following graph shows an example starting with a basis of a $250,000 home with no association fees, putting 25% down and renting for $1,450 / month. Then, in $100 increments, we increase HOA fees and determine the property price required to achieve similar cash flow results.
Long Term Cost of HOA Fees
As the fees go up, the original purchase price must be reduced to achieve a similar cash flow. (There are also lending aspects which are not the topic of this post.) The first reduction is approximately $9,000 under the assumption that most of the insurance needs are covered by the association fees – for attached properties. You still want contents insurance to cover damages your tenant may cause – such as a small kitchen fire. After that, each additional $100 increase in fees requires a reduction in purchase price of about $19,000 in order to maintain the same cash flow. We do not deduct an offset for landscaping as we expect the renter of a home is expected to take care of that expense themselves.
The change in downpayment & closing costs ranges from just over $2,500 to just under $19,000. Assuming a steady 4% appreciation (for all properties) and that the funds saved at closing, from buying a cheaper property, are invested at 6-percent, how much are these HOA fees really costing you over time?
Based on this example, from $12,000 to $90,000. Or, more specifically at a rate of approximately 4.73 – 4.82 dollars not earned per dollar saved on closing. The range accounts for different interest rates, from 6-percent down to 4.875-percent.
What does this really mean to you as an investor? On average, each $100 in HOA fees is going to reduce your purchasing power by about $16,500 and cost you $20,000 in earnings (over a 15-year period) at a 200 to 1 ratio. Please remember, this is a view not from how much of a loan you can or cannot get, but rather from the perspective of keeping exactly the same cash flow as buying a property without association fees.
So, when next you are out looking for an investment property and you find one with $120 in association fees, you can quickly multiply it by 200 and you will quickly know it is going to cost you $24,000 in value.
When using FinestExpert.com, you can select Property Type to include or exclude Townhomes and Apartment Condos which are the most common property types with association dues. Some of the newer single family homes may also have association dues, but you will have to dig through the listings to find them.
To determine the effects on cashflow, be sure to plug-in the specific property's association dues into the property analysis form.
