Real Estate Q&A: Wise Investments and HOAs

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Q & A

Each month, San Diego State University lecturer and Zillow Blog contributor Leonard Baron answers two questions from readers regarding buying, selling and investing. Have a question? Send it to Leonard@ProfessorBaron.com

Real estate as an investment

Hi Professor — I’m looking at some different investment opportunities and considering buying some rental properties. I’ve done pretty well on stock and financial assets over the years, and quite frankly real estate doesn’t look all that appealing as an investment. Why do you think it is a good place to invest? Bob S., Hoboken, NJ

Hi Bob — You hit the nail on the head! For many, real estate may not be a very good investment. If you’re able to earn the long-term average of 7-9 percent returns on financial assets, you’re probably doing a lot better than most real estate investors, probably with less risk and certainly with less hassle. Many property investors fail to do even the most basic financial analysis on properties they buy. This is because they don’t know how to project their investment returns. So they buy real estate in “hopes” of it going up in value, even though it could have significantly negative cash flows, and voila, it’s a really bad financial decision.

And even if they get a fair deal, there’s still the management aspect, dealing with tenants, repairs, etc., that can make real estate less appealing as an investment.

Alternatively, a savvy buyer will buy positive cash-flow properties that pay the bills, manage them well and earn some pretty fair returns on a nice solid asset. Being successful, however, takes a lot more time and hard work than most people believe. So all potential real estate investors should learn about the business, financials and management issues before jumping into the real estate game. It may or may not be for you, but at least do some research so you have an idea of what you’re getting yourself into. Good luck!

Single family home community in HOA

I am looking to buy a home, but the community I like has an HOA associated with it, and I’m really concerned about owning real estate in an HOA due to all the horror stories I hear. Have you seen this before, and what do I need to consider in this decision? Melanie N., State College, PA

Hi Melanie — Yes, single family residence HOAs have become more common in recent years. And while there are some HOAs that are in bad financial/legal/operational shape, there are many in good shape, which should ease your concerns. And there are significant pluses to HOAs, especially an HOA that just has single family dwellings.

Most HOA issues are related to the community members, via the board of directors, not collecting enough HOA fees to pay for long-term repairs and replacements such as roofs, streets, pools and exterior paint. So when there isn’t enough money collected over time and saved in “reserves,” and a repair is needed, a special assessment is set — like $3,000 per unit — and those are a huge complaint of owners, as you can imagine.

In HOAs with just single family residences, the homeowners are typically responsible for their own roofs, paint and yards, and the HOA only owns maybe a pool and/or clubhouse. Because the HOA doesn’t own much, there probably isn’t going to be special assessments because there are no big-ticket items to repair (in general, but you have to review each specific community’s balance sheet). So it can be a lot lower of a risk issue than an HOA for a big condominium building.

HOAs also have other pluses. Rules and regulations keep harmony in the community and ensure your neighbor doesn’t keep an inoperable vehicle in their front yard. So don’t be scared of HOAs. Do your research, and you might find that living within a common interest development may make sense for you.

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Leonard Baron is America’s Real Estate Professor®. His unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches potential real estate buyers how to make smart and safe purchase decisions. He is a San Diego State University Lecturer, blogs at Zillow.com, and loves kicking the tires of a good piece of dirt! More at ProfessorBaron.com.

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

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