If you are looking to add to your portfolio, town homes and condos are a likely target. Most non-single family homes that are newer (1980 or younger) will be in a town home community.
Many investors buy older housing stock, and avoid this issue. Older housing is not subject to HOA’s the way newer housing is. However, the the older stock takes a great deal more upkeep. They also may not attract high quality tenants.
If you go looking for newer attached housing, navigating the issue of where rentals are allowed in these communities can take a lot of time.
Home owner associations must follow guidelines from Fannie Mae and Freddie Mac if they desire to keep up the ability for owners to obtain traditional financing.
Their guidelines include
-No more than 10% can be owned by the same entity
-More than 50% must be owner occupied
-The Homeowners Association is not involved in a lawsuit
-No more than 25% can be commercial space
Communities that meet these guidelines are called ‘Warrantable’, and ones that do not are ‘Non-warrantable’.
Because of these guidelines, the Associations will limit these factors to ensure their owners have access to financing.
It is in the best interest of a Landlord to buy in a community that is warrantable, and meets these guidelines. The property values take a significant nosedive if conventional financing cannot be secured on the homes.
While the rental rate may be the same, the future value is inhibited by the lack of financing options. This may provide a attractive price up front to an investor, but it is important to think about your exit strategy when you buy.
If the community does not have access to traditional financing, there will likely be many more foreclosures and distressed sales. Coupled with the downward pressure from lack of financing options, it keeps appreciation temped down, and may result in depreciation.
For these factors, it is generally better to look for warrantable condos or town homes where the fees are reasonable.
The exception to this is if the investor intends to purchase a large chunk of all the homes in a non-warrantable community. This allows you as the owner to monitor upkeep and help to uphold the integrity of the community for all the owners.
If you are looking to add to your portfolio with a keen eye on value, contact us for local information on communities on both sides of this spectrum.
Naomi Brown 717-819-2825