By Dr. A.P., Guest WriterWe recently sold our condominium in the Gold Coast district of downtown Chicago after purchasing it in 2016. It was our primary residence during training for six years, stayed empty for one year during a time when my wife and I thought we would use it as a city escape (we didn’t), and then was a rental for two more years with a positive cash flow of approximately $600 per month.
We ultimately lost money on the sale in light of the decreased property values in urban markets after COVID ushered in a remote work culture and elevated interest rates. Regardless, we are happy to be rid of a property we never used and no longer have to maintain. We have strategically capitalized on the tax deductions both during the rental period and with the recently transacted loss.
Many physicians look to purchase a condo as a second home, rental property, or even as a primary residence. In many instances, owning a condo can be much easier and more cost-effective to manage when compared to a single-family home. But when purchasing a condo, an added line item to consider in the monthly overhead is the Homeowners Association (HOA) fee. The HOA is an elected group of residents that handles the daily operations of a building through various bylaws and covenants in addition to baseline city ordinances. Municipalities love HOAs as they translate the legality and cost of high-rise upkeep to a privatized group of individuals that govern themselves. This dynamic can make taking legal action against HOAs difficult and arduous. Depending on the size and price point of the property—and the cost of living in that specific market—the HOA fee can range from $500 to several thousand dollars per month.
Let me shed some light on the dynamics of owning an HOA property, specifically a condo, and my experience over the past nine years of ownership.
Does Your HOA Prevent You from Renting Your Condo?
If you are purchasing a condo as a rental property or plan to rent at any time during ownership, understand the rental property cap in the building. On the extreme end, buildings may not allow long-term rentals at all, but most have a hard cap of 15%-20%. The primary reason for this is that lenders are more likely to issue mortgages in high percentage owner-occupied buildings, due to improved property value stability.
We lived in a 100-unit building with a rental cap of 15%. When purchasing a property in a cooperative building, you are buying shares in the building, not a single unit. The share size directly correlates to the size of the condo, and depending on the size of the units rented, the rental property portion is not to exceed 15% of all shares in our building (ie. the building may be capped if 12-13 larger units are rented simultaneously). Hiring a management company to manage your rental in an HOA setting is likely not worth it, as the building will only allow licensed contractors who are known to the building to handle those repairs. You might as well field those phone calls yourself, coordinate the work, and keep the 20%-25% management charge, because you’ll be participating in some form regardless.
The vast majority of condo buildings do not allow short-term rentals due to the nuisance and burdens of frequent turnover. Your HOA board will most likely consist of legacy owners who best understand the dynamics of the buildings, have deep relationships with other resident owners (voters) and local contractors, have the most skin in the game in terms of daily living quality/property values, and (given their tenure in the building) likely feel that they have the most say in proposing mandates on how other residents should live. This dynamic is beneficial to you as an owner if the HOA board is vigilant and competent, but it comes at the expense of placing immense trust in an external entity that ultimately controls a piece of your monthly budget and the value of your property.
More information here:
How to Buy a House the Right Way
Is Renting Better Than Buying? Why We’re Financially Independent and Renting
What You Get in Return for Paying an HOA Fee
The main pro of an HOA is that it does not leave anything open to interpretation. There are rules for almost everything in the building (delivery times, renovation plans, noise, guests, etc.), and if you are a rule follower and want everyone else to follow those same rules with discipline, this model would suit you. The idea is that set rules and guidelines will best help stabilize the quality of life in the building and, ultimately, maintain property values—all while being immune to the whims of unruly owners and long-term tenants.
Repairs can only be done by licensed contractors, and even appliance installs are vetted by the HOA for compatibility. All of this comes at a cost, but it can provide peace of mind to a prospective buyer in knowing that your seller wasn’t allowed to cut corners. The rules are upheld and managed by a property management company that is contracted by the HOA board. Our management company changed three times during our ownership tenure, and there was a drastic difference in customer service quality between these companies.
The other main benefit to the HOA is that the building has an annual budget to handle routine repairs, long-term updates, renovations, and quality control of the common areas (rooftop deck, elevators, pool, gym, in-house laundry room, etc.), and these amenities are included within the monthly HOA fee. If you won’t use these amenities or are a niche consumer who wants a premium gym membership somewhere else, an HOA building is likely not for you. The HOA fee also includes the building’s insurance outside of your unit; doorman/maintenance staff salaries; and, in some cases, the TV/cable and internet.
The monthly HOA fee is annually reassessed and kept the same or increased (it will likely never decrease) for the following year. Beware of a building with an attractively low HOA compared to other buildings in the neighborhood, as it may not have appropriate reserves for long-term repairs and abrupt expenses. This could lead to a special assessment during ownership that would by law require you to contribute a lump sum of money to the building to handle the underlying issue. Newly constructed buildings also attract buyers with deceptively low HOAs only to increase them to market cost within the first 3-5 years of ownership. Don't believe that a new building means low HOAs for decades; it does not.
The best building has an at-market HOA and a documented history of inflation-appropriate annual increases with few if any special assessments. Our building was one of those buildings: progression from $890 per month in 2016 to $1,217 in 2024 (cable and internet added in the fee during that time period) with a single special assessment of $2,500 when converting the boiler to furnace-based heating in 2019. HOAs have far-reaching powers, and the failure to pay special assessments and monthly HOA fees can result in garnished rental income, deducted proceeds from a unit sale, and even foreclosure if financial negligence persists for a prolonged period.
How Much It Costs to Own Our Condo with an HOA Fee
We had a 30-year mortgage at a 3.625% interest rate, and our mortgage payment was about $1,600 per month, $600 of which went to the principal. As I mentioned, the HOA was $1,217 at the time we sold. It’s safe to say that, had we taken the full 30 years to pay off the mortgage, the HOA fee would far exceed the mortgage payment—purely because HOA expenses increase with inflation, whereas the mortgage is fixed. The in-unit condo insurance was $500 annually, and the property tax was approximately $7,000 annually on an original purchase price of $392,500.
The actual property value decreased about 20% from that purchase price over the past four years, but the property tax decreased only for a single year—and then increased back again above the original amount. Cities that are run in a fiscally irresponsible fashion (Chicago is a prime example) tend to have property tax burdens that can be drastically disconnected from actual property values purely because that revenue is so desperately needed due to massive budget deficits. Fighting to have these values reassessed only results in nominal decreases that last no more than a year. Then, you have to restart that battle.
This dynamic will likely only be made worse with the billions of dollars of commercial real estate value being written off in urban markets as we speak and the property tax revenue from those properties drying up. Real estate brokers may tell you that HOA condos hold 5%-10% more value for added stability. I can’t attest to this or quote direct data, but purely as an owner, my opinion is that the HOA fee is a fixed expense, not a value investment. If the building is in disrepair or if the funds are mismanaged and if the HOA increases that are beyond your control are above market for your neighborhood, selling the property is that much harder because a prospective buyer may not be willing to take on that indefinite expense.
As an extreme example, look at the Florida condo market after the Surfside condo collapse induced legislation: it’s hard to sell an apartment at any price with an impending $100,000-$250,000 special assessment per unit needed to fix the building’s foundation. An abrupt flood of seller supply also does not help that case.
In many circumstances, I have a tough time understanding how the HOA is a value add and not a value loss. Of course, as a rental unit in a building that is not capped, all of these expenses (mortgage interest, property tax, HOA, insurance, maintenance) are deductible from your passive income, but in the current elevated interest rate landscape coupled with an at-market HOA, it is difficult to be meaningfully cash flow positive. I would only recommend renting a unit that you are actually happy with and plan on using in the future but simply want to keep in play with break-even cash flow until that happens.
More information here:
When Is It OK to Carry Debt (and How to Feel Fulfilled by It)?
What to Know Before Buying a Property with an HOA
The point of the article is not for you to resent an HOA situation or be deterred by it. I simply want all readers to be prepared if they buy into a building with an HOA. If after reading this article and doing your due diligence, you decide that an HOA condo is appropriate for you, I strongly suggest you pursue a unit with an in-unit washer and dryer. This can add $10,000 of property value, but unfortunately, it can also cost about that much to install in the unit after purchase, when accounting for plumbing modification. I would recommend against buying in a historic or architecturally significant building where an in-unit laundry is not possible.
An owned parking spot is the second most useful extra if your budget can accommodate it: in Chicago that could add an extra $30,000-$50,000 to the purchase price, and in New York, that number is closer to $300,000. Comparing your desired market to these cities can give an idea of the added cost, and if you can’t buy a spot, account for monthly parking fees in your budget.
At the end of the day, people don’t want to carry their hampers to another floor for laundry, and they don't trust or want to wait for a parking garage attendant for their car. If your unit will never have these conveniences due to building restrictions, it will count against you and ultimately affect demand. Buying at least a two-bedroom will open your prospective buyer pool to younger couples that have or will start a family, young professionals that can room together in a rental, and empty nesters that routinely entertain out-of-town visitors. A high-floor unit with a view and/or balcony is an added plus for outdoor cooking and seating (but not the penthouse due to roof leaks). People get hung up on nice bathrooms and an updated kitchen, but a resident can always renovate those when their budget permits. When purchasing a condo, prioritize variables you can’t ever change no matter your budget.
The major pitfall to watch out for is the age of the HVACs. If they are more than 20 years old, you are looking at $6,000-$8,000 per HVAC unit. That is a large pill to swallow in a non-primary residence that is generating no rental income and can’t qualify for a tax deduction—all for an expense that adds no value. Make sure you inquire about insurance claims within the past two years. If any paid settlements are greater than $10,000, expect difficulty in finding affordable in-unit condo insurance or expect to be denied by multiple insurers altogether.
If you are fortunate enough to have a healthy budget, consider purchasing a townhome in an urban market. You may have to deal with some single-family home issues like roof and deck maintenance and a higher property tax burden, but the HOA fees are markedly lower ($100-$300 for basic lawn upkeep, snow removal, etc.), and you are practically guaranteed garage parking, in-unit laundry, and likely more space. Most importantly, the monthly overhead in the townhome is more intrinsically tied to the value of the property when compared to the HOA condo, and so, a higher list price can be more easily justified.
How Much Will You Actually Use Your Second Home?
You might have read WCI articles on the pros and cons of owning a second home. To put some personal numbers on it, it cost us about $36,000 per year to keep the apartment in play. We practice in Iowa, and if we were willing to do the tiresome six-hour drive to Chicago on a given weekend, it would cost about $80 worth of gas each way. More importantly, I would have to take a half-day off work on Friday to even justify the trip from a time standpoint, and then, we would be getting into several thousand dollars of lost revenue.
You will always feel guilty going on vacation elsewhere when you’re in for $3,000 per month or more on a second home, so you better hope you like that destination a lot and use it. Our Achilles heel was that after a tough and busy work week, we never wanted to make the drive. We have also been burned so many times with flight delays and cancellations (yet another added expense) that I just never want to go anywhere in a high-stakes two-day window.
After a while, an apartment that I once adored became a burden that I felt stuck to and had to maintain despite its decreasing value. I was also very anxious about repairs that I had to coordinate during the rental tenure amid my busy work schedule and the fact that I couldn’t readily go there to appraise the situation myself. This anxiety was compounded by apathy since the rental income made no difference in our lifestyle in Iowa.
In summary, if you buy a condo, make sure you or somebody you know benefits from it. If you don’t need the rental proceeds, avoid renting altogether because it is a hassle. If, like me, your only experience is renting your second home and you are not a seasoned landlord/real estate investor, you will dislike what is required and make little money from this endeavor, simply because you will make the mistake of treating the property like a cherished home and not an income-producing asset after expenses.
We are fortunate that we make enough money from our day jobs, with low monthly expenses, that we don’t need to be landlords to achieve our financial goals. And honestly, if you have the money for a second home and you want to go to this destination, say, once a month, consider staying in a premium hotel instead, order a shrimp cocktail and a petite filet via room service late at night after you’ve had a swim and are hanging around in your bathrobe, fall asleep to a movie, enjoy the tea service and a fresh croissant from the patisserie the next morning, neglect to clean the bathroom and make the bed, grab a complimentary lavender-infused lemonade, and have the valet bring your car around so you can go home.
You’ll still probably come out $10,000-$15,000 ahead for the year compared to owning my unit, and best of all, you’ll never worry about the stay again.
Have you had to deal with a building that has or had an HOA? Was it a value-add for you? Did it end up costing you more than you thought?
A thoughtful and insightful article. I was on the board of an older high-rise.
A few notes: State laws vary widely on HOA’s and condos. Condos generally refer to apartments and HOA’s houses and townhouses. States may have different statutes covering them.
Buildings of the 1970’s and earlier face issues of aging roofs, HVAC and often ignored plumbing. Replacing the potable water lines is a major task including asbestos removal.
Has the condo hired an engineer to look at the balconies and parking decks? They can fail. Rebar in concrete rusts.
Prospective buyers should always get the reserve study. Reserves should be 80% – this is debatable some say higher, some will go with lower. Special assessment history should be reviewed. The board’s minutes should be reviewed.
Adding a washing machine in a unit is often prohibited. The drain lines down a stack of units often isn’t plumbed to handle that amount of water in addition to the other waste.
Take a look at the swimming pool and hot tubs. Two domed drain covers per pool and hot tubs are now the standard to prevent “Main Trap Entrapment.” A person can get stuck and drown more easily if there is just one.
All these things are expensive, but the same is true in a house: water line failure, new roofs, new HVAC, repaving driveways, gutters, groundskeeping, painting and windows. It’s why so many older houses get run down, folks just can’t keep up with the repairs.
“Loss assessment coverage” coverage should be added to the owner’s condo policy. It’s often overlooked. Loss assessment coverage can help prevent a condo owner from paying out of pocket if their condo association issues a special assessment for expenses related to an insurance claim which is higher than the master policy payout. For example, if a balcony were to collapse onto a street and kill someone and a court awarded $1.5M but the master policy had a 1M limit; the owners would be liable for the remainder usually through a special assessment. Loss assessment coverage would cover the special assessment to come up with the owner’s portion of the $500,000. .
Unfortunately this author makes many statements about condos and HOAs that are factually inaccurate, for example, presenting things about their former building as universally applicable when in fact they are not.
For example, the author wrote, “…the building will only allow licensed contractors who are known to the building to handle those repairs.” That is not accurate for my condo building. I live in a 6-unit condo building in Brooklyn, NY (where a parking spot cost $50k, not the $300k stated in the article!) and owners hire contractors of their choice to do work inside their units. They are required to be licensed and insured, as that protects the condo corporation from possible liability for certain types of events – something I think all owners should want. Multi-unit buildings do require some “negotiation” of issues around common building elements, as one would expect. The author also wrote, “There are rules for almost everything in the building (delivery times, renovation plans, noise, guests, etc.)” none of which describes my condo building.
Similarly, the author makes some statements about urban property markets, but all real estate is local. My unit has gone up in value since the start of the pandemic and since interest rates have increased – I know this is true because we had a transaction in the building after I bought in. Again, all real estate is local.
It sounds like this person had a pretty negative experience and unnfortunetly lost value on their property. That really stinks. I think they raise some important points of consideration, but people reading should be careful to not take everything stated here as fully accurate – it is not.
Thanks for sharing your experience. It adds to the value of the article.
Searching the Illinois Code, like VA and CO, it distingue between HOA’s, condominiums and cooperatives. Instead of saying “When purchasing a property in a cooperative building, you are buying shares in the building, not a single unit. The share size directly correlates to the size of the condo.” A person doesn’t buy a property in a cooperative; they buy shares and then lease the unit. The last word should be “apartment” not “condo.” Picky, but important when buying and selling.
They are all have boards of directors but often hire companies to manage them; of course this can vary with the board and how hands on they want to be.
Condo’s, HOA’s and coops, are governed not only by statutes directly related to condos, HOA’s and coops, but also by laws governing the operation of non-profit corporations. Then other state laws, local jurisdiction laws, the governing documents (which in many states are filed with the local court and thus are legally binding without a vote of owners and often mortgage holders) and the the polices. There are even some federal laws which come into play.
Failure of knowing what one is buying into is one reason folks are unhappy with condos, HOA’s and coops. For others, they are ideal.
Renting can be a hassle. I was on a board and we were “unfriendly” to rentals; our governing documents were old and had no cap. Our attorney (on retainer) advised that the condo couldn’t manage rental properties; that except for an emergency, all communication had to be from the condo, to the owner (or their management company) to the renter. This left some owners who were out of state having to deal with issues from moving in to fines. We did have a minimum of 30 day leases however and hence Airbnb’s were prohibited. Some were send reminder letters and then levied a $100 a day fine. Repairs were a nightmare for out of town owners to coordinate without a property management company.
Point is know what you are buying into. I bought mine during a slow seller’s market and sold when there was almost nothing on the market for a buyer; my only regret is not holding on to it longer.
Thanks for the additional info.
I’m sorry, but are we talking about a condo or a co-op? It’s true that with a co-op you purchase shares in the building, not the actual unit. But this is not the case for a condo. When I purchased my condo in MA, I owned the unit, as in, I had a deed to it. I also owned a percentage of the common areas based on my unit’s size.
I was free to hire whomever I wanted to work in my unit. But there were rental caps, rules prohibiting any kind of balcony or door decorations, and even natural Christmas trees inside the units! So YMMV.
I agree with the comment that rules for condos and associated HOA’s vary widely.
Right on the spot. We bought a condo in Miami Beach 20 years ago, paid the whole thing in 12 years. Life was good, then the 40 year recertification came and after more than agonizing years of noise, dust and nightmare finally the Job was completed ( almost still some things to finish): the whole process required three different assessments and a internal fight, that make American politics a fairy tale by comparison. In between HOA fees, property taxes, and the mega-assessment s this year we are going to pay close to 27k. Probably we spend may 30 days in the condo per year, so you can deduct we better rent a suite in luxury hotel with this money and still come ahead . Still my wife and myself enjoy walking along the beach , so not everything is about money.