HOAs and Property Management in Rental Communities - EP09

Community management isn't as complicated when you're dealing with a single-family home or maybe a duplex. But when we start to look at projects with increasing density, depending on the types of ownership of how your properties are held, things can get increasingly difficult...

"When you're going to build a house or duplex and you go to rent it—community management isn't as big of a deal because you have one property that you or your property manager is taking care of. But anytime we get some density involved, community management can become an issue, especially when it pertains to how the ownership of the property is held." - Steve Olson, B2R Show

Steve Olson: Welcome to the Build-to-Rent Podcast. I'm Steve Olson sitting here with Chase and Sherida Zenger as usual. We've got a great episode for you today, and we even had a fancy new intro that told you all the things that I always forget to tell you. Preston's going to be mad at me if I don't say subscribe. So please follow us on social media and on Spotify, Google, and iTunes.

That's that way you can keep up with all the latest shows and whatever we're up to over here at the podcast. And today we want to talk about something. We got the idea for this a few minutes ago, when I was mad at an email that I got about community management. Right. And so if you are going to build like a house or your own fourplex on an infill lot Sherida, what's an infill lot, a lot.

Sherida Zenger: That's in the middle of other stuff that's already developed. So it's just a vacant piece of dirt. Maybe it's a neighbor subdivided. Yeah. In the middle of stuff, it's not.

Steve Olson: Yeah. So like a hole in the city, there's this vacant lot. When you're going to build a house or duplex and you go to rent it—community management isn't as big of a deal because you have one property that you or your property manager is taking care of.

But anytime we get some density involved, community management can become an issue, especially when it pertains to how the ownership of the property is held. So most of our experience is kind of the worst part of that, where we have maybe 200 doors they're planted as fourplexes, so that follows my math here.

That's 50 different properties, all owned by different owners. If we just build that and we let everybody have a property manager, but nobody is managing the community. It's a problem. Isn't it? The muster definitely. Yeah. Yes. A cluster. So it's a, it's a big issue because what goes on inside of these properties, isn't only what, the only thing that goes on inside of the development and what happens outside, how people interact with their neighbors and the property itself impact whether they want to renew leases, how much they want to pay in.

How happy they are as, as a tenant. So there has to be one sheriff in town. So two ways to deal with that. If you're fractionalized ownership like us, there has to be an HOA. If it's one complex, right, then this becomes a little bit different. So we wanted to explore that a little bit more. What are some of the things that pop into your mind?

Let's say we have 200 doors over here. 200 doors over here. One of them is one full property. It's one tax ID. The other is 50 properties. It's a bunch of, bunch of fourplexes or something. What are some of the key differences in how that those communities would be managed?

Chase Leavitt: Well, let's talk about the 50 different units or,

Steve Olson: Well, that's a little more intensive.

Chase Leavitt: Let's talk about that. Cause that's what figure is, right. Pretty much. So, as far as the HOA goes, if there's an HOA involved, which we'd like to set up. Um, HOA is going to manage, um, basically everything that's on the exterior and it can be set up differently in different communities. If we're not talking about fig, um, you can go different directions with it, but typically you're going to have a clubhouse involved.

It's being managed and taken care of. You're going to have landscaping, snow removal, and then we can talk about different utilities that are involved as well, such as water, sewer garbage. Um, just anything on the exterior of the building

Sherida Zenger: and the maintenance of the exterior of the building, which also the HOA is going to have insurance, which is going to cover the roof.

That's a big thing that I know a lot of people ask about, but it's nice because if w HOA is taking care of something, you know that every door in the project's going to be taken care of this. Rather than if chase Steve and I all own in one little project and we own thirds of it. Steve may take care of his lawn.

I may take care of the exterior and chase may take care of, you know, some of the amenities, but if his looks really crappy and mine looks really good and Steve's looked really good, he's Chases is going to bring down our value or vice versa. But if you have one person, one HOA in there managing the whole thing, making it all look good, it's going to help your investment over the.

Steve Olson: Yeah, and I think that's accurate in the real world. Chase would be the one to bring down the value. Okay. So, uh, something important to keep in mind there, cause you've seen these communities where you can tell it's separate ownership. There's, there's a bunch of those two up two downs. Boxy-looking fourplexes, right?

You don't necessarily know how they're planted, but if there's a disparity in how the community looks, that's your dead giveaway. Is that a whole bunch of different people own these it's a hodgepodge, right? So Chase, isn't replacing his roof. He's letting people park wherever they want. There's an old Trans-Am on the lawn, right?

There are bikes everywhere. The lawn is. So when Sherida needs to lease her unit, of course, that is a property management responsibility, right. But these tenants pull up and they see Chase's unit. Those are my neighbors. Right? What just happened to Sherida'sas rents? What just happened to the marketability of her billing. It went down.

Where this can become, this is dealt with, but it's, uh, it's kind of cannibalized in the way. So anytime you form an HOA, you're going to get a reservation. You pay those monthly HOA dues as an owner, it covers most of your insurance obligations and many of your utilities, but reserves done by an engineer, a study says, Hey, this roof is going to need to be replaced in 15 years or whatever.

Uh, the sidewalks, the asphalt, whatever that money is saved so that it is there when the time comes. Conversely, you could not do a reserve study. Although I don't think banks and insurance companies let you really get away with that. But HOA boards are notorious for cannibalizing those reserves and not charging enough and then comes the dreaded more special assessment.

Right. And that's probably the biggest reason why people are afraid of investing in a property where it's subject to an HOA. So you need to think about that down the road. If you're doing a build for rent, this is going to come up. Why, why is a special assessment so terrible

Chase Leavitt: because it could be thousands of dollars that you weren't expecting.

Steve Olson: It could take your numbers. Yeah. It's like a surprise, brand new expense that you didn't account for. Right. No one

Sherida Zenger: planned for it. And I think that's a good thing. You know, the hos that we use do reserve studies and they're really good at making sure that they can manage what's going on and they're out looking at the projects and making sure, Hey, is there something we need to get ahead of time?

Yeah.

Steve Olson: So, this morning, um, I got an email about a project that we had done in Houston. And the HOA is going to have, a $10,000 bill because that's the deductible for the community, the crazy lightning storm fried a couple of them, the electrical circuits or something in the fire riser rooms.

Right. And so they're going to have to file a claim, but they, they have reserves. They have budgets. They're watching this. It's no big deal. The money is there and that they can pay for that repair when that money is not there. That's when things begin to. Get really, really cranky. So when it's an investor-owned community that reserves and that whole situation is kind of handled differently than if it's a bunch of homeowners, right.

That's different too. So you have to take him to take that into consideration. We're getting ready to do a project here in Utah. That's going to be mixed, right? Where we have a big central clubhouse and that's going to have a pool and a gym and a leasing office and an HOA office. Right. And then to the left side is going to be a rental company.

Of condos and townhomes and to the right side is going to only be a for-sale community of townhomes. Those two, uh, those two demographics kind of have different needs and wants don't they?

Sherida Zenger: So that's what we're going to do. Two hoas in that community.

Steve Olson: Yeah. A master and then two sub hoas, right. That, so that they can't be totally separate because they will interact with one another, but they're not necessarily always under the same rules.

Sherida Zenger: They may have different needs.

Steve Olson: That's right. Any other thoughts on, on hos and the complexities of them and what to watch out for? Cause I know chase you're on a, you're on a board right now. Aren't you

Chase Leavitt: Tucker's row in Vineyard, Utah. Okay. Okay. So yeah, I have a couple of thoughts. So when looking into nature way, whether it's fig or a different potential investment that you're looking at.

A couple of things that come to mind, you want to look at, okay, who's in charge of that. HOA, the board, who's running the show, who's making the shots who's, who's voting and, and, and being able to make decisions. I think that's huge. And then also just looking under the hood a little bit, understanding what you're paying per month, understanding what's included in that if there's value that.

I know there's some hos where a builder or a developer or whoever is still getting paid a certain number. And so you gotta, you gotta see if that makes sense. Not all of them, we don't do that. So you gotta, you gotta really look into that and see, okay, I'm paying a 100, 150, 200 per unit per month. What is that going to so understand the HOA fees, understand if there's value there?

A lot of times there will be, sometimes there's not. Uh, understand if there's an HOA transfer fee transfer fees, aren't the worst, but understand what it is. We do a transfer fee and a lot of that transfer fee goes to building up the interest reserve account, which two it'll help to make it healthy. If we do have a roof that goes out or something that happens.

Right. And so just understand the HOA who's doing what who's running. What, how much control you have. So hos they're, they're very important. Um, they can be key if they're set up correctly and they also can, can crush you as well. If they're not.

Steve Olson: Yeah. Yeah. You have to have a good board people that care and are going to take time, because for the most part, the most residents don't pay attention until they're mad, right.

About something, it's like politics. Right. We don't want to be involved, but we want to yell at everybody that. Right. So there are probably more good HOA boards than there are politicians. Quick poll. Yes. Yeah, yeah, yeah. Okay. We're going to do start doing more quick unofficial polls that I just surprise you with.

Sherida Zenger: Yeah. I don't, I think HOA scares a lot of people, but I don't think it's something that needs you to need to run away from, but as she said, just understand it. Yeah. Know what you're getting into. I think ours are actually really good in the sense of you're getting more bang for your buck. Some of them. Yeah.

Steve Olson: We'll have Tom come on the show one of these days and talk about hos and some of those complexities. But when you have an HOA involved, you're essentially you're moving light items around on your proforma, right. Things that you would normally budget for, like most of your insurance and maintenance and things like that are separate line items.

And they mostly disappear and they get shifted into an HOA line item. It's the same effect on the numbers, but the control is different. So when we talk about community management going away from fractionalized to, to uniform, right. It's different because in this case, the property manager is the boss across the board.

Are they not? Yeah. Yeah. They're the ones calling the shots. So the property manager and how they get paid, typically the larger the community, the lower the management fee, but then you also have payroll, so you're going to have an onsite. Manager that you're paying. And they're the one that people come to.

My toilet's broken, right? And they're getting paid I'll oftentimes and reduced rent and then a small salary to live there and to be the boss, to be the sheriff of that community. And then beyond that, you've got your, your advertising costs and things. This, this world of management and HOA comes much more together because it's one onsite community manager.

Sherida Zenger: And I think that's another thing to double-check because in. Um, ma HOA and property management are separate. They do work hand in hand, but there are a lot of times that people will say, oh, shouldn't that be the same line by line item? And I think it's because they think that property management and. HOA are the same thing, but ours are broken out.

Double-check. If it's a, if it's one whole community it's usually together and

Steve Olson: it's all in how the ownership of the community is held really that is the determining factor. Have you could have a situation where an entire community is in a master-planned development that has that subject to a development agreement where you have one property manager and the entire thing is subject to.

That could happen as well. Okay. Well, um, this is kind of HOA is kind of like a topic like insurance. You can only talk about it for so long before you're done, but it's important. You have to pay attention. Any last words on HOA and community management.

Chase Leavitt: Yeah. Dan, don't be afraid when you see it. Don't throw your hands.

Just understand it. Look into it a little bit. Understand what you're getting into.

Steve Olson: And we'll get into another episode in the future with more specifics like I've got a bunch of loose ends that I'm working on I'm on an HOA board as well. And some of the things that we've noticed are helpful in community management.

So we'll catch you next time on the build-to-rent podcast. Remember to like, and subscribe.