Reserve Studies and Special Assessments (HOAs & Rental Properties)

What are reserve studies and why should you use them alongside your build-to-rent property. What are special assessments and what can you do to avoid unnecessary cashflow killers...

Watch the full episode: https://youtu.be/fK0u_k4OeTA

Anytime you form an HOA, you're going to need a "reserve study". You pay those monthly HOA dues as an owner and it covers most of your insurance obligations and many of your utilities.

Reserves done by an engineer, the study will say, Hey, this roof is going to need to be replaced in 15 years, the sidewalks, the asphalt, whatever the money you'll need to save 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 word "special assessment". 

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 is a special assessment so terrible?

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

Steve Olson: It could tank your numbers. It's like a surprise expense that you didn't account for.

Sherida Zenger: No one planned for it. And I think that's a good thing. You know, the HOAs 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 ahead of time?" 

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. 

They're going to have to file a claim, but, 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. That's different too. So you have to take that into consideration...