Housing & Mortgage
Avoid HOA Fees and Save $100,000+ Over Time
Or afford a far bigger living space today
Buying real estate in a neighborhood or high-rise building with amenities covered by a homeowners association? Make sure to do a thoughtful cost-benefit analysis. Avoiding a monthly HOA fee could expand your home buying budget by six figures. Or it could help you retire richer.
In a report titled “Attack of the Killer HOA Fees,” Trulia in 2017 said homeowner association fees in America were growing at a faster pace than housing prices.
In today’s ultra-low interest rate environment, HOA fees can represent a sizable chunk of a monthly housing payment. Suppose you buy a $500,000 home and, after a 20% down payment, have monthly mortgage payments between $2,000 and $2,500. A $500 monthly HOA fee means adding 20% to 25% to the monthly expense.
Spend some time on a mortgage calculator, adding in and taking out HOA fees at various price points, and you’ll get a clear picture of how your home buying budget is affected.
Homeowners associations are a given in high-rise apartment buildings and condos with shared spaces, and they often increase as buildings age and require major repairs and more regular upkeep. HOA fees also exist in some single-family home neighborhoods to cover the upkeep of community pools and fitness centers and the enforcement of aesthetic regulations, like how tall your grass can be or what color you can paint your home.
Real estate listings lure buyers with pretty photos and impressive descriptions of HOA amenities, and you should check those out as carefully as you do the stricture you’re considering buying, given you’re paying for them. Plus, think about how often you’d use them. Are they worth $250, $500, $1,000 or more a month?
A bigger home buying budget
Suppose you want an all-in housing payment of no more than $3,000 a month, excluding home insurance. If your desired condo has a $500 HOA, your mortgage budget has fallen to $2,500. If its HOA is $1,000 — not unheard of, especially for an older building with generous amenities like full-time desk person — now your mortgage budget is $2,000. Two-thirds what you likely intended to spend on the payment for the home itself.
Of course, homes with yards and free-standing structures like garages require upkeep at the owner’s expense. Single-family home maintenance is estimated to cost at least 1% of the purchase price annually. That’s another expense to factor in.
A $288,000 difference in Dallas
Let’s look at this another way by comparing two properties in the same city: a single-family home and a condo. Say your purchase price maximum is $1 million. Here’s a look at what you can get.
— In Dallas’ high-end Preston Hollow neighborhood, a $1 million ranch-style home with no HOA fee. There are four bedrooms and three bathrooms spread across 3,357 square feet, plus a fenced yard and two-car garage. We assume annual maintenance and repair on the home costs around $10,000 a year, or 1% of the purchase price.
— In Dallas’ walkable Victory Park neighborhood, a $1 million condo in a high-rise building developed by the W Hotel. The home has two bedrooms and two bathrooms in 1,762 square feet. A $1,629 HOA fee is included. Even with maintenance costs added in on a monthly basis, the single-family home turns out to be nearly $800 cheaper a month than the condo, and you get nearly twice the space.
Over 30 years, that’s $288,000 more out-of-pocket for the high-rise, where the banner perks are a pool, spa and gym. The W Residences might be a top-tier property with a premium to match, but many buildings aren’t as flashy and still charge a hefty HOA fee.
Run the numbers for your own budget and choice properties. What would you do with an extra $500 a month? Invested over 30 years with a 5% rate of return it could turn into an additional $400,000 for retirement.
New York and Chicago have been cranking out residential high-rises, and Philadelphia, Seattle, Boston and Dallas aren’t too far behind. Be on the lookout for HOAs if you’re home shopping there. Some data to get started with: The average price per square foot in New York is $161, and the average price per square foot in Chicago is $120.
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