HOA Fees and Rental Yield: The Line That Decides Whether a Condo Works

An HOA fee is charged per unit regardless of rent, so it hits cheap condos hardest. Emeryville and San Mateo worked both ways, and why a high gross yield on a condo is often a fee in disguise.

Every other cost in a rental calculation scales with something. Property tax scales with price. Maintenance and management scale with rent. An HOA fee scales with nothing — it is a flat monthly charge set by the association's budget, and a $500 fee is $500 whether the unit rents for $2,000 or $6,000.

That makes it the most dangerous line on a cheap condo and a minor one on an expensive house. It is also the usual explanation when a condo shows a gross yield that looks too good.

Emeryville: the region's highest gross yield, tested

Emeryville tops this site's table of 92 Bay Area cities at 8.68% gross — rent $3,104 a month against a mid-tier value of $429,369, the lowest value of any city here. Emeryville is almost entirely condo and apartment stock, so an HOA fee is the rule rather than the exception.

The $550 fee takes 1.54 percentage points off the net yield. At $6,600 a year it is the largest single cost line on the unit — larger than property tax at $4,723, larger than maintenance, and larger than management and vacancy put together. Only the three rent-scaled lines taken all together ($8,567) exceed it.

Why the fee hurts a cheap unit more

The fee is the same dollars; the rent it comes out of is not.

• Emeryville, $550/mo fee against $3,104/mo rent: the fee is 17.7% of rent.
• A Palo Alto condo at a $550/mo fee against $4,558/mo rent: 12.1% of rent.
• A hypothetical Antioch condo at $550/mo against $2,814/mo rent: 19.5% of rent.

So the same association budget consumes half again as much of an Antioch tenant's rent as a Palo Alto one's. Since the cities with low prices are exactly the cities with low rents, the HOA line works against the high-gross-yield inland markets — partly offsetting the geography that makes them attractive in the first place.

The million-dollar condo, worked

A concrete case, because it is the question people actually ask. A $1,000,000 condo in San Mateo, achievable rent $3,400 a month, HOA $450 a month:

• Annual rent $40,800. Gross yield 4.08% — which looks far better than San Mateo's city-wide 2.84%, because a condo costs less than the mid-tier house the city figure describes.
• Property tax at 1.1% of the purchase price: $11,000.
• Insurance $2,200, vacancy $2,040, maintenance $4,080, management $3,264.
• HOA $5,400.
• Total costs $27,984 — 68.6% of rent.
• Net operating income $12,816. Net yield 1.28%.

Gross 4.08% becomes net 1.28%. The HOA is $5,400 of the $27,984, so it is the second-largest line after property tax and larger than maintenance.

Full treatment of this case, including what happens with a mortgage, is on San Mateo rental yield.

What an HOA fee buys, and why that matters to the yield

Part of an HOA fee is not a cost at all — it is a cost you would otherwise pay separately. A fee that covers water, sewer, rubbish, exterior insurance, roof and building maintenance replaces lines you would carry yourself on a detached house. Double-counting it against a full 10% maintenance allowance overstates the true expense.

So the careful version of the arithmetic reduces the maintenance assumption when the HOA covers the building envelope. In the San Mateo case above, dropping maintenance from 10% to 4% of rent — on the basis that the association handles the roof, the exterior and the common areas — adds $2,448 back to net operating income and lifts the net yield from 1.28% to 1.53%.

That is the right way to treat it, and this site's standard tables do not do it, because the standard tables assume no HOA at all. Where a page works a specific condo, it says which maintenance assumption it used.

What to check before buying a condo to rent

1. The fee, and its history. Three years of increases tells you more than the current number.
2. The reserve study. An underfunded reserve means a special assessment is coming, and a special assessment is a capital call you cannot refuse.
3. What the fee covers. Then adjust your maintenance assumption to match, rather than stacking both at full rate.
4. Rental restrictions. Many associations cap the share of units that may be rented, impose minimum lease terms, or require owner occupancy for a period first. A cap that is already met makes the yield calculation moot.
5. Litigation and insurance. An association in litigation, or one that has lost its master policy, can make the unit unmortgageable — which affects both your purchase and your eventual exit.

Related: gross vs net rental yield for the other cost lines, and why published rental yields are wrong for why condo yields in particular are so often quoted wrongly.