Ask Paula - Should I Buy a Rental Property with an HOA?

#140: Should you buy a rental property that mandates HOA payments? How do you adjust for cap rate over the years, as the property's rent increases with inflation? Should you buy an $88,500 house that rents for $1,250 a month? And can you dive into detail about how you work with contractors and property managers?

I answer these four questions in today's Ask Paula episode, themed around real estate investing.

Daria asks:
My husband and I live in Charlotte, North Carolina. I've been looking at local properties and I notice that a lot of these properties, Class C+ or higher, come with HOAs. For example, I've found properties that cost $80,000, rent for $1,000 per month, and have HOA fees of around $150. What do you think about HOA fees in general, and how do these affect factors like cap rate? I'd love to hear your thoughts.

Sabrina asks:
How does the cap rate on a property change over time, as the rent increases with inflation and other operating costs shift around?

Jasmin asks:
I'm looking at a rental property that costs $88,500 and needs $2,000 in initial repairs and other fees. My gross rent would be $1,250 per month, with estimated 8 percent vacancy. I estimate $555 monthly in expenses ($6,660 annually), including setting aside one percent of the purchase price for repairs and maintenance and another one percent of the purchase price for capital expenditures. What do you think of this deal?

Rob asks:
Can you please explain how you work with your contractors and property managers? On your blog, you describe texting with your contractor, but shouldn't the manager handle that? I'd appreciate any insight into how you handle these relationships.