There was an investor who wanted to buy a condo in Monterey to rent it out. It wasn't until after closing that they discovered the HOA regulations prohibit short-term rentals of less than 12 months. This meant their rental income calculations and plans were off from the start. Such situations are not uncommon. CC&Rs, or the rules and regulations of the HOA, can impose broad restrictions on pet ownership, rental methods, and renovation projects, which may not be evident just from reviewing the sales contract.

The median HOA fee for condos in Monterey County is around $413 per month. This is somewhat higher compared to California's average of about $300 per month, reflecting the market characteristics of a coastal area with a mix of older buildings and upscale amenities. Typically, management fees cover building exterior maintenance, master insurance, common area management, landscaping, garbage collection, and reserve fund contributions.

The Monterey condo market has characteristics that overlap with tourism and vacation home demand. There are luxury condos used as second homes near Pebble Beach and Carmel, while the downtown area features many small, low-rise buildings built around the 1970s. Smaller complexes often take longer to build up sufficient reserve funds due to fewer units, so it's especially important to carefully review the financial statements when looking at older small complexes.

Rental restriction regulations vary by HOA. Some complexes prohibit rentals altogether, some only allow long-term rentals on an annual basis, and others permit rentals of 30 days or more. These regulations are not always included in the sales listing description. It is necessary to request a copy of the CC&Rs directly from the HOA management company through the responsible agent and to thoroughly check the rental-related clauses from start to finish. If you find out after closing, it can be difficult to reverse the situation.

Apart from rental restrictions, the financial health of the HOA also impacts loan assessments. According to Fannie Mae standards, if delinquency rates, reserve fund ratios, or litigation status fall outside the criteria, the property may be classified as a non-warrantable condo. If you are looking to purchase a condo for investment purposes, it is wise to check not only the rental regulations but also these financial assessment criteria. Observations in the market suggest that complexes with strict rental restrictions often maintain better building management, as the goal is to reduce wear and tear on facilities caused by short-term rentals.

A reserve fund is money set aside for major repairs such as roofs, plumbing, and elevators. If it is insufficient, special assessments may suddenly be imposed. California mandates that a reserve study be conducted at least every three years under Civil Code 5550, and following the Surfside condo collapse in 2021, SB 326 requires that buildings with three or more stories have their exterior elevated elements, such as balconies and decks, inspected every nine years. The first inspection deadline was January 1, 2025. Due to the coastal area's characteristics, many wooden structures are exposed to moisture and salt, so the results of these inspections can significantly impact reserve fund planning.

Here are the items to check:

• Rental methods and minimum rental period restrictions in the CC&Rs
• Pet ownership clauses
• Recent reserve study and financial statements
• Compliance with SB 326 balcony inspection requirements

As a note, condos in coastal areas often experience faster wood decay due to moisture and salt than those in inland areas. It can be helpful to verify whether the company that conducted the reserve study has experience inspecting coastal buildings and whether the condition of wooden structures is specifically mentioned in the recent report.

If you are looking for condos with the goal of rental income, it is advisable to check the rental-related regulations before focusing on the management fee numbers. You cannot definitively predict market appreciation or rental income, and you must also assess the risks involved. This article is not investment or legal advice, and consulting with a professional before making any actual contracts is recommended.