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As a real estate investor, it’s important for you to know all the details about a property before you buy it, from the amount of work needed on it to title issues — and especially something called restrictive covenants.
Imagine buying a rental property and then realizing that you won’t be allowed to rent it out.
Imagine buying a rental property and then realizing you owe HOA fees that eat away at your monthly profit margins.
Imagine buying a home and being told what you can and can’t do with your yard.
In all of these situations, not knowing and/or understanding restrictive covenants can be a tremendous mistake.
Today, there are over 355,000 of these communities with each having its own rules in the U.S. — rules that real estate investors need to be aware of.
If you’ve never heard of restrictive covenants, or you’re looking for more information about their advantages and disadvantages, let’s look deeper into them.
What is a Restrictive Covenant?
A restrictive covenant is a rule or set of rules that homeowners in restrictive covenant property law zones agree to follow when they buy property.
The goal of restrictive covenant real estate is to maintain the values of homes in these areas. Restrictive covenants that apply to all homes in a restrictive covenant neighborhood make this happen.
A restrictive covenant creates consistency from one house and yard to the next, and the rules of the restrictive covenant are found in the title or deed. They may also be found on the plat or other documents related to the property.
The neighborhood’s Homeowner’s Association (HOA) manages the restrictive covenant. You must join the HOA and pay annual fees when buying restrictive covenant real estate. With this, you agree to obey the restrictive covenant rules.
An HOA’s restrictive covenant can be tough on real estate investors who want to rent their property. An HOA’s restrictive covenant property law can also affect what you do to a home you want to fix and flip.
Types of Restrictive Covenants
Restrictive covenant property law has two categories: usage and maintenance. Next, we’ll explore how they differ.
Property Usage
Restrictive covenants limit how owners can use their property.
This is the case with rental properties and home businesses — under certain conditions, they may not be allowed.
Property Maintenance
Keep in mind that the first sign of restrictive covenant real estate is the appearance.
A restrictive covenant neighborhood has common paint schemes and manicured yards at the same stage of growth. Similar house styles are also common.
Advantages of Restrictive Covenants
Restrictive covenants do come with advantages. They include:
- Restrictive covenants create consistency for all homes
- Your home’s value won’t decrease due to a neighbor’s actions
- You won’t see a farm in a backyard, disabled cars in driveways, or unkempt yards; These things are prohibited
- Increased property values
Disadvantages of Restrictive Covenants
Restrictive covenants also come with disadvantages. They include:
- Restrictive covenant real estate limits control of your own property
- Failure to abide by the rules of a restrictive covenant can lead to costly fines
- You must pay HOA fees. Every HOA is different, and some associations in areas with members who have a large income can charge upwards of $700 – $1,000 per month, while some will only charge around $100 per month.
- Unpaid fines or HOA fees can lead to the HOA filing a lien for money owed.
Examples of Restrictive Covenants
Now that we know more about restrictive covenant property law and some pros and cons, let’s take a look at some common restrictive covenant examples.
Here are a few:
Investment Property
Most HOA’s have a restrictive covenant against using a home as a rental property.
If you’re buying a home to use solely as an investment property, you may get approval by asking for a vote at the next board meeting, but in the majority of cases, we recommend focusing your real estate business elsewhere.
Home-based Businesses
Extra traffic is a noise nuisance to neighbors, and creates parking issues, and it’s also unsafe for kids playing.
Because of these factors, a restrictive covenant usually exists for home-based businesses.
If you’re a real estate investor looking for a home-based business, again, we recommend steering clear of a property with restrictive covenants.
Curb Appeal
If you aren’t a fan of mowing your lawn and trimming the shrubs often, or don’t have time, you won’t like this example of a restrictive covenant.
You can expect to do or pay for lawn care at least once a week with a restrictive covenant.
You’ll need permission before you build a privacy fence, too.
Exterior Décor
A restrictive covenant may go as far as limiting the size of your U.S. flag and where you fly it.
Also, restrictive covenants can tell you when it’s ok to set up your front porch holiday ornaments and when to take them down.
Construction
A restrictive covenant requires approval of new home additions, and they’ll have to match the style of the rest of the house.
Restrictive covenants also apply to small buildings like workshops and boat sheds.
Restrictive Covenants: The Bottom Line
As you can see, there’s a lot to think about when buying restrictive covenant real estate.
The restrictive covenants are in place to help neighborhoods and all owners benefit from them. But a restrictive covenant can be tough for investors whether they are buying a property to score a profit, or if to live in it and work from home.
As is the case with any real estate investment, be sure to understand every facet of the property you’re interested in, from any necessary repairs, to the title and especially restrictive covenants.
Doing so can help you avoid the wrong property, and help you find the perfect real estate investment.
