Question: Will a rental cap in a condo building increase or decrease my property value?
Unless you live in a community that relies on a high percentage of FHA loans, a rental cap will decrease property value. However, some communities decide to introduce a cap in order to maintain a quality of life desired by current residents.
- Better quality of living: Owner-occupants generally invest more in their home, take better care of common areas, and take more pride in developing a strong social community. In small associations or those intent on maintaining a certain standard of living, quality of living may prevail over property value.
- Protect FHA and investor loans: Once an association has 50% or more of its unit rented, potential buyers won’t qualify for FHA or investor loans. If a community relies on FHA loans on a significant percentage of its home sales, property value will drop as soon as the rental rate exceeds 50% due to a reduction in the buyer pool. However, before making a decision based on historical use of FHA loans, Jake Ryon, Loan Officer with First Home Mortgage, points out that “with Fannie Mae lowering their down payment requirements for conventional loans (3-5% depending on loan size), we’re seeing fewer buyers interested in FHA financing, particularly when purchasing a condominium. These recent changes by Fannie Mae are targeted at first time homebuyers, the market FHA was supposed to be helping.”
- Fewer Buyers: I regularly have clients tell me they won’t consider a condo with rental caps because they plan to hold and rent as a long-term investment. If a buyer/buyer’s agent doesn’t know a rental cap exists when they make an offer, they’ll find out when they review the condo docs and can void the contract (3 day review period) without penalty.
- Lack of owner options: Financial struggles? Job ships you to a new location? Decide to go to grad school? Married and moving in with your spouse? These are common occurrences for homeowners and they don’t always occur with warning or during hot real estate markets. If rental caps exist, selling becomes an owner’s only option, even if renting makes more sense. The result of an owner being forced to sell is often a lower sale price, which depresses property value in the community.
In every scenario I’m aware of, the introduction of a rental cap is considered a change to an association’s by-laws, which requires a supermajority of owner votes to pass (usually 67-80%).
Question to condo owners — what are some other factors that have been considered within your association when discussing whether or not to introduce a rental cap?