Everything you need to know about condo rental restrictions

What are condo rental restrictions, and what is their purpose?

Condo rental restrictions are rules established by a condominium's association or governing board to manage the rental of units within the community. These rules can include limits on short-term rentals, requirements for tenant approval, or caps on the number of units that can be rented at any given time.

A condo association might adopt a rental restriction for a variety of reasons. One of the most important reasons to enact condo rental restrictions is that maintaining a controlled ratio of rental units in a building or community can help protect property values, improve access to favorable mortgage options, and can even make the association eligible for FHA Certification. Additionally, renters may not have the same level of investment in maintaining their units or following community guidelines as unit owners do. That’s why many associations aim to keep the ratio of renters to owners low and stable.

The benefits of enacting condo rental restrictions might make you eager to put new rules and regulations in place, but it’s important to take a thoughtful approach. As a condo board member, methodically assess what rental limits work best for your community and follow the proper procedure to adopt a cap. In 2016, a case was heard in the First District Appellate Court of Illinois about rental restrictions that a board of directors added to their rules and regulations.

Unfortunately, the community didn’t check their governing documents to verify that the new regulation was compliant, and the courts ultimately ruled against the association.
 

How are condo rental restrictions applied?

To make condo rental restrictions effective and enforceable, consider these five key steps:

1. Prepare for a community discussion

   Before adopting any restriction, condo boards should assess whether a rental cap aligns with the community’s best interests. Identify who is asking for the rental cap and what their reasons are for wanting it. Is a request coming from the majority of residents, or just a few people? Are you proactively planning to limit rentals? Prepare for a discussion on the impact of condo rental restrictions by obtaining data from similar communities in your area to support the initiative.
   
   A 20–25% renter-to-owner ratio typically qualifies buyers for lower mortgage rates, while FHA-backed loans may require a 50% or lower rental cap (unless an exemption applies). Exact percentages can fluctuate with regulatory changes, so it’s important to check FHA’s latest guidelines.
   
   In addition to financial benefits, there is also a community benefit to having a high number of unit owners who tend to be more invested in their community, concerned about rules and regulations, and putting down roots in their neighborhood. However, the limit on renters can impact those purchasers who are looking for rental investments in a community. In times when interest rates are low, or when there are many foreclosures on the market, investors may be snapping up real estate, and a low rental rate (or a rental waiting list) may make your community less attractive to them.
   
   If an owner is currently renting their unit, they may no longer be able to do so under the new restrictions. It’s possible that the owner might not be able to afford the property if they are restricted from renting it out, or that they would be unable to pay their monthly assessments. That could lead to higher delinquency rates or forced sales. It’s also critical to consider how renters perceive these rules — an overly restrictive approach could create unnecessary division within the community.
    

2. Identify the process to enact the rental changes

   There are several ways to adopt condo rental restrictions. Some condo boards opt to add a rental cap through rules and regulations with a simple board vote, but this can lead to legal challenges if not explicitly permitted by governing documents.
   
   An amendment to the association’s governing documents may make it easier to enforce restrictions and minimize misunderstandings, though it will require a vote by the unit owners. Your community association manager and legal counsel should help guide you through this process to support compliance with Illinois law and existing association bylaws.
    

3. Discuss with unit owners

   Once you’ve collected your data and built a rental cap proposal, it is important to meet with your unit owners and obtain their buy-in. Your community association manager and your association attorney should attend so that they can address any procedural questions or legal issues. Go through all the pros and cons of adopting condo rental restrictions and explain the ramifications of a rental cap on the community. If the proposed rental cap is lower than the current number of rentals, you may consider allowing existing leases to expire gradually or implementing a waitlist system. Both of these approaches require clear communication and thoughtful coordination with landlords.
   
   Let the residents air their opinions and work towards a consensus on whether to move ahead with the new rental approach. This is a good time to assess support for the change, especially if you will need a majority vote to enact it in the next step.
    

4. Adopt the rental amendment

   Consider adopting the new amendment before your rental ratio is too high — this can save your board members a few headaches as reversing this trend later may be difficult. If you plan to enact the rental cap via a change to the rules and regulations, a simple majority vote is usually all you need from the condo board. If you are changing your community’s bylaws, you’ll typically need at least two-thirds of your co-owners to approve rental caps. Consult an attorney specializing in community association law to verify that the amendment is properly drafted and enforceable.
    

5. Enforce the new condo rental restrictions

   Notify unit owners of the new rental cap and give the owners of rental units any additional information they will need to become compliant. Be prepared to answer any last-minute objections or questions about the policy. If there are any new fees or paperwork that landlords or their tenants will need to take care of, explain the requirements in advance. To avoid the perception that renters are second-class citizens, give them the same access to amenities as owners. Take steps to include them in community events such as a book club or summer picnic.

Examples of condo rental restrictions

Condo rental restrictions vary depending on state laws and community needs. Some common approaches include:

• Rental caps: Setting a maximum percentage of units that can be rented at any time
   
• Lease term minimums: Requiring leases to be at least 6–12 months to discourage short-term rentals
   
• Waiting lists: Implementing a queue system for owners who wish to rent their units when the cap is reached
   
• Hardship exceptions: Allowing temporary rental permissions for owners facing financial or personal challenges
   
• Occupancy requirements: Requiring owners to live in the unit for a specific period before being eligible to rent

Each restriction should be tailored to the specific needs of the association for clarity, fairness, and enforceability. Once you have made your initial decision, work with an experienced property management company to define the amendment for your community. For more details, contact FirstService Residential, the leading property management company in Illinois.