To Rent or Not To Rent? How Your Community Can Handle Rental Restrictions
Some issues to look at when considering a rental restriction are the availability of individual mortgages for units and the association’s ability to get a loan, for a capital improvement for example.
The federal government mandates an acceptable rental rate through policy enforced by the Federal Housing Authority, Freddie Mac and Fannie Mae. No one making use of these federal lending programs may get a mortgage in a community with more than 50 percent rentals. That number fluctuates with the economy and market; in the wake of the subprime mortgage crisis of 2007 to 2010, it was reduced to 25 percent and has come back up as the market recovered. If the membership of your community isn’t planning to make use of those federal programs, having a rental cap may not matter to your association.
“The number of rentals in your community plays a huge role in prospective owners getting mortgages for units,” explains Bob Rogers, executive director of high-rise for FirstService Residential in New Jersey. “Many people know that. Lesser known is that the percentage of your community that allows rentals can also negatively impact your association’s ability to get a loan. The bank looks at your accounts receivable, rate of delinquencies and the number of renters living in your community.”
Why do banks look at rentals? “Banks that lend to associations view a high number of renters as a risk because people who live in a unit as their primary home are more likely to pay their assessments because it is their home,” explains Andrew Ahrensdorf, vice president of FirstService Financial, the banking and insurance affiliate of FirstService Residential. “Bankers see investors who own several units in the same building as a high risk as well. The theory is that if that one investor goes bankrupt, they will stop paying the assessments on all of the units, raising the association’s risk of default.” If you do decide to institute a rental restriction, you may want to also limit the number of units owned by a single investor or group of investors.
Renters create extra work for the board and management team in terms of paperwork, approvals, background checks and ensuring that owners submit updated leases every year, so that may be a factor in whether or not your community decides to limit how many people in the building are generating that additional workload.
Beyond limiting investor ownership and the number of rentals, good rental policy finds a way to weave renters into the fabric of your association. If, for instance, your policy goes beyond mandating a restrictive threshold and also requires that renters attend an orientation, then it’s a great way to include them and welcome them to the neighborhood. Many communities see renters as potential buyers...though they may not be in the position to purchase a home at that precise moment, they may be enticed to purchase at a later date if they’re made to feel at home.
“Apathy is a real problem I see,” Rogers said. “Absentee owners and investors simply aren’t going to be as involved in the community and that worsens apathy. They are less likely attend meetings or vote on issues. The state of New Jersey recently passed an amendment to the Planned Real Estate Development Full Disclosure Act (PREDFDA). The amendment, known as the ‘Radburn Bill,’ focuses on how boards are elected, but also allows a provision for rejection balloting. That means that the board can send out ballots on an issue, with appropriate notice, and rather than needing a majority to pass the measure, they can require that 10 percent of the ownership reject it. It’s designed to help communities accomplish business in communities where apathy prohibits measures passing with the standard two-thirds of ownership voting for them. That has already proven to be helpful in communities with high rates of absentee owners.”
While many discussions of rental ratios are born out of conflict, you can turn it to your advantage. Consider discussing the issue of owner to renter ratios with your association and encourage neighborhood engagement. It’s an amazing opportunity to bring people together to create a discussion about the future of your community so that all residents share the same vision for the place they call home.
There is, quite simply, no proven correlation between the ratio of renters and property values, but the perception is there and we all know that perception can often equal reality. If a member of your board or a group within your association is basing their desire for rental restrictions on this assumption, the matter should be well researched and adequate information should be provided so all parties are educated on the topic before moving forward with establishing a policy.
Rogers said that he has, in his years of property management, seen cases where renters don’t care as much about the building or following policy. “They know we cannot bill them for damages or fine them for violations,” he said. “We are required by law to bill the unit owner, who then has to recover that money from the tenant. It can create a lot of conflict and resentment in the community.”
Make no mistake, a rental policy should be upheld within your association...but it should be done fairly, judiciously, and with the intention of welcoming renters as contributing members. Oftentimes, an experienced property management company can help you develop just such a policy.