Rental Restrictions: How Should My Community Association Limit Rentals?
All too often, the solution usually arises in the form of what is mostly an arbitrary percentage. Yet this simplistic approach ignores the complexities of individual communities and the specific character of your particular residents.
Why should you consider restricting the number of rentals in your community? The primary reason has to do with financing. Federal lending programs, including those through Fannie Mae, Freddie Mac and the Federal Housing Administration, limit rentals to 50 percent of the community. If a majority of the owners in your community are paying cash for homes or not taking advantage of these programs, then you may not need or wish to impose a cap at all.
Andrew Sytnik is a FirstService Residential community association manager in Philadelphia. The over 600-unit townhome complex he manages enacted its first rental policy in the fall of 2017. “We didn’t have any kind of problem or issue with renters,” Sytnik said. “We wanted to abide by the federal lending guidelines, and the Pennsylvania Condominium Act gave us the opportunity to enact a policy that did so without needing a full association vote.”
Sytnik said that the Pennsylvania Condominium Act provides associations the ability to enact policy so that it aligns with federal law. Because the policy that the association implemented is the same as the federal lending guidelines, the policy could be created as technical corrective amendment. If the association had wanted to cap the rentals at a lower percentage, they would have needed 67 percent of the owners to agree to it. Because it’s a technical corrective amendment, the policy is “living.” “If the federal government decides in two years that the cap on renters for their lending programs should be 60 percent, then our policy must adjust accordingly,” Sytnik explained.
How does this association manage unit rentals? The units are rented by individual owners, of course, and those owners must get a permit to do so. Those permits must be signed by both the owner and a member of the board or community management. The permit is valid until the owner sells to a third party, and once a permit is granted, the unit must have a tenant within 90 days, or the permit may be revoked, at the discretion of management. “We don’t want people hanging on to permits for five years without actually renting, but if it takes 95 days, I’m not going to revoke it,” Sytnik said.
The majority of owners who are renting bought units when they were young married couples or single, and outgrew them as their families grew, according to Sytnik. Rather than give up the property when they moved to bigger homes, those owners chose to hold onto their lucrative investment and rent it out. “We are fortunate that we are always at 100 percent occupancy and have a waiting list for permits to rent units,” Sytnik said. “Our phones ring non stop with people looking for rentals.”
Sytnik explained that a rental cap actually helps those owners maximize the return on their investments. “Demand is very high and rents are going up in response,” he said. “Capping the number of rentals available in the community is causing rental rates to go up and those owners are making more off their properties.”
Back to that waiting list: Owners who want to get on the list must put down a small deposit to be considered for a permit. It’s critical that the list and records of deposits be maintained meticulously to avoid conflict and contention among homeowners as to who was in what position on the list and when.
An appropriate 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.
It’s important to keep in mind that there is, quite simply, no proven correlation between the ratio of renters and property values. 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.
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.