Condo Rental Caps: Economics and Equity

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paul
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Condo Rental Caps: Economics and Equity

Postby paul » February 20th, 2018, 10:55 am

Hello, This is my first StreetsMN post.

I’m on the board of a large downtown condo that is considering a rental cap. (A rule that limits the percentage of units that may be rented) This seems like a bad idea. It is anti-renter and I think it will hurt property value. What do people think? Has anyone seen economic research on rental caps?

BBMplsMN
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Re: Condo Rental Caps: Economics and Equity

Postby BBMplsMN » February 20th, 2018, 11:27 am

I don't have any data, but I would think this is the norm rather than an exception to the rule. My condo has a rental cap. I haven't given it much consideration.

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Re: Condo Rental Caps: Economics and Equity

Postby paul » February 20th, 2018, 11:34 am

I don't have any data either, but I frequently look at large condo buildings in Hennepin County as investment properties. Usually, the MLS listings don't have property caps but the ones that do have rental restrictions seem to have lower prices. But, I don't have data just some casual observations, and even if the prices are lower, it would be hard to show causation from rental cap to lower valuation.

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FISHMANPET
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Re: Condo Rental Caps: Economics and Equity

Postby FISHMANPET » February 20th, 2018, 11:47 am

There are some issues with FHA loans when a building is above a certain percent renter, which could explain part of the drop in price. They're harder to get financing for.

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Re: Condo Rental Caps: Economics and Equity

Postby paul » February 20th, 2018, 11:58 am

The criminal-background check requirement that condos impose on potential tenants disqualifies this (and probably most similar) condos from FHA loans. In this economy, Associations are happy to forgo FHA approval. Check out the downtown condos on the FHA site. https://entp.hud.gov/idapp/html/condlook.cfm every single condo in 55401 zipcode has the status: withdrawn, rejected or expired.

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Re: Condo Rental Caps: Economics and Equity

Postby MNdible » February 20th, 2018, 1:56 pm

I'll echo what's been noted above -- when we were looking at condos, the ones that didn't allow rentals seemed notably less expensive. It's sort of a "last one in raise the drawbridge" mentality, and it can potentially cause real hardship for existing owners who, for unforseen reasons, need to start renting their units.

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Re: Condo Rental Caps: Economics and Equity

Postby amiller92 » February 20th, 2018, 2:00 pm

Just to note for a counterpoint: neither of the Loring Green associations allow rentals.

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Re: Condo Rental Caps: Economics and Equity

Postby grrdanko » February 20th, 2018, 8:18 pm

paul wrote:
February 20th, 2018, 10:55 am
Hello, This is my first StreetsMN post.

I’m on the board of a large downtown condo that is considering a rental cap. (A rule that limits the percentage of units that may be rented) This seems like a bad idea. It is anti-renter and I think it will hurt property value. What do people think? Has anyone seen economic research on rental caps?
As a board member you have an obligation to work in the best interest of the owners. Something to consider is the value of the property is more than just resale value. For me personally it's more important to have the ability to cash flow my unit if I need to.

I think a good compromise is to have clear rules for renting that are consistently enforced to protect the rest of the owners' property values. I also think it's important to have a strong enough enforcement mechanism in place to make sure the owners comply.

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Re: Condo Rental Caps: Economics and Equity

Postby MNdible » February 21st, 2018, 12:07 pm

Nailed it.

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Re: Condo Rental Caps: Economics and Equity

Postby QuietBlue » February 21st, 2018, 3:39 pm

FISHMANPET wrote:
February 20th, 2018, 11:47 am
There are some issues with FHA loans when a building is above a certain percent renter, which could explain part of the drop in price. They're harder to get financing for.
Yep, it's currently a 50% limit, or 65% if certain conditions are met (basically, the association finances have to be in excellent standing).

Whether it's worth it to go through FHA certification depends on the property and who's likely to be buying the condos.

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Re: Condo Rental Caps: Economics and Equity

Postby QuietBlue » February 21st, 2018, 4:21 pm

paul wrote:
February 20th, 2018, 10:55 am
I’m on the board of a large downtown condo that is considering a rental cap. (A rule that limits the percentage of units that may be rented) This seems like a bad idea. It is anti-renter and I think it will hurt property value. What do people think? Has anyone seen economic research on rental caps?
I live in a suburban condo HOA that has been dealing with the same question over the past few years. Since our association has had a lot of FHA mortgage buyers (including myself), I'm in favor of a cap that protects our FHA eligibility, but I don't see a need to go beyond that. A significant number of the other homeowners do, though.

Personally, I have no interest in being a landlord, but I'm also not going to live in my condo forever, and maybe whoever buys it from me will want to rent it out. The way I see it, a cap that is too strict will decrease the pool of potential buyers when it comes time for me to sell. I think this is what a lot of people who support strong rental caps don't realize. However, I also know that in my association, the people who most want the cap are the "lifers" who probably aren't going to buy another home, and may not be able to afford to in this market anyway. It seems to be younger owners who are more opposed to the cap, though there are a few older ones too.

I don't know what, if any, research is out there on this subject, or how viable research on this would even be due to the need to control for so many other variables that could affect selling prices. It would probably have to be limited to a very specific market.

paul
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Re: Condo Rental Caps: Economics and Equity

Postby paul » February 22nd, 2018, 10:13 am

I got some data:


No Rental Caps
Saint Anthony NE, Centre Village, Crossings, Grant Park, Itasca Loft, River Station, River Towers, Riverview Tower, Rock Island Loft, Sexton Lofts,Stonebridge Lofts, Winslow house,

20% Cap
918 Lofts, Calhoun Place, Groveland Terrace, IMS Lofts, Loop Calhoon, Loring Way, Gallery Tower (21.5%)

15% Cap
The Groveland, Westin Galleria, Calleria Residences,

10% Cap
1225 LaSalle, Ivy, 1200 On the Mall (12.5%)

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Re: Condo Rental Caps: Economics and Equity

Postby seanb » February 26th, 2018, 8:46 am

I'm fairly certain Itasca had a rental cap (and waiting list) a few years ago when I looked at a unit in the building; the cap was a deterrent for me - don't want to be forced to sell my condo if work or life takes me out of the area for a couple years. I ended up at American Trio in Downtown East, which has no cap. The topic came up at an association meeting a while back (in the context of FHA reverse mortgages), but there was little support.

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Re: Condo Rental Caps: Economics and Equity

Postby QuietBlue » February 26th, 2018, 9:14 am

I would think some of the condos downtown would exceed the FHA loan ceiling for Hennepin County anyway, making it a moot point for them.

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Re: Condo Rental Caps: Economics and Equity

Postby Didier » February 26th, 2018, 1:20 pm

My condo has a rental cap at 50 percent. In addition to the FHA stuff, I think people generally prefer owner-occupied units instead of buying into a building that's mostly an investment property for others. Even though absentee owners technically still have a vested interest in the property, the dynamics are different and, speaking for myself, I probably wouldn't buy into a condo as a place to live if the majority of units there were being rented out.

(ducks for cover)

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Re: Condo Rental Caps: Economics and Equity

Postby aeisenberg » February 26th, 2018, 3:15 pm

paul wrote:
February 20th, 2018, 10:55 am
Hello, This is my first StreetsMN post.

I’m on the board of a large downtown condo that is considering a rental cap. (A rule that limits the percentage of units that may be rented) This seems like a bad idea. It is anti-renter and I think it will hurt property value. What do people think? Has anyone seen economic research on rental caps?
Rental caps are dumb-- unfair to the owners who can't rent, unfair to potential renters, buyers, etc. Personally (and professionally) I think buildings should go one way or another-- either allow rentals or don't. OR create a formula that levels the playing field for all owners, instead of allowing some to profit indefinitely while others are forced to sell or buy somewhere else.
Aaron Eisenberg / Realtor, Keller Williams Integrity
612.568.5828 / aaron@agentaaron.com / 1350 Lagoon Ave #900
http://www.agentaaron.com

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Re: Condo Rental Caps: Economics and Equity

Postby sdho » February 27th, 2018, 12:08 am

My boyfriend's association (small, cheap building in Stevens Square) has no rental cap, but does require units renting out to pay another $100/mo in HOA fees. (Since the base HOA fee is only $175, that's a pretty substantial increase.)

I sort of think this is a decent solution. On the one hand, a tenant could be better than an owner for the building, and there is no real "burden" being placed on the building by a good tenant. On the other hand, there are some disadvantages like those noted above, and forcing them to pay a slightly disproportionate share makes up for the disadvantages other owners are dealing with. Plus, it can be enough to discourage buying up units solely for investment/LL purposes.

When I was looking to buy, myself, I briefly considered a couple condo buildings and was told flatly by my realtor to not even bother looking at FHA loans, because my options would be much too narrow for a condo search.

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Re: Condo Rental Caps: Economics and Equity

Postby QuietBlue » February 27th, 2018, 8:26 am

sdho wrote:
February 27th, 2018, 12:08 am
When I was looking to buy, myself, I briefly considered a couple condo buildings and was told flatly by my realtor to not even bother looking at FHA loans, because my options would be much too narrow for a condo search.
That must be a city thing, because there are a fair number of them in the suburbs, or at least Dakota County.

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Re: Condo Rental Caps: Economics and Equity

Postby QuietBlue » February 27th, 2018, 8:37 am

Didier wrote:
February 26th, 2018, 1:20 pm
My condo has a rental cap at 50 percent. In addition to the FHA stuff, I think people generally prefer owner-occupied units instead of buying into a building that's mostly an investment property for others. Even though absentee owners technically still have a vested interest in the property, the dynamics are different and, speaking for myself, I probably wouldn't buy into a condo as a place to live if the majority of units there were being rented out.

(ducks for cover)
IME, it's definitely harder to get non-resident owners involved in things, to attend meetings, etc. None of them showed up for anything in ours until the rental cap was proposed. Plus, if there's an issue with something a tenant is doing, there's an additional layer of communication to go through.

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Re: Condo Rental Caps: Economics and Equity

Postby go4guy » March 15th, 2018, 7:34 pm

I think one big reason is lending. FHA isn't the only one that limits amount of rental units. FNMA also requires at least 51% owner occupied units in a project for the project to get CPM approval, which is a standard approval for FNMA. Since almost all loans are completed to FNMA guidelines, this is very hard to get around. Nobody wants to limit their buyer pool because they cannot get financing in that particular project.

On another point, someone wanting to live in a condo would want as many owner occupied units for the very obvious reasons and would prefer a rental cap. Where as someone owning investment properties would likely prefer a lack of rental caps.


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