How Rentals Affect a Condo's Value

How Rentals Affect a Condo's Value
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In this era of shrinking job security, real estate is shifting from a market of buyers to a market of renters, especially in major cities. Owners or potential buyers of condominiums are increasingly interested in the option to rent out their unit. However, too many rentals can have an adverse affect on property values within a condominium development, which is leading to rental restrictions in some communities.

Federal Mortgage Requirements

The most tangible way in which an over-saturation of rentals can affect property values in a condominium development is the FHA's regulations for mortgages on condos. The Federal Housing Administration requires that a condo building be at least 50 percent owner-occupied in order to qualify for their mortgages. If units don't sell because buyers can't get the mortgages they need, property values fall. While some condo boards may not want to be accountable for a potential buyer's ability to secure a mortgage, they are ultimately responsible for maintaining the value of the entire community -- which means keeping vacancy rates as low as possible.

Quality of Life

Beyond the quantitative factor of federal mortgage restrictions, there is also a qualitative aspect to rentals within a condominium community. The perception that owners take better care of their units than renters is common. Moreover, many condo boards and owners fear that investor-owners will be so disconnected from their tenants that disruptions or nuisances will go unchecked. These negative aspects of allowing transient residents can devalue an entire condo community.

Rental Caps

Condo boards are responding to the rising demand for rentals by restricting the number of units that can be rented out. Many condo boards are upholding the FHA's limit of 50 percent to ensure that buyers can secure federal mortgages, and some are choosing caps well below that to protect the owners's idea of quality of life as well. In addition to capping the number of units rented at any given time, some condo associations are also requiring that new owners occupy the unit for a minimum amount of time.

A Catch-22?

While these rules do have the intention of protecting the overall property value in condo communities, boards that are too strict can also have the adverse affect of increasing foreclosures and sales in the building. Without the option to rent, owners who can no longer pay their mortgages will be forced into foreclosure, and owners who must relocate for their jobs -- even temporarily -- will have to either sell their units or lose money on them in their absence.