Question: Will new FHA owner occupancy ratios change the way condo associations view rental caps?

Owner Occupancy Ratio Requirement Likely to Decrease from 50% to 35%

Last month I wrote about rental caps in condo buildings, noting that oftentimes condo boards decide to implement a rental cap in order to meet the FHA loan requirement that the percentage of owners living in the building vs renting their unit must be 51% or more.

This month we got news that this burdensome ratio is likely to be reduced to 35%, making affordable condo ownership more accessible for buyers and giving owners more control over their investments. In a 427-0 vote, the House passed the Housing Opportunity Through Modernization Act to reduce FHA restrictions, which includes a clause to reduce the owner occupancy ratio from 51% to 35%. Although the bill still has to pass the Senate and be signed by the President, the landslide vote bodes well for this change.

Condo Boards Should Reconsider How They Determine Rental Cap Rates

Most people agree that quality of life and building conditions deteriorate as the percentage of renters increase and many condo boards will choose to maintain current cap rates for this reason. However, cap rates are often set around 45-50%, using FHA requirements as a guideline.

If the bill passes and 35% becomes the new FHA requirement, condo boards should reconsider the reasons behind their rental cap rates. Without data available that shows when rental caps have a positive effect, it’s guesswork. What if the biggest dip in quality of life/building condition occurs when 30% of the building is rented and there’s not much change after that? In that case, Boards using a standard 45-50% cap rate are restricting owners without the well-intentioned benefits. What if the decrease in quality of life/building condition is linear? In that case, one could make the same argument for a 1% rental cap as a 70% rental cap.

My point isn’t that rental caps are a bad idea (in theory) or that Boards are complicit in implementing them, but that the FHA owner occupancy ratio is really the only empirical reference point being used. If the bill does pass and the ratio decreases to 35%, Boards should strongly consider adjusting their caps accordingly.

On a related note, if your condo is not approved for FHA loans (check here), many property management companies charge $500 to $1,000 to file and process an application, but some local lenders offer it as a free service. I know that Jake Ryon of First Home Mortgage (jryon@gofirsthome.com) offers it. There’s little required by the Board and it can be completed in just a couple of months.

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