RENTAL RESTRICTIONS (Rental Caps) and Financing

It is truly a sign of the times. A great deal of condo boards in buildings across Chicago are arguing whether or not to impose rental restrictions, known as “Rental Caps,” in condo buildings across the city. Such restrictions would limit the amount of rentals in a building. Some believe that a lower percentage of renters mean financing is easier to obtain for both buyers and current owners seeking to refinance; thus helping sustain values of the units in a building.

Recently mortgage lending has eased and the following is now true:

There are now no limits on the amount of rental occupied units in a condo building for Conventional, Owner Occupied mortgages.

If we are discussing investor mortgages (a mortgage taken out by someone who never plans to occupy the property and only rent it) these limits are 49% Rental Occupancy, meaning that 51% must be owner occupied

Non-Conforming Owner Occupied Loans (Typically talking about Jumbo Mortgages here, $417,000 +) the percentage will vary from lender to lender but will typically bounce around 30% give or take. Typically lenders that are more relaxed on rental restrictions will charge a slightly higher interest rate for the sole purpose of supply and demand (there are less lenders with the relaxed restrictions thus they can charge a higher rate and such investors holding this paper demand a higher rate).

The question is, with the above information should buildings institute rental restrictions? I’ve written about this before so there is no need to start mentioning all the fine points again. However, I will say that the laws of economics are clear. You cannot force the market and you cannot change it. If the market has said that X amount of units in a building need to be rented then the passing of rental restrictions  WILL decrease the value of the units in the building if a significant number of units that were previously rented can no longer rent.


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