As an investor, when you find yourself dealing with the term “rent stabilization”, it can bring about a mixture of curiosity and concern. While learning how to obtain rent-stabilized status is more than just legal trivia, it is critical to forecast your financials accurately.
The building must be of an age, size, and comply with local laws in order to determine if the unit will be subjected to rent stabilization. This determination has a direct impact on the income ceiling that you have available to you, as well as any exit strategy that is available to you.
What is Rent Stabilization?
Rent control (or rent stabilization) is a legal mechanism that limits the amount that may be increased annually in individual apartments, but allows annual increases based upon a reasonable level of return.
Although this does not completely freeze rents, it provides a balance between affordable housing options for tenants and your ability to make incremental profits, resulting in good numbers in your cash flow statement as a landlord. Most local housing agencies establish a maximum allowable annual percent increase based on the previous year’s inflation rate.
You can look at rent stabilization as a way to prevent rapid rent spikes that could displace long-time renters from their homes or units, while still providing some predictability regarding future rental income for landlords.
Difference between Rent Control and Market-Rate Housing
The three types of housing, rent-controlled, rent-stabilized, and market rate, have different sets of rules. Getting the wrong kind could ruin your investment plans.
Rent Control
Rent control is much more aggressive in limiting price increases than rent stabilization. It typically ties all future rents to a certain time period (i.e., a base year) and limits the amount by which rents can increase annually.
Furthermore, a unit becomes a rent-stabilized apartment if it was built before a certain year and belongs to a property with a specific number of units. In many states, rent control has been replaced by rent stabilization as the primary means of regulating landlord-tenant relationships. However, some legacy areas still retain rent control.
Rent Stabilization
There is no time limit on the rental agreement, as long as the property is stabilized. However, owners are allowed to raise the rent annually using formulas typically based on the local board’s approved inflation factor.
The law requires leases to be renewed on the same terms as before, so as not to give you unreasonable ability to terminate a tenancy and provide you with a stable and ongoing source of income over the years.
Market-Rate Housing
You are free to charge whatever market-rate rent you want, as there are no limitations on the amount you can charge per year. That said, local governments may pass “rent gouging” legislation that places certain restrictions on your pricing. This classification offers the greatest potential for profit, but leaves you open to dealing with upset tenants and/or vacancy issues if you overcharge your rent.
Role of Property Management in Maintaining Compliance
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Many real estate investors are often unable to comply with all the requirements for their properties. Working with a good property management company will ensure that no registration deadlines are missed, no incorrect rent increases are applied, and no inadvertent violations of local regulations occur.
Here’s how they protect your investment.
Correctly Classify Every Unit
Incorrectly labeling a rental unit as “market rate” when it has been “stabilized” may lead to penalties imposed by government authorities, lawsuits brought against you by tenants, and/or potentially being forced to lower rents.
A local rental manager in Washington, D.C. can help landlords determine if their multi-family property is exempt based on the date of its certificate of occupancy. This thereby ensures that each unit in your investment portfolio is properly classified from the time it is first rented.
Draft Compliant Lease Agreements
Stabilization laws require specific riders, renewal lease periods, and a written, reasonable current legal rent explanation. Generic Leases do not fulfill these requirements. A property manager creates documents meeting all Housing Agency Requirements for you, preventing technical infractions, which are frequently used by tenants to withhold rent or contest future rental increases.
Calculate and Apply Annual Increases Accurately
Annual rent increases are governed by each jurisdiction’s maximum allowable percentage above an inflationary index. The application of an incorrect percentage, even 1%, may be considered overcharging. Your property manager is responsible for tracking the RGB annual orders, applying the appropriate mathematical formula, and providing the required Notice to Tenant. This should preserve your ability to apply future compounding increases while avoiding potential liability.
Manage Rent Registrations and Filings
In most stabilization programs, there is a requirement to file an annual rent registration with either a state or city agency. Failure to submit registration prior to the deadline will result in the freezing of your rents. In this case, a property manager develops and maintains a compliance calendar, ensures timely filing of all necessary paperwork, and retains documentation as evidence of filings.
Educate Tenants and Resolve Disputes Early
Your property manager educates your tenants on the stabilization regulations and answers their questions about what they can and cannot charge. Educating them before confusion arises reduces formal complaints.
If a dispute arises, your property manager has documented every action taken to comply with agency regulations, thereby proving full compliance when reviewed by agency auditors, and resolving issues before penalties accumulate.
Conclusion
Classifying your units correctly provides the backbone for compliant and profitable property ownership. The distinctions among rent-stabilized, rent-controlled properties, as well as market rate properties, allow for forecasting income and avoiding monetary fines.
A capable property management company can track changes in local ordinances, register your property with the appropriate agencies, draft bulletproof lease agreements, and monitor compliance. As an investor, when you have compliance on your side, you protect your asset value while developing consistent revenue.
