Condominium owners are a very specific breed: willing, if not eager, to give up the privacy of a single-family house in exchange for handing over the burdens of maintenance, lawn-mowing and pool-cleaning to someone else.
However, condo owners often cling to one of the same protections against downside risk that house owners do: “I can always rent the property out.” Scared you’re paying too much money for your unit? That’s ok — you can always rent the property out. Scared your job might be relocated? Well, the condo, is, after all, rentable.
Or is it?
(PHOTOS: When Billionaires Move)
Last month, a somewhat under-the-radar new mortgage directive clarified and updated guidelines for condo buildings in order for them to be approved by the Federal Housing Administration. While your building doesn’t have to follow these guidelines, the FHA is such a gorilla in the current mortgage market — backing one out of every three home loans, according to real estate experts DataQuick — that conformation with the standards is likely.
So let’s take a quick look at the newest directive (formally, Mortgagee Letter 2011-22) and see what they mean for your ability to just “rent the property out.”
- Minimum lease terms are supported. Renting out your unit for just a few days is a practice that is easier than ever, thanks to short-term-stay Internet sites like vrbo.com and airbnb.com. Typically, condo associations dislike the practice and put some sort of minimum lease term into their bylaws so that owners don’t run their units as hotels. In the boom, many buildings with such rules on the books looked the other way rather than stop such innkeeping; now, the FHA regs (and the tighter lending market) are likely to cause them to crack down.
- The building can limit the number of units that are rented at any given time. Current FHA guidelines are for buildings to be at least 50% owner-occupied; the individual condo can, if it wants, put in place even tighter restrictions. If you’re buying a condo in a vacation spot, and the real estate agent talks about how “easy” it is to rent units, be slightly wary. Check the condo bylaws to see how many units can be rented at one time. Strong rental demand will mean nothing to you if you can’t get your lease approved because half the owners already rented it out ahead of you.
- The building can request specific information about your lease. A building might typically ask for a copy of the lease in writing. The new guidelines allow a building to ask for other information (say a list of all persons permitted to occupy the property under the lease) as well. In my experience, this is a sensible process; the only problem with it is that, like all paperwork, it can take a little while. If you’re thinking of becoming a landlord, be prepared for your building to take from two to six weeks before it hands you its stamp of approval.
I’m not trying to come across as anti-investment-condo — I own one, and it’s an essential part of my retirement plan — but I do think it’s worth taking a moment, when you buy, to think through what it would be like to rent it out. In other words, landlord emptor.