Several states enacted legislation over the past 50+ years to stabilize rents in the multifamily investment space. These rent stabilized apartments typically rent for significantly less than market rates and require owners to follow a set of guidelines around raising rents and apartment maintenance.
Rent Stabilization Regulations
Before investing in a rent stabilized or rent controlled building, an investor should do specific research around how much rent can be charged and when and how units can be de-stabilized or de-controlled. Most municipalities provide guidelines online as a reference. Investors should also consider consulting an attorney to ensure that the previous owner followed the appropriate procedures around rents. Similarly, investors should ensure that their leases comply with the state and city guidelines.
Rent Stabilized Investment Strategy
Investors should consider two strategies when investing in rent stabilized apartment buildings. First, consider the basic cash flow strategy. Simply holding the properties guarantees an investor a set amount of cash flow every month. Additionally, the set rent increases allow for an investor to benefit despite changes in the market rate rent. Even when the market rate declines, rent stabilized apartments’ low rent base typically allows those investors to increase rents.
The secondary strategy in rent stabilized investments is the conversion to a market rate rental. In many states, once an apartment reaches a certain rent level, it can move to a market rent. Additionally, if an investor improves the apartment, they can raise the rent by some percentage of the improvement dollars spent. The combination of these two guidelines can help an investor move their units to market.
Rent Stabilized Investment Considerations
Again, it is very important to consult an attorney that specializes in rent stabilized apartments before committing significant dollars to this strategy. Additionally, tenants often turn very slowly in rent stabilized buildings, sometimes even subletting apartments for a higher amount than they pay. Furthermore, tenants know their rights and will be much harder to evict in rent stabilized apartments than in other types.
When investing in rent stabilized apartments, investors must be patient and methodical. When tenants are late with rent or other payments, start the eviction process. The process can always be stopped if the tenant becomes current, but should they continue to get behind, investors can save themselves two or three months of the process. Do not forget to document everything. The better the landlords’ case when it comes to missed payments, disruptions and illegal activity, the more likely they will win the eviction proceeding.
Remember, regardless of the investment strategy, tenants should be treated with respect and dignity. Tenants will treat their building the way their landlord treats them. If landlords listen to and respect their tenants, they will do the same with the building they live in.
Michael Cook - Michael Cook is currently a Real Estate Investment Banker for Wachovia. He and his partnerstarted their own real estate investment ...
