On June 14th, 2019, New York State Legislature passed the “Housing Stability and Tenant Protection Act (HSTPA) of 2019. In the grand tradition of sweeping government-mandated reforms, no substantial impact has been felt…yet.
It’s going to take another year or two before enough leases expire for investors to see results on the New York City real estate market.
We all know that most property owners are decent folks trying to make a living. Yet, horror stories about slumlords running buildings that look like they belong in a third-world country are not uncommon. Sadly, these stories characterize what many higher-ups think about New York City real estate owners.
It appears as if lawmakers listened to too many tales where tenants see their rents jump beyond what they can afford. While unfortunate, these situations are rare. Yet, they are the cornerstone of the new laws. These laws have significant side effects that have created problems for both tenants and landlords alike.
The Impact of Rent-Stabilization
As of March 31st, 2020, capitalization in New York City residential real estate has dropped by almost 20%. One core reason for this drop is that rent-stabilized buildings inherently lower potential returns on investment (ROI).
Maintaining a building isn’t cheap. Upkeep is more than fixing leaky pipes and making sure the heat stays on.
Cleaning, especially in a pandemic era, is costly. A building must be updated and remodeled. No one wants to live in a place that looks like the setting of a bad 70’s cop show. Investors aren’t going to pour their money into a property without the potential for significant ROI.
Add in urban renewal, and your pool of renters becomes significantly smaller. Gentrification is a dreaded term for potential lessees. They feel it forces neighborhoods to lose character. However, many real estate professionals agree that investing in a community promotes growth, thus there is potential for a large ROI.
Remodeled and restored buildings offer space for new business opportunities. New businesses bring new jobs. While many people dislike neighborhood restorations, investors must note that many people are quick to move into these revitalized neighborhoods. Keep in mind, around 50% of multi-family residential apartments fall under the rent stabilization laws.
So, there are plenty of opportunities to profit from long-term investment in properties in areas undergoing redevelopment.
Side-effects of Rent-Stabilization
The overwhelming majority of economists agree that rent stabilization, often colloquially referred to as rent control, is harmful. They claim:
Rent stabilization adds to the housing crisis–the very problem it’s supposed to fix.
The Before and After
Prior to new rent stabilization laws, to qualify for an apartment renters needed first month’s rent and security deposit upfront in most cases. If your tenants had the funds and could pass the usual credit, income, and background checks, the apartment was theirs. That hasn’t changed.
What has changed are the rules concerning prepayments. Before the new laws, if a potential lessee didn’t qualify but had enough money in the bank, they could prepay the rent. Prepayments gave landlords a sense of security. Under the new law, this is no longer the case. Potential residents can no longer prepay rent. Landlords can only require one-month security and one-month of rent.
Such little financial assurance puts landlords in a troublesome position. Tenants with lower credit scores, tenants with lower than average incomes, or tenants who are in job transitions become risks.
The new laws eliminate potential renter who has been saving money to move into their own apartments.
Why? They can no longer use their savings account as a factor in the approval process.
The result? Landlords refuse these types of tenants.
Thus, it hurts those people trying to get out and on their own.
Other times, the renter has to reach out to an insurance agency. They hire a third party to underwrite them and act as a guarantor. The cost of this type of service is often more expensive than any savings brought on by rent stabilization.
Because payment to a guarantor is necessary upfront, it’s harder for people to absorb the initial cost of securing an apartment. This is the opposite of what lawmakers hoped HSTPA would correct.
When landlords have less opportunity to secure their payment, the extra cost burden falls on the tenant.
Is There a Silver Lining, or is that Tin-Foil?
It’s not all doom and gloom for investors. With every change, there is an opportunity for those who choose to take the risk.
There could potentially be some good real estate deals in the coming months and years. Between the Corona Pandemic and HSTPA, many multi-family rental property owners will seek an exit from the market.
Think of it this way. Imagine buying a brand-new Corvette and planning a long road trip. Now imagine that beautiful open and level blacktop highway suddenly turning into a muddy dirt road with lots of steep hills.
For many investors, this is the kind of change New York City residential real estate went through with the implementation of new rent stabilization laws. They might want to sell that Corvette, and it may let it go for bottom-dollar.
Despite the side-effects of investing in rent-stabilized properties, they can still bring in a modest income.
Maybe one of the biggest problems with HSTPA is that it mixes in more uncertainty into an already chaotic and nerve-wracking year. Riots, COVID-19, an election between candidates who have very different plans for the country’s future. The state of the country has made even the most cavalier investor jumpy.
But ask anyone who invests in real estate, and they will tell you, “Risk reaps reward.”