Developers sometimes decide to rent units in a condo building instead of selling them, usually due to adverse market conditions.
The developer may be waiting out a period of low demand during a downturn, anticipating selling at higher prices later. They may also need the rent money to cover carrying costs, and renters materialize faster than buyers.
But condos going rental can affect owners, so it is important to understand this possibility before making the investment in a condo.
Which condos can go rental?
A building’s offering plan will stipulate whether the condo can go rental.
A condo offering plan is a disclosure document that lays out the terms under which a sponsor can sell you a condo. If you are buying new construction or a building that is being converted into a condo development, an offering plan explains exactly what you are buying and how it will be run.
What are the risks of condos going rental?
A condo going rental could lead to the building having few actual owners. That could cast doubt on the viability of the project and complicate financing for future buyers. That would in turn make reselling difficult. It could also compromise home values.
In addition, the rentals could mean that owners need to pay higher common charges to finance building upkeep. It depends on whether rentals actually cover all the expenses a unit owner would have covered.
Finally, as an owner, you typically want other owners as neighbors because they have invested in the long-term quality of the building and community. Renters have less financial incentive to preserve the quality of life in the building.
What can buyers do to protect themselves?
First and foremost, hire a savvy real estate attorney to look over an offering plan before buying a condo. They know what to look out for.
In addition, verify how many units a condo has already sold. The more units sold, the less likely on average a condo is to go rental. Marketproof New Development, a NYC real estate data platform, tells you what percentage of a building’s units the developer has sold.
Our explainer on the life cycle of a new development explains the conditions buyers face depending on how many units a building has sold.
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Photo above courtesy of Maverick.