by BarryCondo Association CCRs and Leasing Restrictions: What Real Estate Investors Need to Know
When considering the purchase of a condo as a long-term investment, one of the most important factors you need to understand is the condo association’s declaration of covenants, conditions, and restrictions (CCRs). These are the rules that govern how you can use your condo, and they can have a significant impact on your investment strategy—especially if you plan to lease the unit. Leasing restrictions outlined in the CCRs can determine whether or not you’ll be able to rent out your condo, and they can even affect the condo’s eligibility for Fannie Mae loans.
In this post, we’ll break down what CCRs are, how leasing restrictions work, and what real estate investors should be aware of to avoid buying a condo they can’t lease.
What Are CCRs?
Covenants, conditions, and restrictions (CCRs) are the rules established by the condo association that govern what owners can and cannot do with their property. When you purchase a condo, you automatically become part of the condo association, which means you agree to abide by the CCRs. These rules are designed to maintain the appearance, value, and quality of life within the community, and they can cover a wide range of topics, such as:
- Rules for common areas (pools, parking lots, gyms, etc.)
- Exterior changes or renovations to individual units
- Pet policies
- Noise restrictions
- Leasing restrictions
While some CCRs may seem straightforward, others—like leasing restrictions—can have a serious impact on your ability to use your condo as a rental property.
Understanding Leasing Restrictions
Leasing restrictions in condo CCRs are rules that limit the ability of owners to rent out their units. These rules are becoming more common as condo associations aim to maintain a balance between owner-occupied and rental units within the community. The idea is that a higher proportion of owner-occupied units tends to enhance the stability and overall quality of life in the condo development.
Here are some common leasing restrictions you might encounter:
Waiting Periods: There may be rules that require new owners to wait a certain period—such as one or two years—before they are allowed to lease their units.
Minimum Leasing Periods: Some condo associations require that units be leased for a minimum period, such as six months or a year. This prevents owners from renting their units on a short-term basis, such as through Airbnb or similar platforms.
Rental Caps: A rental cap limits the percentage of units in the building that can be leased at any given time. For example, the condo association may restrict leasing to no more than 25% of the total units. Once that cap is reached, owners who want to lease their unit will have to wait until other units come off the rental market.
Lease Approval Requirements: Some associations require that leases be submitted for approval by the board before tenants can move in. This adds an extra step to the process and can delay finding renters.
Fannie Mae Loan Eligibility and Leasing Restrictions
If you plan to finance your condo purchase with a loan backed by Fannie Mae, it’s important to understand how leasing restrictions can affect the condo’s loan eligibility. Fannie Mae has specific requirements for condo projects that are eligible for its loans, particularly when it comes to the percentage of owner-occupied units versus rented units.
For a condo project to qualify for Fannie Mae financing, typically at least 51% of the units must be owner-occupied. If leasing restrictions cause the number of rental units to increase beyond that limit, Fannie Mae may refuse to back loans for units in the building. This can limit your ability to get a mortgage and can also affect the resale value of the condo in the future.
Pitfalls to Avoid for Real Estate Investors
For real estate investors, purchasing a condo that you intend to lease without thoroughly understanding the CCRs and leasing restrictions can lead to significant issues. Here’s what you should do to avoid pitfalls:
Consult with an Attorney: Working with a real estate attorney, like those at Edwards Law, can help ensure you fully understand the implications of the CCRs and protect your investment.
Read the CCRs Carefully: Before making an offer on a condo, make sure to request a copy of the association’s CCRs and review them thoroughly. Pay special attention to any sections on leasing restrictions.
Ask About the Current Rental Cap: If the condo association has a rental cap in place, find out what percentage of units are currently being rented. If the cap has been reached, you may not be able to lease your unit immediately after purchase.
Check the Fannie Mae Eligibility: Ensure that the condo development meets Fannie Mae’s owner-occupancy requirements if you plan to finance your purchase with a loan backed by Fannie Mae.
Investing in a condo can be a smart long-term strategy, but it’s essential to know the rules set by the condo association before you buy. Leasing restrictions in the CCRs can significantly impact your ability to rent the unit and even affect your financing options. At Edwards Law, we’re here to help real estate investors navigate the complexities of condo purchases and ensure your investment is protected. Contact us today for a consultation and let us guide you through the process.