State-wide legislation opens unintended investment options for multi-family property owners.
New York City multi-family property owners got their world rocked this June when New York state lawmakers in Albany passed a suite of sweeping tenant protection laws. While advocates of the new laws argue the new changes will make renting more affordable and stable for the estimated 5.4 million renters in the city, landlord rights groups are highlighting how the legislation may have some unintended consequences.
A National Movement
First, recognize that New York isn’t the first to adopt statewide tenant protection reform laws. Oregon won that honor earlier in 2019 when it adopted legislation setting statewide rent control measures. (Previously, where rent control procedures existed, they were generally regulated at the city or county level, and they obviously varied from state to state). New York was the second state to enact new rental rules. They apply statewide but obviously have the most impact on NYC dwellers, of which 65% rent. California’s newly passed tenant protection laws become effective at the beginning of 2020. Other states, including Illinois are likely to follow.
Broadly speaking, these new regulations are designed to help protect renters, especially in areas where affordable housing is limited, and multi-family property values are appreciating rapidly. These measures generally take two forms:
Greater protection for renters by controlling or stabilizing rates
Greater protection for renters on issues related to eviction
The laws are extensive, and we can provide additional insight if you have questions about how the legislation will impact you as a landlord. We can also recommend experienced and trusted attorneys to help advise you on protection your owner rights.
The Owner’s Dilemma
Since the new laws went into effect, I have been receiving many calls from multi-family property owners and investors who are nervous about the potential impacts on their investment property. They are concerned about how rent control restrictions will affect their income and ability to make necessary property improvements, but they’re mostly concerned about how their property values and appreciation will be impacted. Both are legitimate concerns, and these are issues property owners are already dealing with in Oregon and California.
Many owners are expressing their reluctance to hold onto their investment properties and would considering selling if they could receive a good offer. They recognize, however that selling a property and using a 1031 exchange to find a replacement property probably doesn’t make much sense if the new property is in NYC and burdened by the same new laws.
The Owner’s New Opportunity
An unintended consequence of these rent reform laws is that many investors may choose to sell their investment properties and look for reinvestment opportunities in states that are more owner friendly. We already see this happening and we anticipate this trend will only increase as investors and owners look for greener pastures.
Fortunately, if suitable, there is an investment vehicle that accommodates these investors’ desires and it provides several other compelling potential benefits. For accredited investors, the DST (Delaware Statutory Trust) is a 100% passive real estate investment permitted within the guidelines of a 1031 exchange. It permits investment property owners to sell an asset using a 1031 exchange and reinvest into a diversified portfolio of institutional quality properties including multifamily or any other type of asset class.
Importantly, many of these properties are in markets that don’t have restrictive rent control laws and where the potential for property appreciation and higher cap rates is much greater. Often the DST will include multiple properties which affords owners a greater degree of investment diversification, and being a passive investment, the DST eliminates the daily headaches of property management for investors and owners.
Contact us if you are one of the millions of NYC multi-family owners and investors impacted by New York’s new rent reform laws. We are available to help address any questions you have, and we can introduce you to several DST investments that may be of important and timely interest to you.