The Unforeseen Impact of Rental Restrictions on Communities

November 8th, 2023

by Dale Wills, Owner & Founder of Centra Companies

In an ever-evolving real estate market, it’s essential for homeowners and potential buyers to be aware of the factors that can impact their property values. One such factor that often goes unnoticed, but has far-reaching consequences, is the implementation of rental restrictions in communities. At a glance, rental restrictions might seem like a way to maintain the integrity and cohesiveness of a community, but they can inadvertently hurt homeowners in more ways than one.

Loans

One of the most immediate and tangible effects of rental restrictions is the limitation they place on homeowners’ loan options:

3. Limited Loan Options: FHA or VA loan options allow you to purchase a multifamily home with only a 3.5% down payment if you intend to live in one of the units. But, when a community has a rental restriction in place, obtaining government loans, which are often more flexible and offer better interest rates, can become difficult. Such limitations are not just a theoretical concern; they manifest in real, tangible ways. 
4. Risk of Default: Reduced loan options may lead some buyers to opt for riskier financing options, increasing the risk of default, which ultimately affects the entire community.

Future Flexibility

One of the fundamental principles of owning property is the freedom to decide how you use it. Rental restrictions can encroach upon this fundamental right and affect homeowners’ future flexibility in various ways:

1. Changing Life Circumstances: Rental restrictions can limit homeowners’ ability to rent their property when faced with financial challenges, affecting their economic mobility. Life circumstances change. Job opportunities, family needs or unexpected events may require homeowners to move temporarily or permanently. Rental restrictions can restrict these choices and force homeowners into undesirable situations.
2. Financial Losses: Without the ability to rent out their homes, homeowners may be forced to sell at unfavorable times or take significant financial losses. This lack of flexibility can create unnecessary stress and financial burdens, ultimately affecting the overall well-being of homeowners and the vibrancy of the community.

Property Values

While rental restrictions may initially seem like a way to preserve property values, they can have the opposite effect in the long run: 

1. Decline in Home Values: It’s been observed in multiple instances that communities with rental restrictions experience a drop in home values. At Centra Companies, we have seen in many communities that home values drop by as much as 25% compared to neighboring homes as a result of rental restrictions.
2. Limited Buyer Pool: For many, the flexibility to rent out their homes, either immediately or in the future, is a significant factor in their buying decision. Consider today’s climate: we have homeowners with mortgage rates as low as 2.5% and 3%, who might be considering upsizing. For them, the logical step would be to buy a larger home and keep their current property as a rental. However, with rental restrictions in place, this option vanishes, thereby impacting their decision and, by extension, property values.

Vibrancy of the Community

Rental restrictions can also impact the vibrancy of a community, which can have inadvertent effects on property values:

1. Aging Communities: Rental restrictions can lead to aging communities as younger generations may seek more flexible housing options, such as rentals, and avoid neighborhoods with stringent restrictions.
2. Decreased Diversity: A healthy rental market can enhance property values by attracting a diverse group of residents who contribute to the community’s vitality. Rental restrictions can stifle this diversity and deter potential investors who might have otherwise improved properties and contributed positively to the neighborhood.

While the intention behind rental restrictions might stem from a place of preserving community harmony, the negative repercussions on property values and homeowner flexibility cannot be ignored. As the owner and founder of Centra Homes, I believe in empowering homeowners with knowledge and choice. It’s crucial for communities to weigh the pros and cons before implementing such restrictions and to consider the broader implications on the housing market and their residents.