Rent Regulated Apartments: The Alternative to Home Ownership

 In Spending

R ent controlled apartments and rent stabilized apartments are never mentioned in any of the buy v. rent calculators or any of the articles extolling the virtues of home ownership. I find this practice questionable because especially in a city like NYC with a notoriously competitive housing market, rent regulated apartments give renters a viable alternative to home ownership. The truth of the matter is that we’re all paying for housing whether it’s via a mortgage or through rent. In cities like NYC, the cost of buying may not make sense or you have to settle for housing that isn’t great, so finding rent controlled apartments means a better quality of life AND the chance to achieve financial independence by having more investable liquid assets. Plus, not being locked in to a property and the knowledge that rent increases are controlled means you have the best of both worlds in terms of flexibility and future planning options. Here’s our experience living in rent-stabilized apartments in NYC.

Rent Controlled Apartments v. Rent Stabilized Apartments

N YC has two types of rent controlled apartments: those subject to rent control and those subject to rent stabilization. Rent controlled apartments are much more favorable with below market rent being charged, but it is easier to luck into a rent stabilized unit than it is to find and qualify for a rent controlled one. The NYC Rent Guidelines Board defines these terms as:

  • The rent control program generally applies to residential buildings constructed before February 1947 in municipalities that have not declared an end to the postwar rental housing emergency (there are 51 such municipalities in New York State). Rent control covers about 27,000 apartments occupied generally by an older, lower income population who have been in occupancy since July 1, 1971, or by their lawful successors. Apartments under rent control become decontrolled upon vacancy. The long-term trend is towards zero rent-controlled apartments, but no one knows when that will exactly occur.
  • Rent stabilized apartments are generally those apartments in buildings of six or more units built between February 1, 1947 and January 1, 1974. Tenants in buildings of six or more units built before February 1, 1947 and who moved in after June 30, 1971 are also covered by rent stabilization. A third category of rent stabilized apartments covers buildings with three or more apartments constructed or extensively renovated since 1974 with special tax benefits (see 421-a and J-51 program information below). Generally, these buildings are stabilized only while the tax benefits continue.

I n 2011, I moved into a rent stabilized apartment and we will be moving to a larger rent stabilized apartment this month. What’s funny is that these rent stabilized units are both in brand new buildings, something I did not realize could occur. Until I lived in one, I always assumed that rent controlled or rent stabilized apartments were old and dingy, but I was wrong. Rent stabilized units start out at market rate prices but annual rent increases are controlled each year thereafter.

O ther cities may make a similar distinction between rent control and rent stabilization, though shockingly, the majority of states actually prohibit rent controlled apartments. 11 states have no rent control laws and you’ll want to visit that link in order to determine whether the city you are living in or considering moving to has any sort of rent regulations.

The 421-a and J-51 Programs in NYC

A s noted in the rent stabilization definition above, there are three types of rental units that can be rent-stabilized in NYC. For those seeking more modern apartments, you’ll want to look for buildings that were built under the 421-a program or renovated under the J-51 program. Developers receive preferential tax treatment in exchange for offering rent stabilized apartments while the tax benefits are in place. Typically, this is for a period of 15 years.

T he way developers and management companies make money even if they offer rent stabilized apartments is that they’re allowed to increase rents by a certain percent each time a tenant moves out. There’s a densely worded paragraph in DHCR Fact Sheet #5 that specifies a 20 percent vacancy increase for a two-year vacancy lease; or a vacancy increase for a one-year vacancy lease equal to 20 percent minus the difference between the guidelines percentages applicable to two- and one-year renewal leases; or the Preferential Rent Vacancy Limitation. So while my legal rent is currently at $2162 and the unit will remain rent stabilized until 2027, the monthly rent will jump 20% to $2594 in July when the next tenant moves in to my unit and will then continue increasing annually at the Rent Guidelines Board’s specified rate.

Benefits of Rent Stabilized Apartments

R ent stabilized apartments are a godsend because tenants can lock in manageable rent increases for up to two years at a time. Since 2011, rent increases have ranged from 1-4% and typically haven’t been more than 3% over the last 10 years. For the last two years, the rent increase was 0% for 1-year leases, so our rent has stayed the same for two calendar years and if we were staying on, it would have remained the same again. Being able to afford your rent increase brings peace of mind and allows you to achieve financial independence. You’re also not forced to move every time an unaffordable rent renewal offer is served – moving is costly! While I don’t advocate staying in an unaffordable unit simply to avoid moving, neither should you accept having to move so frequently.

T he argument is always made that you’re throwing away money if you rent, but no one talks about how you’re also throwing away money when you pay interest on your mortgage, property taxes, home owner’s association or condo fees, and maintenance. Sure there’s a tax benefit, but paying to borrow money to finance a house in order to “save” on taxes is not as effective as just not borrowing. There is also much more in terms of home insurance that a renter wouldn’t face, especially if a house is situated in a flood zone. As the contrarian Patrick puts it: your choice is to rent a house or rent money to buy a house. Rent controlled apartments give you a middle ground from which to approach the rest of your financial independence as you should be able to sock away extra money in other investment assets instead of funneling everything into your mortgage.

The Key to Making Rent Controlled Apartments Work for You

W hile a rent stabilized unit is better than an unregulated apartment, you have to be the first tenant in the unit to take full advantage of the benefits. Otherwise, recall that landlords can increase rent up to 20% on the rent stabilized unit when a new tenant moves in. If you are the first tenant in a rent-stabilized unit, congratulations! Try not to mess it up and leave too early! Hubby and I have made a 390 sq. ft. studio work for six years and we will try to make our 900 sq. ft. apartment last even longer.

A lso note that if you aren’t living in a 421-a or J-51 building, you will have to worry about high income, high-rent deregulation. As of this year, units could be deregulated if the legal monthly rent hit $2,700 and if the combined income of tenants in the unit exceed $200,000 for two or more calendar years. If you and anyone else on your lease collectively earn more than $200,000, your only recourse to a rent-stabilized apartment is to live in a 421-a or J-51 building unless you manage to find a sympathetic landlord who doesn’t care about the procedures and is willing to follow the RGB’s guidelines on their own accord. It’s worth asking if you are a financially strong candidate. If the high-income rules don’t apply to you, you can use a broker to help you search or simply luck into a regular rent-stabilized property which usually will be owned by a private landlord.

F inally, if you have a side gig and earn non-W2 income, you can write-off the rent associated with your dedicated home office area which is a nice bonus if you can find a 421-a or J-51 building that has a den, home office, or extra room. You could I suppose try to rent out a room in your home, but many buildings in NYC prohibit AirBnB practices, so don’t lose your apartment over a money-making scheme that isn’t going to be permanent.

How to Find Rent Controlled Apartments

T he NYC Rent Guidelines Board maintains a database and PDF listings so you can check if you’re in one of the rent controlled apartments. There is a separate J-51 database that you can search as well. Large new building developments are typically also 421-a eligible, so when you read real estate sites like Brick Underground or YIMBY, some of the news blurbs will mention whether a building under construction is part of the program. Otherwise, you can always call the number on a teaser site for a development and ask. Brokers should also be able to help you find rent stabilization friendly landlords, but remember that this is not an option for you if all parties on the lease earn more than $200K a year.

S pending the time to find a building that you’ll want to live in and a unit that you can love for at least 5 years is a smart way to make expensive cities like NYC work for you. If you can ladder your moves so that they coincide with your ability to sign a lease as the first tenant in the next rent-stabilized building, you can keep trading up for better/larger homes and get a better product than what you could probably afford to buy outright. The worst case scenario is that you make do with smaller spaces until the opportunity comes up. But this is no different than house hunting and looking for good value. Rent controlled apartments are the unsung hero of the housing market in metropolitan cities.

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