Smart investors know they’re not just up against the market. They’re also up against the regulatory environment. Regulators aren’t the enemy, but the evolving regulatory environment does demand very close attention. Ignorance isn’t an excuse. Investors who find themselves out of compliance with new regulations can face very steep penalties.
Real estate regulations, such as building codes, can be modest in scope or far reaching. After the financial crash in 2008, regulators made changes that dramatically reshaped the housing and financial markets. The repercussions of those changes are still felt today in the booming housing market. Innovative services, such as discount real estate brokers and companies that buy houses for cash, have emerged in response.
Here are four regulatory changes real estate investors should know how to navigate.
Short-term rental regulations
Many first-time real estate investors purchased properties for the short-term rental market over the past decade. During that time, the short-term rental market operated in a Wild West environment with few, if any, regulations governing their use in most municipalities.
In many markets, local residents claim short-term rentals push up rent and increase noise and foot traffic. Hotel operators claim they represent unfair competition. As a result, the regulatory environment for these rentals has evolved rapidly — and not usually in their favor.
New regulations range from total bans to strict usage limits and new permitting processes. In New York City, for example, new regulations that took effect in September have essentially banned Airbnbs.
Because regulations are applied locally, investors who want to stay current on short-term rental regulations need to engage with their local government officials. This has the added benefit of helping you build relationships with the regulators who may investigate your investment properties. That gives you a chance to influence how those regulations play out.
Beyond that, carefully consulting local and online resources can usually deliver the answers you need.
Zoning
Most seasoned investors and developers will research zoning regulations before undertaking a big investment. Zoning laws do change frequently, though, and an unforeseen change could complicate a property investment.
If the property is already finished, it will likely be grandfathered in under new regulations. If it’s not, you could ask the local zoning office for a variance. However, a zoning change that comes early in the conception phase of an investment property can cause stress, delays, and extra expenditures.
This is an especially pertinent concern now because work-from-home policies and the housing crisis have pushed many cities to consider rezoning commercial or office areas into residential ones.
Rent Control
For investors looking to invest in rentals, especially multifamily rentals, rent control is an extremely important consideration. It can affect everything from vacancy rates to the price per square foot.
Many cities have experienced huge increases in the rent-to-income ratio. As a result, rent control regulations that aim to insulate tenants from large annual rent increases have become more popular as housing costs have escalated.
Although New York City has had rent control laws on the books for decades, other cities have either recently implemented rent control or proposed it.
Rent control laws can be complex, and it can be confusing to parse which properties are restricted and which are exempt. If you’re investing in a property located in a rent control municipality, make sure you understand how local rent control regulations apply to you before you finalize your investment.
Even if there are no rent control laws presently on the books, you should research whether it’s a political possibility in your area.
Environmental laws
Regulators have implemented new environmental regulations for years now, but a new proposal from the Securities and Exchanges Commission could put added pressure on real estate investors in the near future.
The proposed regulation would require publicly traded organizations to disclose their environmental risk and exposure. It would also require them to disclose emissions from upstream and downstream activities in their value chains.
Under these regulations, investors who rent commercial property to a publicly traded business would fall under the disclosure requirements. That means regulators may pressure investors to reduce emissions, and investors may have to pressure vendors and contractors to reduce their emissions because the regulations require disclosure from up and down the supply chain.
As the climate crisis continues, investors can expect more environmental regulations like New York City’s Local Law 97, which places carbon caps on buildings larger than 25,000 square feet. The news isn’t all bad, though. Many investors are seeing huge profit potential in “green retrofitting” commercial real estate.
How to manage regulatory changes
Once regulations are in place, there isn’t much a smart investor can do except comply, but there are steps you can take to make that process a little easier.
First, try to participate in the regulatory process. Most regulations are local, so you should be able to get acquainted with your local regulators and have some input during their deliberations. Most regulators are fair and want to hear your concerns. Even if you can’t influence the process, participating in it will keep you updated on all the developments and help you prepare.
Hiring outside experts can ease your regulatory journey as well, especially when it comes to complex matters, such as taxes. Most investors like to keep an experienced real estate attorney on retainer, as well as a good tax accountant.
Finally, if you’re investing in a very fluid regulatory environment, it’s a good idea to limit your debt and keep adequate capital reserves. Sudden regulatory changes can impact your cash flow, so it’s wise to maintain financial flexibility and minimize risk.
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