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How Rent Control in New York Can Affect Your DSCR Loan

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Debt Service Coverage Ratio (DSCR) loans are a great financing option for real estate investors who specialize in rental properties. However, for those in New York, it’s a little more complicated.

Understanding how rent control intersects with DSCR loans is key for investors who want to succeed in New York’s competitive housing market.

This is because NYC has strict rent control and rent stabilization laws. Great for tenants, but a unique challenge for anyone applying for a DSCR loan. Unlike conventional loans, DSCR loans rely heavily on the property’s income to determine eligibility. Predictable rental income is the cornerstone of the loan’s viability.

Let’s dive into the basics of what DSCR loans are, how rent control works, and the ways these two dynamics can clash.

What is a DSCR loan?

A DSCR loan is a type of real estate loan primarily used by investors. Instead of focusing on personal income or credit scores, lenders assess the property’s ability to generate enough income to cover its debt obligations.

The Debt Service Coverage Ratio (DSCR) is calculated as:

DSCR = Net Operating Income (NOI) / Total Debt Service

A ratio of 1.0 means the property’s income is just enough to cover its debt payments. Most lenders will look for a minimum DSCR above 1.2 (or even 1.5) to provide a cushion for unforeseen expenses or vacancies.

This is why anticipating steady and predictable rental income is a vital part of being approved for and paying back a DSCR loan.

For more detail, check out how to calculate DSCR for an investment property.

How rent control works in New York

New York’s strict rent control laws fall into two categories: rent control and rent stabilization. They aim to protect tenants from unaffordable rent increases, but by doing so they impose restrictions on landlords.

  • Rent control: covers older buildings and caps rents at low levels, often below market rates. Rent increases are typically tied to inflation or fixed percentages.
  • Rent stabilization: applies to a broader range of properties and allows slightly higher rents than rent-controlled units. However, increases are still tightly regulated and subject to approval by the Rent Guidelines Board.

While these laws guarantee affordability for tenants, they create hurdles for property owners and investors: especially those relying on DSCR loans.

Learn more about these restrictions in our ultimate guide to New York’s rent control laws.

Challenges rent control poses for DSCR loans

Real estate investors looking for a DSCR loan in New York need to be aware of a few unique challenges posed by rent control. For example:

1. Capped rental income

DSCR loan eligibility depends on the property’s net operating income, which is directly tied to rental income. This is an issue because rent control limits a landlord’s ability to raise rents, even if operational outgoings such as maintenance costs, taxes, and utility bills increase. This can make it difficult to meet DSCR thresholds and secure financing.

2. Lack of flexibility to adjust rents

With New York’s rent control policies, rental rate increases are often tiny. For example, the Rent Guidelines Board’s approved increase can be as low as 2% annually: regardless of inflation or market demand. This restricts the landlord’s ability to adapt to changing economic conditions, and could make it difficult to meet repayment terms.

3. Restrictions on tenant turnover

Many rent-controlled properties have strict rules governing tenant turnover. When a tenant leaves, landlords often face legal and financial hurdles when it comes to resetting rents to market rates. This further suppresses any income potential.

4. Lower property valuations

Properties with rent-controlled units typically have lower appraisal values than those with market-rate units. This can reduce borrowing power and reduce chances of loan approval, especially if the DSCR falls below lender requirements.

Strategies for managing DSCR loans in rent-controlled properties

So, how do you set yourself up for success when it comes to securing a DSCR loan for a rent-controlled property? Positive cash flow is key, and you can mitigate some of these difficulties by following these tips.

1. Diversify your rental portfolio

Invest in a mix of rent-controlled and market-rate properties to balance risk and maintain a steady income stream. Non-controlled units can offset the income limitations of rent-controlled properties.

As rent control doesn’t apply to commercial property, it might be worth adding this to your real estate portfolio too. We take a deep dive into the pros and cons investing in commercial property.

2. Target High-demand neighborhoods

Rent-controlled properties in desirable areas often have low vacancy rates, as people are reluctant to leave such a good deal. Investing in these locations can help ensure consistent occupancy, so even if rents are capped you still have a steady monthly income.

3. Explore additional revenue streams

Aside from rent, there are other ways to generate supplemental income to boost net operating income. For example:

  • Parking fees: charge tenants or non-residents for reserved parking spaces, especially in areas with limited parking availability.
  • Storage units: rent out on-site storage spaces to tenants who need extra space for belongings.
  • Pet fees: introduce monthly pet fees or one-time pet deposits for tenants with cats and/or dogs
  • Laundry services: install coin-operated or card-based laundry machines in shared spaces to generate consistent income.
  • Amenity access: monetize premium amenities such as gyms, swimming pools, or rooftop spaces by charging membership fees or rental rates for private events.
  • Advertising space: lease billboard or signage space in high-traffic communal areas of your property.

Reduce operating costs

Another way to improve the property’s net operating income is to reduce the cost of operation. Some ways to achieve this include:

  • Optimizing property management: streamlining property management processes—like using software to automate rent collection, tenant communication, and maintenance requests—can reduce overhead costs and improve efficiency.
  • Renegotiating vendor contracts: regularly review and renegotiate contracts with service providers such as landscapers, cleaning companies, and maintenance crews. Long-term agreements with discounts can help reduce expenses while maintaining quality service.
  • Implementing energy-efficient upgrades: upgrading to energy-efficient systems and appliances, such as LED lighting, high-efficiency HVAC units, and low-flow water fixtures, can drastically cut utility expenses.
  • Conducting preventive maintenance to avoid expensive repairs: Scheduling routine inspections and maintenance for major systems like plumbing, electrical, and HVAC can prevent small issues from becoming expensive emergencies.

5. Careful financial planning

Work with a financial advisor or lender experienced in DSCR loans, and model different scenarios together. This way you can make sure your investment strategy accounts for any potential constraints caused by rent control, and lets you put measures in place to manage your loan payments before issues arise.

Rent control vs. DSCR: long-term implications for real estate investors

Investing in New York properties with rent-controlled units requires a nuanced approach. While these units can provide stability in terms of tenant retention, the constraints on rental income growth can make it challenging to meet DSCR loan requirements.

This is made even more complicated by evolving legislation, which may further tighten restrictions: adding uncertainty to future cash flow projections.

However, with strategic planning and a focus on diverse income streams, real estate investors can stay ahead of these risks. By understanding the intricacies of rent control and its impact on DSCR loans, you’ll be better equipped to navigate New York’s real estate market and achieve long-term success.

Get a DSCR loan in New York with Express Capital Financing

When it comes to financing your rental property, getting a DSCR loan in New York offers several advantages. With Express Capital Financing you can expect fast access to capital, flexible underwriting based on property value (rather than credit history), and tailored loan structures that accommodate the challenges of rent-controlled properties.

Hard money loans secured by property value also allow real estate investors to leverage equity for financing, making these loans ideal for maximizing returns despite regulatory constraints.

Apply today and we’ll help you to navigate the complexities of New York’s rent control without sacrificing financial performance.

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