New York’s complicated rent control laws can be a dream for tenants, but a nightmare to navigate if you’re a landlord.
This guide will walk you through New York’s rent control and rent stabilization laws, breaking down how they affect property ownership and what you need to know to make the best investment decisions.
Introduction to New York rent control and rent stabilization
New York City’s rent control and rent stabilization laws are some of the strictest in the country.
These rent regulation laws exist to provide affordable housing by putting a cap on how much you can charge tenants in rent. This allows people who don’t make a lot of money to still live in New York City.
These regulations trace back to housing shortages following World War II, and have continued to evolve: responding to market pressures and tenant advocacy groups. Unsurprisingly, there has been some pushback from investors.
Earlier in 2024, the Supreme Court refused to hear challenges to New York’s rent regulation laws: so for the foreseeable future, it’s likely they’ll stand.
For property investors, it’s important to understand these regulations as they directly impact property values, rental income, and long-term investment strategies.
Rent control vs. rent stabilization: What’s the difference?
The terms “rent control” and “rent stabilization” are often used interchangeably, but they have distinct legal definitions. Here’s a quick breakdown:
- Rent control applies to buildings constructed before 1947 with tenants (or their legal successors) who have been in continuous residence since 1971. This means that they’ve not moved out. These apartments are relatively rare, but when present, they tend to have highly regulated, below-market rents.
- Rent stabilization applies to buildings with six or more units built between 1947 and 1974 or those with certain tax incentives, such as J-51 or 421-a benefits. These apartments have regulated rent increases, and tenants enjoy lease renewal rights and other protections. This is the most common form of rent regulation in New York.
To work out if a property is rent-controlled or rent-stabilized, look at the building’s age and tenant history.
Buildings with newer tax incentives, such as those under the 421-a program, may also be subject to stabilization regulations.
As an investor, it’s important to research a property’s regulatory status to avoid legal complications. This will also help you to estimate accurate rent potential, and calculate a DSCR on a loan for your property if needed.
Key provisions and restrictions for investors
As part of New York’s rent laws, there are some workarounds that let investors increase rent even on properties that are controlled or stabilised. However, it’s important to understand the limits.
Annual rent increase caps
The New York City Rent Guidelines Board (RGB) sets yearly rent increase limits for rent-stabilized apartments. These caps are based on economic factors and are designed to keep rents affordable for tenants.
These increases tend to range from 0% to around 2%, with the specific percentage varying by lease term (one-year or 2-year leases).
In some years, it may be higher. For example, in 2024-5 the allowed increase was 2.75% for one-year leases and 5.25% for 2-year leases (read more on the RGB website).
Because this limitation changes annually, it can affect long-term rental income projections. Investors should take time to investigate past RGB trends.
2. Major Capital Improvements (MCI) and Individual Apartment Improvements (IAI)
One way to increase rent in regulated units is by renovating them while your long-term tenant is in-situ.
You can either do this by investing in Major Capital Improvements (MCI), such as upgrading boilers, roofs, or other building-wide improvements. For single units, you can raise rents if you make Individual Apartment Improvements (IAI), such as kitchen and bathroom renovations.
As of October 2024, the IAI cap is set at $30,000 and allows for a rent increase of up to $178. This is a positive outcome for landlords, as the cap was previously $15,000 over 15 years with an allowable rent increase of just $83 or $89 (depending on the building size).
For empty properties that had been continuously occupied for 25 years, or have been vacant from 2022 to 2024, the IAI cap is now $50,000 — allowing for a maximum rent increase of $347.
Making an IAI doesn’t just allow you to increase legal rent, it is also a way to increase the overall value of the property.
3. Vacancy decontrol
Some rent-stabilized apartments may lose their special status if they become vacant. Two cases where this applies is:
- If the apartment is stabilized because the property owners receive J-51 or 421-a tax benefits
- The apartment was occupied by a stabilized tenant during its conversion to a co-op.
Before June 2019, investors could remove apartments from rent stabilization through high-rent or high-income deregulation. However, the Housing Stability and Tenant Protection Act of 2019 (HSTPA) means that this is no longer possible.
While there are only limited ways that rent-controlled apartments can become decontrolled due to vacancy, it’s definitely worth doing your research on the unit’s rental history to find out if there are any opportunities.
4. Preferential rents
Preferential rent is a discounted rate below the legal maximum base rent that could be charged for the property.
You might offer a discount to attract tenants, to allow them to qualify for a welfare program like Section 8, or simply to reward them for doing you a favor (e.g. moving from a larger unit that you also own).
Until HSTPA, landlords could increase the rent to the legal maximum upon lease renewal. However, the preferential rent is now considered the legal base rent for that unit, for as long as the tenant is living there. This means you can’t hike rent up to the legal maximum when it’s time for renewal, but can only increase it by the smaller percentage approved by RGB.
This restriction can impact revenue potential, especially if you were hoping to attract tenants with an “introductory” deal. Or if you have a long-term tenant who wants to stay for ages: reducing your chances of being able to rent the apartment at its current market rate.
Tenant rights and protections
Housing affordability and security are at the heart of New York’s rent control laws. That means there are a lot of built-in rights and protections for tenants who are occupying this type of property. As an investor, you should be aware of the following:
1. Eviction restrictions
In New York, rent-stabilized tenants have significant protections against eviction. Landlords can only evict these tenants under specific conditions, such as failure to pay rent, illegal occupancy, or plans for the owner’s use of the apartment. In these cases, landlords must follow strict procedures, making it challenging to pursue eviction.
2. Lease renewal requirements
One of the most significant aspects of rent stabilization is the tenant’s right to renew their lease, generally for a term of one or two years (at the tenant’s discretion). Landlords must offer renewal leases within the legal parameters set by the Rent Guidelines Board, giving tenants additional security and reducing turnover for landlords.
3. Succession rights
Rent stabilization laws allow family members to “inherit” the lease if they can prove they have lived in the apartment for at least two years — one year if the successor is a senior or disabled.
This regulation creates a longer-term impact for investors, as the lease may continue without substantial rent increases or vacancy turnover.
Risks and challenges for investing in rent-controlled units
New York’s rent regulations directly impact the market value of properties. Rent-regulated units tend to lower the value of buildings because they limit rental income potential.
When doing a valuation impact, investors should consider the fact that lower cap rates on stabilized properties are offset by lower tenant turnover and steady (though restricted) rental income.
They should also take into account the following risks and challenges.
Strict regulatory compliance
Failing to comply with rent regulations can lead to severe consequences, including fines, legal action, and even forced rent reductions. Proper documentation, regular legal consultation, and familiarity with tenant rights are essential for avoiding expensive legal challenges.
Market risks and political climate
As housing remains a politically charged issue in New York, further changes to rent regulations are always possible. New proposals, such as universal rent control, could impact your investment strategy: underscoring the importance of long-term planning and flexibility.
Maintenance and capital expenses
The balance between maintaining property standards and managing costs can be challenging under these laws, especially since MCIs are now capped, and other rent increases are tightly regulated.
Strategies for navigating rent control regulations
Despite the limitations, there are some strategies you can pursue to optimize returns on rent-regulated properties:
- Research and due diligence: Before purchasing a rent-regulated building, investors should research the building’s history, tenant occupancy, and legal compliance records. This preparation can help avoid unexpected challenges and optimize rental income.
- Make capital improvements: Leveraging MCI and IAI increases can help to raise income
- Look into tax incentives: Programs like 421-a and J-51 offer property tax breaks that can offset the effects of regulated rents
- Focus on mixed-use properties: Mixed-use buildings can be more lucrative as they include commercial spaces, which are not subject to rent stabilization. These properties provide a diversification of revenue streams within the same investment.
- Seek compliance and legal assistance: Navigating New York’s rent laws can be complex. Partnering with an experienced property management team and consulting with a real estate attorney specializing in rent regulations can save time and help avoid costly compliance issues.
These strategies can be used alongside our tips on growing your rental property porfolio to ensure you’re making the best investment.
Exit strategy considerations
Exiting a rent-regulated property investment can be challenging, as the market tends to value these properties less due to the restrictions on rental income.
Converting properties to condos or co-ops is an option, but it’s a complex process, is heavily regulated, and requires the buy-in of existing tenants.
Before investing in rental units covered by these guidelines, take time to fully work out your exit strategy.
Finance your next investment
Navigating New York’s rent control and stabilization laws can be hard, but with the right knowledge (and a strategic approach), investing in the city’s unique real estate market can be highly rewarding.
For those ready to take the next step, Express Capital Financing offers tailored solutions, including DSCR loans designed to support investment in New York property rentals. With our specialized financing options, investors can confidently enter this market, optimizing cash flow while navigating New York’s regulatory landscape. Apply today for the funds you need.
