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Should we limit the number of rentals in our building if we want banks to lend to prospective buyers?

It depends on the bank, but many will expect a certain percentage of primary residents to live in the building. 

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Question:

I live in a brownstone with seven apartments. One of the apartments is a rental, and owners of two other units want to rent them out as well. I've heard that banks won't lend to potential buyers if there are too many rental units in a building. Is this true? What is the cap on rentals in NYC?

Answer:

Banks do prefer that you place a cap on the number of rentals in your building, but the exact number varies from lender to lender, our experts say. 

Some loans are only available to buyers who intend to occupy their apartments, rather than rent them out as investment properties. Furthermore, banks expect to see a certain percentage of owner-occupied units in a property in order to loan to prospective buyers.

For buyers to obtain federally guaranteed mortgages, the building they're purchasing in must be at least 51 percent owner-occupied, and private lenders have their own requirements. 

"It depends on the bank, and it also depends on the size of the mortgage and whether it’s a co-op or a condo building," says Deanna Kory, a broker with Corcoran. "Many banks want buildings to have 70 percent primary residents. The minimum is 51 percent primary residents. So you are right to be concerned." 

Given that your building has only seven units, if three of them were rented out it would still pass the 51 percent mark, but future buyers could run into issues getting loans from certain banks. 

"Typically, we recommend trying to maintain at least an 80 percent owner occupancy, since guidelines are always subject to change," says Brittney Baldwin, vice president and loan officer at National Cooperative Bank (FYI, a Brick sponsor.)

This certainly warrants a discussion with your neighbors, as renting out their units could end up dissuading future buyers who need mortgages. However, keep in mind that there are banks that will loan to buildings like yours. 

"If a building goes below standard guidelines there may be portfolio lenders, such as NCB, who can lend in a building with lower owner occupancy percentages," Baldwin says. 


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