On June 24, 2011, the New York State Legislature passed The Rent Act of 2011 extending the rent regulation laws for 4 years until June 15, 2015. The major changes include raising the threshold for deregulation on vacancy or luxury decontrol to $2,500 per month from $2,000. For the latter, the tenant must have earned $200,000 for each of the last two years, which is up from $175,000. Lastly, landlords of buildings with 36 units more will only be able to increase their monthly rents by 1/60th of what the individual unit improvements cost as opposed to the previous 1/40th, which will remain for buildings with 36 units or less. All these changes will now make it more difficult for landlords to decontrol units and increase their rent rolls.
With all these changes you may ask: why do investors still flock to rent regulated buildings? The main reason is due to the inherent upside. Simply put, these buildings generally offer no downside as the rent levels are kept artificially below market levels. If rent regulated units can be vacated, there can be a major impact to the building’s cash flow and value.
For example, if a rent stabilized tenant paying $800 per month for a 2-BR apartment vacates, a building’s value may increase by close to $800,000. The math is as follows: a market rent of $5,000 would provide $50,400 more in net operating income per year. At a conservative 6% return, this would translate to an additional $840,000 in value. Assuming this is in a building with less than 36 units, a landlord would have to spend about $61,000 to renovate and deregulate the unit, which is calculated as follows: the $2,500 threshold minus $960 (which is the $800 previous rent plus a 20% vacancy bonus) x 40. Thus, the net increase in value would be about $775,000...
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