Rental Restrictions – The Third Rail of HOA Policies

Over the past 10 years, many Home Owner Associations have sought to amend their Governing Documents to restrict leasing.  This topic is so volatile, it could be called the “third rail” of HOA decisions.  In fact, one law firm’s PowerPoint presentation on this topic starts with the slide: Rental Restrictions: How to Best Create Dissension and Animosity in Your Homeowners Association. 

Given that, why not just keep the peace by letting each owner do what they want?   While that’s one option, many HOA Boards limit leasing to protect property values and to keep the association in good standing. 


Owners preferred, please

Most homeowners prefer other owners as neighbors because renters don’t have the same stake in preserving the community. (That may be less true today when many foreclosed owners have carried their habits of “ownership pride” over to their newly-rented place.)  Nevertheless, high leasing ratios cause a drop in buyer demand which, in turn, lowers market prices. 

And there’s no denying that leasing reduces the on-site owners available for the HOA Board and other association tasks.  Since most HOA’s already have a chronic shortage of volunteers, this is an important consideration.


Impact on mortgages and insurance

One of the biggest reasons homeowner associations limit leasing is to comply with mortgage financing rules so that the pool of qualified buyers is as large as possible.  Mortgage insurers, such as Fannie Mae and Freddie Mac, reject loans if the development’s owner-occupied ratio is too low.   For new condos, the GSE’s owner-occupied requirement ranges from 51% to 70%.  Established condos  must have at least 51% if the buyer is an investor.  But when the buyer will live in the unit, there is no limit. 

In contrast, FHA loans currently require 50% owner-occupancy minimum for existing projects, whether or not the buyer is an investor.  In new developments, FHA will reduce their minimum to 30% owner-occupied in certain circumstances beginning August 2011.  The lending rules for condos are complex and ever-changing.  Whether you are a buyer or an HOA board member considering a leasing policy, consulting an experienced attorney or loan officer is crucial. 

Leasing levels of 51% or more will also cause insurance companies to classify the entire development as investment property.  That designation significantly increases the cost of the HOA’s master insurance policy, which in turn raises the HOA assessments.  High assessments may cause owners to flee and prospective buyers to stay away.


A smorgasbord of solutions

The main response of HOA Boards has been to cap the number of units with leases.  Once the rental ratio is determined, the next decision is how to make the transition to the new rule.  Some HOAs start by grandfathering in current owners on the premise that it is unfair to impose this rule change on that group.  Others grandfather in existing leases for a specified time – for a year after the adoption of the new rule, or until the lease term ends or until the current occupant is no longer a tenant. And some boards implement the new rule quickly by notifying owners that all leases must terminate in the near future. 

Finally, some HOA’s prohibit leasing entirely.  Bans like this are most often found in small associations of 20 units or less. But just as too much leasing can hurt property values, so can a rigid rule that allows no leasing at all.


Related Posts in this Series: 

HOA Rental Restrictions – Owner Perspectives

HOA Rental Exceptions – Grandfathering and Hardships

How to Challenge an HOA’s Rental Policy

HOA Rental Policies -Procedural Flaws That Matter 

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  1. Does this mean that it would be legal for a homeowners association to state that no person of Polish decent can own a codno in a certain project? I don’t think so.

    For decades states in the south did not allow blacks to sit at the same luch counter as whites. There excuse was it was the law. HOA’s should not be permitted to take away the basic rights of individuals. It seems to me that renting out your home is one oif them.

    • HOA provisions that violate or conflict with federal or state laws are invalid. The federal Fair Housing Act prevents the type of discrimination you mentioned.

  2. Pamela Pulver says:

    Hello Rebecca. I have just about given up. I own a townhouse in Washington state that has been on the market over a year. I’m paying double housing expenses, the condo and my apartment, I thought it would sell better empty. HOA has an amendment for a rental cap, which is met. There is no Hardship Waiver clause. They have denied my hardship waiver request in retaliation for an insurance settlment I got when a board member destroyed my personal property. They will not update 2006 rigid rental restrictions for the dysmal housing market.
    I bought my condo in 2005, the amendment was in 2006, there is no grandfather clause.
    They are due for FHA recertification, and violated an owner-occupancy requirement in 2008, prohibiting all rental restrictions. It last until 3/2011, when FHA waived it for a year. If I don’t rent my unit, I will lose it. I know the by-laws by heart, Washington state HOA laws deny the owner’s right to rent that Florida has.
    THanks, Pam

  3. Our HOA, in Illinois, has 52% owner-occupied units, barely above the percent required by FHA. We’d like to increase that to 60% or 65%. Does anyone have suggestions as to how we do this, a procedure that would work and also one that our owners would accept, since it would require a change in our declarations?

    We could grandfather in those who are currently renting out their units, and include a hardship provision, but then what? I have heard of a waiting list procedure, but that would involve the issue of what an owner does while on the waiting list. (If someone is moving out of town, does the unit just sit vacant?) A waiting list procedure was rejected by another HOA in Chicago.

    • P. S. By “waiting list procedure,” I meant that people could be on a waiting list to rent out their units.

      We don’t want to do away with rental units completely, just to increase the percent of owner occupied units

    • Hi Eleanor-
      You raise a good question!

      I’d start by amending your Declaration to say that new owners are only allowed to rent out their units after they have been owner-occupants for 1 or 2 years. That discourages new investors from buying and will help reduce future demand for being allowed to lease.

      Many HOA’s conclude that waiting lists are a necessary evil for keeping rentals below a certain percentage. One of the difficult things about them is that degree of owner-hardship does not factor into their position on the waiting list. While you could try a hardship “merit-based” list, that opens the HOA Board up to lots of complaints and possibly lawsuits. And in your scenario, yes, someone who moves away while still on the waiting list must let their unit sit vacant.

      I hope this info helps.

      • Thanks, Rebecca, but there is a problem with saying that new owners can only rent out their units after they have been owner-occupants for 1 or 2 years. Our two buildings have about 40% studios, 40% one-bedrooms, 20% two or three-bedroom units. The rentals tend to be concentrated in the studios, since most people who want to be owner occupants want a one- or two-bedroom unit. So a requirement that new owners occupy their units, even for just a year or two, would make it very difficult to find buyers for the studios.

        This policy would require a change in our decs that would have to be approved by 2/3 of the owners. I think the studio landlords wouldn’t vote for it.

        What would you think of saying that owner occupants could only sell to owner occupants, but that those currently renting out their units could sell to either owner occupants or to renters? With that policy, the percent of owner occupants would not drop below our present 52%. In fact, it would increase over time as some of the apartments that are currently being rented out were sold to owner occupants. (Some one- and two-bedroom units are currently rented out.)

        Do you think this policy would work? Would it be acceptable to owners, so they would vote to change their decs? Would it be legal in Illinois?

        • Hi Eleanor-
          You certainly have an interesting and challenging set of facts! I cannot offer any opinions about what is legal in Illinois because I am a Minnesota-licensed attorney.

          I strongly encourage your HOA Board to hire an Illinois attorney experienced in this area ASAP. Amending a Declaration with exactly the right words using exactly the right legal process is tricky business. Spending some $$ now on a lawyer is cheaper than a lawsuit later.

          That said, I can suggest a couple of options that you could explore with your HOA attorney. I will send the ideas to you via separate email. Good luck and let me know how it turns out!


  4. elizabeth says:


    My HOA is trying to limit how LONG you can rent a unit. Indicating that those who have received approval can only rent for a maximum of 24 months. I understand rental restrictions in numbers, but this rule seems crazy. Life situation required that I move out of my condo. I had it on the market two seperate times and have not been able to sell it. In the past 4 years it sat empty for a combined total of about ten months. I would sell it again, but my complex is suffering a lot from the foreclosures/short sales so it would be nearly impossible. We are staying afloat and paying things, but could not endure the full cost of the condo on top of our living situation where we are. I would LOVE to sell – this is not an investment – only a way to survive.

    • Hi Elizabeth,
      My heart goes out to you and the many others who are trapped in this Catch-22 situation. Usually, the only reason an HOA would limit the rental period is because the rental cap has been reached and there is a waiting list of owners who want to have a tenant. If this is not the case with your HOA, ask for their rationale behind this restriction. Although courts give a lot of deference to HOA decisions, those decisions must still be reasonable, have a rational basis for their existence, and be related to protecting the best interests of the HOA community. Unfortunately, challenging an unreasonable rule requires going to court with all of those costs and hassles.

  5. Mary Sharpe says:

    We are a young HOA with standard bylaws for TN. We recently made a rule that owners could not rent if their Association Fees were not current (our bylaws give us the right to evict tenants of such units). One ‘paralegal’ on the Board says this new rule violates Fair Housing Law and is illegal. Can’t find any citation that restricts this rule. Is the rule appropriate or illegal?

    • Hi Mary,
      I don’t see anything in the facts you presented that would be a violation of the federal Fair Housing Act as long as you apply the new rule uniformly. The Fair Housing Act prohibits discriminatory actions based on race, color, national origin, religion, sex, familial status or handicap such as:

      •Refuse to rent or sell housing
      •Refuse to negotiate for housing
      •Make housing unavailable
      •Deny a dwelling
      •Set different terms, conditions or privileges for sale or rental of a dwelling
      •Provide different housing services or facilities
      •Falsely deny that housing is available for inspection, sale, or rental
      •For profit, persuade owners to sell or rent (blockbusting) or
      •Deny anyone access to or membership in a facility or service (such as a multiple listing service) related to the sale or rental of housing.

      People who do not pay their HOA fees are not a class protected against discrimination. If your “paralegal” remains unconvinced, ask that person to give you the statutes or court decisions supporting that view.

  6. Hi Mary,
    I’m an HOA board member in Oregon and we’re struggling with the sale of rented units. All three were once owner occupied, but are now rented due to the dismal sales market and people having to move away for work. Our interest is keeping the building owner-occupied to the degree possible, and not allowing currently rented properties to become permanent investments that can be sold and resold as de-facto permanent rental units. Are there common practices for how to deal with these units at the time of sale? Is the right to rent commonly transferable to a buyer, or can we terminate the right to rent at the time of sale (thus making the next person on our waiting list eligible)? I know you’re based in Minnessota, but any perspective would be appreciated.

    • Hi John,
      Examining your Governing Documents is the first step in determining the options available to your HOA Board on restricting rentals. The two most common situations are that 1) the Declaration says something like “Owners may rent out their units, subject to reasonable rules and regulations adopted by the HOA Board” Or 2) the Declaration says “Owners cannot rent out their units unless they meet the “hardship” critieria and obtain permission from the HOA Board.”

      In general, the current owner’s ability to have a tenant is not transferable to a new owner unless the Governing Documents say it is (and that would be rare). The rental status of the condo ultimately “belongs” neither to the unit nor to the individual owner. It belongs to the majority because that’s where the power resides to determine the condo’s status. That may be a majority of the HOA Board or a majority of the homeowners or both, depending on how the Governing Documents are worded.

      Common solutions include: Owners who bought when there was no leasing restriction retain the right to lease for as long as they own the unit OR for as long as their current tenant remains in place OR for a maximum lease period of 2 years OR only owners who meet the Board-specified definitions of “hardship” are allowed to lease and only for the duration of the hardship. The critical thing is that whatever policy is adopted, it must be properly incorporated into the Governing Documents AND those documents must be given to prospective buyers before the sale so that they have notice of any rental restrictions.

      Rebecca (aka Mary) :)

  7. Hello, Mary – I am so glad to have found your site! My husband and I are looking to buy a condo or townhouse in Minnesota. Of the units we’ve looked at so far, we definitely prefer the areas with strict owner occupancy rules. After looking for over a year, we can easily tell which HOA’s allow rentals and which don’t — no need to peruse the governing docs, just walking on the premises tells us whether these are rentals or owner-occupied.

    You offer some good ideas for HOA’s stressed by vacancies but wanting to maintain the property values for their current members!

    • Hi Sue,
      Thanks for your positive comment! I am so glad you found my website useful. I hope you and your husband find the perfect new home.

      Rebecca (sometimes called Mary by mistake) :)

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