Most D.C. Residential landlords are familiar with the following webpage: http://www.dchousing.org/rent_hcvp.aspx , it’s where they go to keep an eye on the approved DCHA HCVP (Section 8) approved rents per D.C. neighborhood and BR count per unit. And while year over year the rent increases vary greatly (I have seen them go up as much as 9% and as little as 1% year over year), over the past 5 years that I can recall, I never noticed the rates decrease until 2019, where DCHA decreased the rates in the “Tier 1” areas – tax districts such as Old City, Eckington, Foggy Bottom, 16th ST Heights, etc., etc. For example, a 1BR approved Tier 1 HCVP rate in 2018 was $2,573 – which was reduced to $2,467, a little over a 4% drop. So, it may be until 2021 when the rates rise to the amount that subsidized landlords were expecting in 2019, as 2020 will be a catch up year.
How this could reduction in rents could potentially negatively landlords:
- As is obvious, most landlords/developers/investors make decisions based on expected incomes, so if an investor spent $X bringing a unit to market with the intent of leasing at a certain rental rate, and that rate is then unexpectedly reduced, the reduction in rents may cut into the ability of the Landlord to retain enough reserves to properly maintain and improve the property, i.e. it may force a landlord to purchase lesser quality materials or systems for repairs, or may prevent a landlord from making improvements for tenants that are considered “extras” or “nice-to-haves”.
- In the event an investor purchase a multifamily property, and leased up all of the units at the 2018 rates, then refinanced, there is a potential that in the event of turn-overs (and the resulting lease-ups at the lower 2019 rates) that the investor may no longer meet the DSCR requirements of their loan.
I’m sure there are other issues that I’m not thinking of here. There are also some caveats. The more units a landlord has leased in Tier one areas to HCVP tenants, the higher their risk. And the higher their LTV on their loan balances and tighter their DSCR ratios, the higher their risk. Also I have heard from the large commercial brokerage houses specializing larger multifamily real estate that they feel as if a rate reduction is something that only happens a few times every decade or so, however, it can still be an unsettling occurrence for many landlords.
So what are my take-a-ways. One, I need to think about LTVs and DSCRs a little more carefully, the saying “when something’s to good to be true, it often is” may ring true here, if rental rates are higher than they appear to be elsewhere, it may be wise to assume that rents may “settle” over time, bringing HCVP rents down with them.
Disclaimer: I am a licensed real estate agent and a licensed property manager specializing in small multifamily and small commercial assets in DC, however, I am not your real estate agent or property manager (unless I am, then Hi!) – long story short, get a real estate agent and property manager with day to day knowledge of the market to assist you. I am also not a Lawyer, Accountant, Financial Adviser, Architect, General Contractor, Psychiatrist, or any of the other myriad of other professionals it requires to properly purchase/own/operate/dispose real estate assets – long story short, get all of these professionals on your team and consult with them before you engage in any real estate/investing related activities. All opinions/musings are of my and are limited in their scope and breadth of understanding, and are casual in nature, there are other points of view to consider and evaluate prior to making any specific real estate/financial/investment decisions, and as such, the subject matter covered therein is not intended to be specific legal, investment, tax, or any other form of advice or direction. All parties reading this material hold the author harmless for any inaccuracies or misinterpretations of information, and will do and rely on their own due diligence prior to making any decisions.