Rent control regulation has become a hot topic of discussion. As it needs to be - housing costs are an election issue in the United States for the first time in years.
Rent regulation refers to the establishment of a set percentage by which landlords can increase the rent during the duration of a tenancy. The percentage can be determined by inflation or the cost of living in that area or determined by local regulators. While calls for a federal response have taken precedence, rent control regulations have state and city-specific policies with varying laws. Most states don’t have any laws regarding rent regulation, and some even prohibit rent caps. There are two sides to this coin, but how do these regulations impact real estate investors?
The Purpose of Rent Control Regulation
Rising prices of rental units in the U.S. started the politicized discussion of whether rent regulation needs to be taken a step further. According to the National Multifamily Housing Council, the District of Columbia, New York, Oregon, and cities and towns in New Jersey and Maryland have rent control or rent stabilization policies in place. California passed the Tenant Protection Act of 2019, a statewide rent cap with city-specific laws.
By enforcing policies on rent increases, lawmakers are hoping to create more stability in the housing market and have more rental properties available to those at a lower or fixed income. Intentions are good but do governmental interferences in the market really help in the long run?
What Rent Control Regulation Means to Real Estate Investors
Basic economic theory seems to disagree with the proposed benefit that rent ceilings can bring to the American public. Economists believe rent caps reduce the quality and quantity of affordable housing. Landlords are renting units to tenants below market value while still assuming financial responsibility (maintenance, taxes, mortgages, and insurance) at current market rates.
An increase in regulation and fiscal costs means a lack of return on investment. Higher multifamily property costs for owners points to limited maintenance and decreased property development. By placing a price ceiling on rental prices, lawmakers are changing the incentives for investors to invest in that particular market and to look elsewhere. Why contribute more when there’s no gain?
How Investors Are Adapting to the New Market
Many investors are choosing to sell and invest in other markets with less interference, and others are willing to play the long game. Investors in non-rent regulated markets might make the most out of this situation by selling to retreating investors at a higher price. There’s also no telling if these markets will implement the same changes by enforcing a rent ceiling.
The other option is to capitalize on a long-term investment strategy. While some investors are selling and leaving, others might be able to buy up properties for a bargain price. Certain provisions allow owners to apply for hardship increases if the owner cannot make a minimum profit on their investment. These vary by city, but if money is being lost, the option to apply for an increase is better than selling at rock-bottom prices. Additionally, because the rents are below market, rent-stabilized property tends to see extremely low or no vacancy and stable lease rates.
Risk comes with real estate investment, and investors might have to get creative to maximize their returns. When all is said and done, it’s better to be prepared - read the fine print about rent control regulation policies in your market to take advantage of every exclusion.