There are few things that the entire real estate industry can agree on, but one is that rent control is bad for business. Restricting how much a landlord can raise rents hurts a property’s profitability and can have a disastrous effect on its value.
There are also many negative effects of rent control measures. Rent control can prevent landlords from completing necessary building upgrades, creating substandard living conditions and even leading to neighborhood blight. Understandably, the real estate industry spends significant amounts of money lobbying against rent control.
When California’s latest rent control measure, Proposition 33, was on the ballot last November, real estate industry groups raised massive amounts of money to campaign against it. Of the $350 million raised to campaign for the 10 measures on the ballot in California, over half was tied to Prop 33. Ultimately, Prop 33—which would have given cities more power to impose rental limits—failed, with 60% of voters rejecting it.
Despite the industry’s best efforts, rent control isn’t going anywhere. Even as the political landscape shifts to the right, many cities and states continue to look at rent control as a way to address housing affordability. There may be valid reasons for that sentiment. Rent control measures, while imperfect, can be effective at keeping rents down.
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For politicians, capping rents is also a simpler solution to housing affordability challenges than tackling the more complex issue of increasing housing supply. In some markets, geographic constraints, zoning laws, or local opposition make it difficult—or even impossible—for regulators to effectively increase the housing supply.
Rather than outright rejecting the idea of owning rent-controlled properties or avoiding rent-controlled markets altogether, owners and operators should consider the opportunities that lie behind the perceived threats.
There have been many studies on the effects of rent control over the years. One researcher, Konstantin Kholodilin, a Senior Researcher at the German Institute for Economic Research (DIW Berlin), performed a meta-analysis to understand the overarching impacts of rent control across very different markets.
His main takeaway was somewhat expected: “Although rent control appears to be very effective in achieving lower rents for families in controlled units—its primary goal—it also results in a number of undesired effects, including, among others, higher rents for uncontrolled units, lower mobility, and reduced residential construction.”
Professor Kholodilin also observed another important trend while reviewing studies on the topic: while rent control can negatively impact the properties it applies to, it can actually boost the property values of homes that are not subject to the restrictions.
“As a rule, rent control leads to higher rents for uncontrolled dwellings,” he wrote. While it might seem risky to invest in a market with rent control measures, properties not subject to rent control can experience increased demand and, consequently, higher returns.
This unintended consequence highlights how rent control can hurt the very renters it is designed to protect. “The imposition of rent ceilings amplifies the shortage of housing,” Professor Kholodilin explained. “Therefore, the waiting queues become longer, and would-be tenants must spend more time looking for a dwelling.”
Another surprising effect of rent control, according to the studies he analyzed, is that it tends to increase homeownership rates in the affected areas. By reducing the supply of rental housing, rent control laws push more people into homeownership. This shift can benefit communities by promoting wealth creation and encouraging long-term residency among homeowners.
Owning a rent-controlled property not only reduces the potential future value of the investment but also introduces operational challenges. Complying with rent control measures often means dealing with additional paperwork, regulations, and complexities.
Rent-controlled properties can also carry greater downside risks, such as dealing with delinquent rent payments or lawsuits from dissatisfied tenants. However, these complications can create opportunities for investors who know how to navigate them.
“Understanding and effectively managing local rent regulations is an invaluable tool for housing providers to create value for residents, owners, and other stakeholders,” said K. David Meit, Principal at Oculus Realty. He argues that there are times when purchasing a rent-controlled property can be a great investment—particularly when buying at a discount from owners who prefer traditional, less restrictive ownership structures.
One major concern with owning rent-controlled units is that rental income may not keep pace with the rising costs of ownership. This disconnect can lead to situations where buildings lack the profitability needed for critical upkeep and improvements.
However, some rent stabilization laws include provisions that savvy property owners can leverage to avoid this issue. For example, St. Paul, Minnesota, has an ordinance allowing landlords to apply for exemptions in certain situations, such as changes in property taxes or unavoidable maintenance costs. “By utilizing mechanisms in most rent stabilization regulations, housing providers can fund often-needed capital improvements to reposition a property,” Meit explained.
The real estate industry will undoubtedly continue to rally against rent control. The laws harm property values, reduce new residential construction, and create incentives for tenants to stay in units they no longer need.
But, avoiding rent-controlled markets entirely may be short-sighted. Until cities across the country find alternative solutions to alleviate the high cost of housing, rent control will persist. Rent stabilization laws can emerge in any market at any time, and finding ways to navigate them profitably could be the “secret sauce” for some property owners.
Where one owner might view rent control as a threat, another could see it as an opportunity. By understanding the nuances of these laws and effectively managing rent-controlled properties, investors can uncover unique advantages in an otherwise challenging environment.
Source: Propmodo
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