Rent Control Initiatives Make Or Break Your Investments

Does the recent upsurge in rent control initiatives and advocacy mean I could be making more selling my current residential investment property? Does that seem upside-down? Don’t forget, there are two sides to every coin.

The Scoop

Lawmakers and rent control advocates are currently working to repeal state laws forbidding rent control to revive the practice in states across the country. Illinois, California, and Washington are gaining some foothold in their efforts to reinstate the practice in an effort to control housing costs. In Oregon— in spite of a narrowly defeated 2017 measure — the concept is gaining ground in cities with drastically increasing rents and limited housing availability. This is especially the case in the lower-income ranges.

Any undergraduate student enrolled in a Microeconomics 101 class will tell you that people respond to incentives. Rent control seeks to place an artificial price ceiling on a good or service (in much the same way that minimum wage places a price floor on wages). On paper, this policy caps rent prices so investors reach an artificial max limit, while renters enjoy a cap on the costs they’ll incur. However, like any economic policy, there are always unintended consequences. In the case of rent control, this policy changes the incentives for investors to invest in the market.

The Downside

By placing an artificial ceiling on the revenue stream of the investment, rent control also places a limit on how much most investors are willing to invest. Having limited gain potential while maintaining complete risk of loss means investors will contribute less in these markets as they seek higher returns elsewhere. People respond to incentives. Investors are less likely to both purchase properties and perform repairs and maintenance at the level they might in other markets. It also means many investors will simply take the next exit and invest in other markets.

The Repercussions

As funds flee potential rent control markets, investors will seek opportunity in other markets with less government interference. This creates a golden opportunity for investors in non–rent control markets to sell at a higher price. If rent control dies in these select markets, I predict a bit of a price correction downward in non–rent control markets.

If you have considered selling your investment in a location that investors fleeing rent-control areas might find attractive, now may be the time. The largest exodus is most likely to occur before the election in November. Perhaps you are considering a 1031 exchange, retirement, or a host of other reasons. Now is a great time to sell.

Another attractive option is selling your current property in an area further into its growth cycle and leverage that property into areas of newer growth. In many newer-growth areas, the ratio of rents earned to initial capital investment dollars may be significantly higher than your current property. This allows you to multiply your investment by distributing that capital into multiple properties in these areas of reduced initial investment entry. The result is a more diversified investment portfolio across multiple markets and property types. This strategy can seriously improve your cash flow and IRR.