Rent Control: Investing in California just became less attractive

[Spencer Gray]

This is a bit of a rant, but I had to get it off my chest.

California, following in the footsteps of Oregon, once again is acting with emotion and without reason or a sense of how economics works by passing a cap on rental rates increases. Rent control doesn't work and only exacerbates the supply/demand imbalance. The issue isn't price, the issue is scarcity. Capping the growth of revenue only puts downward pressure on the only thing that will alleviate the problem: new supply.

The new law puts a 7% + inflation cap for three years on annual rental increases. In a sense they have criminalized deep value add projects and heavy re-positions. These projects usually pencil with 7-20%+ rental increases after the asset has been improved by investing significant capital ($5k-$15k / unit) to not only make the units look better but to fix differed maintenance and to properly maintain the asset. If the incentive to fix and maintain the asset is capped at a political derived (aka arbitrary) figure, investment will continue to decrease. Assets will fall into disrepair and supply will be decreasing at a rate faster than it can be replaced.

At the last minute the California Assembly amended the bill to eliminate the cap on new construction and properties under 10 years old. The result of that amendment will be the construction of only the wrong type of supply (new luxury CORE AA+) and will allow the most wealthy and insulated developers to continue to do what they do. For everyone else who is trying to take D and C assets that are quickly deteriorating and turn them into nice C+ communities that are safe to live in through a targeted value add program, sorry, you're the bad guy.

For those in the middle class in California who want to build and create wealth through rental properties, sorry. California would much rather you stick to your W2 job, your 401K, to count on social security and the safety net.

If you're saying "well 7% + inflation is 9%, isn't that enough?" keep in mind they were aiming for 5% and it still nearly eliminates the incentive for the only solution, new supply and maintaining the existing supply through value add programs. 

The unintended consequences of these types of laws will be a further supply imbalance and an exacerbation of the wealth inequality gap. 

For those of you in California (or anyone read in) - am I missing something?

For those of you in other deep blue states, how will these types of policies effect your business in the future?

Does anyone think this type of economic central planning works?

Read more -

Mercury News - California Assembly passes rent-cap bill

LA Times - California plan to prevent big rent hikes advances, but only after it’s limited to three years