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

[Dan H.]

Originally posted by @Tony Gunter:

Constituents vote based on emotion.

Politicians act based on constituent opinions.

The politicians aren’t necessarily motivated to do what’s right, just do what the constituents want.

A conversation with three economists would dispel all the rent control rhetoric. However, the politicians want to follow constituents desires, even if they are erroneously calling for “off with his head”.

Sad...

There was just a vote in California that 62% voted against rent control.  This was a resounding indication that the constituents voted against removing state wide regulations banning rent control  

So this act is not what the constituents want but what their constituents want.  What else justifies this inconsistency.  

I see similar things in the conservative states and at the federal level.   The politicians are not doing what the constituents want but what they believe their constituents want.  

[Matt R.]

Originally posted by @Spencer Gray:

@Matt R. You make some good points. 

Do you think rent control is the cause of the appreciation and increased value in those markets or is it simply correlated to being in areas of high population density and attractive places to live?

I'm just wondering what the value and appreciation would be without price controls not to mention the societal impact of a more balanced supply. 

Also, who get's to decide on the "perfect" rental rate or increase? Should it be determined by the market or by politics?

 Maybe the bigger factor is the physical geography as there is virtually no land to build and limited mostly to infill or tear down. Mountains, oceans and in NYC partly an island pinch all options. So perhaps this combo is creating even worse shortages. 

Also for the LA area only a smaller portion is even under RC and as mentioned most new build is very expensive rentals/luxury. Right now I think the lowest a 2bd might be is 2k a month and that would be in the worst area in town. When you do the math even under rent control that becomes 3k eventually. The base is so high now RC might not help that much even in best case examples. 

[Account Closed]

@Spencer Gray SOMEHOW less attractive? It was already extremely unattractive for me before the expansion of rent control. 

[Will F.]

Pricing regulations usually backfire.  Rent controls and price controls tend to backfire.  As far as basic economics as others have said over-regulation in housing market leads to investors leaving.  Therefore theirs less housing.

This is unless the government starts building cheap housing and that's not happening either.

They need developers to create more supply and investors to fix up old housing stock (BRRRR method etc) and revitalize cities. That's not happening when ignorant politicians are responding to emotions rather than reason.

The more regulation and controls government have--for instant strict building codes, it scares of investors and makes existing housing worth more.  They contribute to the problem they don't understand.

It sounds counterintuitive, but in the long run, every economic study done (like 99%) shows that rent controls 1. don't work.  2. lead to less affordable housing (due to basic laws of supply v demand)

[Dan H.]

Originally posted by @Will F.:

Pricing regulations usually backfire.  Rent controls and price controls tend to backfire.  As far as basic economics as others have said over-regulation in housing market leads to investors leaving.  Therefore theirs less housing.

This is unless the government starts building cheap housing and that's not happening either.

They need developers to create more supply and investors to fix up old housing stock (BRRRR method etc) and revitalize cities. That's not happening when ignorant politicians are responding to emotions rather than reason.

The more regulation and controls government have--for instant strict building codes, it scares of investors and makes existing housing worth more.  They contribute to the problem they don't understand.

It sounds counterintuitive, but in the long run, every economic study done (like 99%) shows that rent controls 1. don't work.  2. lead to less affordable housing (due to basic laws of supply v demand)

 I would add a third ...

worse maintained rentals.  There is now incentive for the LL to not do things like maintain the paint as nice, the yard as nice, replace the flooring as often, etc.  Tenant turn over can lead to significantly increased rent for the LL (if rent appreciation exceeds the cap for a couple/few years).  Why would a LL pay to keep a unit looking optimal if the incentive is not to in order to achieve tenant turn over.

Note with as high as this proposed rent increase cap there may not be much incentive to turn over the tenant but at lower cap percentages it could be different.

[Charles G.]

I don't understand the small landlord exemption. Does the 10 SFR limit apply to an LL who has a couple duplexes/triplexes or do they all have to be homes?

Thanks!