Rent Control—Is it Bad for Landlords?

We all know there are many reasons that drive landlords to raise their rent, so it's hard to imagine investing in an area that has rent control regulations in place. Who would want to restrict themselves from keeping up with market rates, inflation, tax increases, and generating more rental income?

Barely anyone, to be honest.

Many real estate investors avoid rent-controlled rental properties because they are subject to regulations on:

1. How much rent you can raise

2. How often you can increase it

3. Under what circumstances you’re allowed to raise it

I mean, New York City’s rent control laws were supposedly the answer to how Monica from the TV show Friends could rent a ridiculously lavish West Village apartment. When Chandler said, “Rent control made it a friggin’ steal!” I'm sure all the landlords watching the show cringed.

Rent control ordinances also vary in each city or state, where next-door communities could have drastically different regulations. The variation is increasingly complex if you’re investing from out-of-state or you have holdings in multiple communities.

Yet, surprisingly, rent-controlled properties could make sense in your real estate portfolio.

Before we tell you how let’s look at how rent control ordinances work.

Definition of Rent Control

Rent control is a government program that limits the amount landlords can charge rent for a property. The goal of such ordinances is to encourage affordable housing.

Instead of the federal government, it’s the state that regulates rent control laws—resulting in varying rules from one state to another. Moreover, rent control can vary within the state. We have nine states that allow rent control, but none of their cities implement it.

Now, one of the biggest concerns of landlords is getting stuck with unreasonably low rent amounts for years. The reality is, while rent control laws can limit your income, it doesn't always restrict the amount at drastically below-market rates.

In recent years, modern rent control regulations have evolved in different ways:

1. Laws, such as Oregon’s 2019 bill, don't just cap the maximum rent. Instead, they have rent regulation or rent stabilization rules prohibiting landlords from jacking up rent amounts by more than 7% (over-inflation) annually.

2. Some cities determine their rent increases on their consumer price index (CPI), typically ranging from 2% to 5% per year. For example, California rent control laws allow landlords to raise the rent by 5% every year on top of their CPI.

If you’re not sure what rent control regulations your state or city currently has, here’s a map provided by the National Multifamily Housing Council (NMHC) as of September 2020:

Source: NMHC

Keep in mind that even if rent increases are allowed in your state, your city may have ordinances that override the regulations. Local knowledge is vital, especially if you're investing from a distance because rent control rules are strictly location-based.

Rent-controlled properties are less common these days—dwindling from 2 million homes back in 1950 to around 48,248 (0.11%) of rental homes in 2021. Still, as we’ve seen in the map above, there’s a chance that you might come across rent-controlled rental properties up for grabs.

This begs the question: Are these homes good investment opportunities?

Let’s evaluate the advantages and disadvantages of investing in rent-controlled areas.

Pros and Cons of Rent Control

Like most real estate rules, landlords need to weigh the implications that come with tenant-protection laws.

On the one hand, rent control ordinances create opportunities for lower-income families to rent a home they otherwise couldn't afford. That means landlords will enjoy higher occupancy rates and lower turnovers. On the other hand, investing in rent-controlled properties may limit profitability and restrict landlords from evicting problematic tenants at their own discretion.

Here’s a comprehensive list of pros and cons to help you see the bigger picture:

Conclusion

All things considered, rent control is neither good nor bad for landlords. Instead, it’s more of an important consideration when evaluating a potential investment opportunity.

If you ask us, “Are rent-controlled homes good investment opportunities?” We’d say the trick is to find a balance. You want rent increases to inch up with market rates while assuring tenants that their rent-controlled property won't push them out of their financial capability.

As long as the odds are in your favor and everything remains profitable, you can be confident in investing in rent-controlled properties. If you’re hoping to expand your rental portfolio, they’re definitely worth considering.

Do you have any other tips on investing in rent-controlled properties?

Image courtesy of Bret Sayles