Written By: Shawn Johnson, RMP
As we continue to see more and more municipalities embrace rent control, it raises the question of who’s next. There are currently more than 100 municipalities that have rent control laws in place and more are taking the bait.
Let’s explore both sides of the coin and see how it impacts us. We can probably all agree, the more regulations that are in place, the more the general public needs professionals like us to navigate the waters and keep investors out of trouble. But, at what cost, and what does it do on an economic level? Before we get into that, we’ll look at the history of rent control. Many historians believe rent control began when Julius Caesar ruled Rome and a sitting Senator received a substantial increase in rent. Rather than move, he lobbied to make a law to protect his wallet. Even so, after World War I and World War II, housing shortages were on the rise in major cities like New York and, thus, rents rose as well. Funds were being directed to war efforts and not into developing more housing, causing these shortages. Then the government steps in, controlling what a landlord could charge for rent. It’s a basic summary, but you get the point.
Today’s rent control simply feels different. The frequency of increases, the amount of increases, the timing of increases and even limitations on reasons you can evict a tenant are all factors that are coming into play. Rent control has many effects on housing for investors and tenants alike. Here are just a few of the pros and cons for tenants and investors.
Investor Cons: Due to the inability to keep rents at market rates, investors often find themselves with lower and lower margins. Often times, current tenant rent rates end up well below market rents. The allowable rent increases under rent control frequently do not match the increases in operating costs, such as property tax, insurance, and maintenance costs. Furthermore, many rent control laws cause difficulties in evicting tenants, further compounding the problem.
Investor Pros: Really, I could only think of one longer term tenancy. When a tenant is acquired, they often stay long term because their rent increases are more fixed. Who would want to leave only to find a more expensive home?
Tenant Cons: The same long-term tenancy affects
tenants who are looking to move, or who are just coming into the renting scene. Because tenants are more reluctant to move for fear of an increase in rent, supply of available units are diminished. Another con can be attributed to the lack of margins the investor may be experiencing. Low to no profits have been known to cause investors not to make necessary repairs, resulting in housing that diminishes to lower quality.
Tenant Pros: The obvious one is low, slow, or no rent increases, even when the market suggests otherwise. Another pro for tenants is that, despite increases in wages, rent stays fairly consistent.
In reviewing the pros and cons for both the landlord and the tenant, it begs the question, can’t these issues simply be resolved by allowing free markets to exist? I believe markets have a tendency to correct themselves. A more effective method to dealing with housing shortages is simply to build more housing. It seems simple, but obviously, there is way more to it. It truly is a supply and demand issue as supply of housing goes up, rents go down, and as supplies decrease, rents go up. If new housing doesn’t keep up with market demands and supply further decreases, people will likely disburse to cities where housing is more abundant, and therefore, more affordable. It’s the simple law of economics.
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