This article was originally published on Forbes by Nathan Miller, President of Rentec Direct.
Rental rates continue to rise year over year, with a vast majority of the nation’s 100 largest cities seeing increases. For tenants, the first question that often comes to mind is: “Is this even legal?!” The short answer is yes, unless you live in an area that has rent-control or rent-stabilization acts in place. And rent control probably isn’t going anywhere — a report from late last year indicated that there was not a single location in the country where someone working a full-time minimum wage job could afford to rent a two-bedroom apartment.
But what exactly is rent control, anyway? The topic seems to be making headlines regularly. People typically picture one of two things: Tenants imagine beautiful apartments at below market value (think the Friends apartment), while landlords think of reduced profits and lost incentives. Straight out of the dictionary, rent control is the government regulation of the amount charged as rent for housing. In other words, rent control is a program that places limits on how much landlords may raise rent on existing tenants.
Rent control is a controversial subject, and the lack of affordable housing in many major markets is once again bringing this issue to a head. Like any other social issue, rent control has two sides, and as a real estate investor, it is important to understand both.
Rent Control Pros
• Rent control has good intentions. The purpose of these policies is to try and ensure that a city has a certain amount of affordable housing options for lower- and middle-class renters.
• Rent control policies allow larger cities to maintain economic and social diversity, rather than forcing all lower- or middle-class individuals to live in specific low-cost areas.
• Tenants are able to have some stability and security with rent control. Besides paying an affordable rent, they are able to budget for the future without the fear of large or unexpected rent increases.
• Tenants save money on other things, too. By allowing lower- and middle-class workers to live in areas well-served by public transportation and other amenities, rent control can help tenants save money on things aside from rent.
• Rent control tends to keep tenants motivated to stay, which makes things easier on landlords. In a perfect world, rent control could keep your building full of tenants who pay their rent on time, turning your investment into a relatively secure cash flow.
Rent Control Cons
• On the flip side, tenants who remain in their apartments longer reduce the number of available apartments at any given time. This can also drive up the price of other available rental units that are not under rent control policies.
• Lower prices mean higher demand. With more rent-controlled apartments at an affordable price, more renters are going to be trying to rent than there are rent-controlled apartments available.
• Landlords who pay more for their buildings than they are allowed to collect in rent won’t be able to afford regular maintenance and repairs.
• Rent control allows the government to influence rental rates rather than letting supply and demand take its natural course.
• The incentive to invest and develop decreases. Property investors take risks with years’ worth of savings to have a (hopefully) profitable investment in the future. If rent control causes a landlord to take a loss or break even on their investment, it might not be worth the risk for them. The same goes for developers, as it becomes difficult to profit from residential buildings.
• In many cases, jobs in rent-controlled areas tend to remain low-paying. Higher rents means higher-paying jobs, which means nicer, well-maintained communities. If you have an area that suppresses rents, then higher paying companies have a harder time finding employees, leaving lower-paying companies to thrive in those areas.
So, is rent control good or bad?
Simple question, complicated answer.
A Stanford study found that while rent control provided benefits to covered tenants, the reduced rental housing supply caused more widespread rent increases. Landlords dealing with rent control should consider this when contemplating large increases in rents, which may attract media buzz.
It’s my belief that all rental property owners should be able to determine appropriate rates in order to meet the demands of property expenses, taxes and inflation — and maybe make a profit. Alongside this, everyone also deserves a place to live.
The trick is to find a balance. Small, regular rent increases allow landlords to keep up with market rates while allowing tenants avoid huge increases that have the potential to displace them.