For property investors, landlords, and tenants alike, rent control is a complex (and often contentious) subject. Even if you currently live in a state without rent control, that may soon change. In 2019, two states passed rent control laws; major cities and municipalities strengthened existing regulations, and countless local governments (including ones in Florida) proposed and debated initiatives. Although it may not affect property management in Jacksonville, FL, property management in West Palm Beach, or other places across the U.S. quite yet, it’s needless to say that the topic of rent control is likely not going away. Rent control in Florida and Texas may not exist now, but the initiatives have been discussed, which is why staying informed on potential rent ordinances is important as a property investor, landlord, or tenant.
So, what does this mean for local housing markets? It’s a more complex picture than you might imagine. Although the laws are intended to keep long-term residents from being priced out of their neighborhoods, some analysts argue that they create housing supply shortages and drive up housing costs for other residents. Some even claim the laws make it difficult for landlords to maintain rental properties, which affects the quality of available housing.
Whatever the long-term effects are on property management, rent control ordinances are a reality for many real estate investors — and it isn’t all bad news.
Let’s delve into the rent control pros and cons from a real estate investor’s perspective.
Benefits of Rent Control
While rent regulation is largely developed to protect tenants, there are still some ways that property owners benefit from these practices under the right circumstances. Here are a few of the advantages of rent control.
Lower acquisition costs
Because rent-controlled buildings are generally less profitable, these properties often come at a much lower purchase price than their non-regulated counterparts. You’ll also face less competition from other landlords bidding on them. This can make them great bets for long-term investments and great entry purchases when you’re trying to get a foothold in the market. With some patience, luck, and work, you can raise the value of the land to lift the rent to fair market rate (and in some cases, deregulate it).
Residents in rent-controlled properties will stay a lot longer than other tenants. That means fewer turn costs and less time spent placing tenants. As long as you’re in the black, this steady stream of income requires less work, even if it’s not as much income as you might make without the regulations.
Though it’s not always in pace with the market, the steady rent increases you are allowed will help you earn more the longer you own the property. Plus, tenants are much more likely to be able to keep up with rent when the increases are predictable, so you are less likely to deal with late payment or non-payment.
Greater ROI for building upgrades
Many cities will allow a landlord to raise rents for major improvements. For example, some cities allow you to raise the rent as much as 10% to cover the cost of these upgrades, meaning you are increasing the value of your investment as well as your cash flow. Local laws differ widely on how much you can benefit from this, so you should always do your homework before you spend too much capital on upgrades.
Rent will virtually never decrease
Because you are almost always charging below-market rates for a property, it’s a safe bet that you will never have to lower your rent to keep residents in place. In an unregulated property, on the other hand, economic slumps may force you to lower the rent to stay competitive and avoid high vacancy rates.
As long as you purchase a rental property that is profitable, you’ll have a steady stream of income that can increase over time. Even if you can’t raise rates as quickly as other properties, the predictability of rent-controlled properties make future revenue projections easier than ever.
Drawbacks of Rent Control
Of course, all these regulations can make things difficult for property owners and can eat into profits considerably if you fail to account for them in your bottom line. To follow are a few of the significant concerns with owning rent-regulated apartment complexes.
You can’t charge market rates
While neighboring properties might be increasing rent by as much as 10% annually, you will still be restricted by the allowable increases, which are often much lower. That translates into lost income and ultimately puts a ceiling on how much you will be able to make on your investment. You’ll need to carefully consider your projected income and expenses before you purchase a new property, and be wary of areas ripe for new developments that will drive up the prices.
Property taxes can be a burden
Local regulations often fail to account for the burden of property taxes. The amount you are legally allowed to raise the rent each year won’t always cover any increase you have to pay in taxes, and you’ll be on your own to cover the difference.
Maintenance can eat into your profits
Because most rent-controlled properties are older, it can take a lot of money to keep them up to code. For the most part, the burden of repairs is on you. No matter how much it costs, you will be required to keep the building up to code or face severe penalties. Of course, it’s in your best interest to keep your property in good shape to protect your investment, but this can be hard to afford if you don’t plan for it properly.
Difficult residents can stick around
Most city rent control ordinances require you to renew a tenant’s lease, no matter how difficult they make your life. Typically, when a resident has found such a good deal on housing, they will want to stay put. Rent control laws often limit the reasons you can evict a tenant. This can include what you are allowed to put in the lease agreement — so factors like constant noise complaints might not be enough to remove difficult residents from your property.
Thorough tenant screening can curb this problem. Make sure you are contacting previous landlords, running background and credit checks, getting personal references, and more. Great Jones can help property investors by providing reliable tenants that fit their needs while handling the daily hassles of routine maintenance and rent collection.
What Makes a Good Investment?
Buying a rent-controlled property can be a great way to add stability to your investment portfolio, and there are a few ways to avoid falling into a money pit. Much of this has to do with local legislation. If you are allowed to raise the rent upon tenant vacancy, then you want to avoid properties with residents who have stuck around for more than three or four years. Smaller units will generally have higher turnover (as residents age out of the space) and thus give you more opportunities to raise the rent.
Remember – markets with consistent, low cap rates aren’t always a bad thing, especially in neighborhoods where the market rent rate has held steady for a few years. The ‘slow and steady’ approach to property investment isn’t always exciting, but it gives you a stable income stream that boosts your investing power. If you’re trying to build a portfolio, rent-controlled or rent-stabilized properties are a reliable asset you shouldn’t overlook.