Whether you’re an experienced landlord or a total newcomer to real estate investments, you may be wary of purchasing a property that’s affected by rental regulations. ‘Rent control,’ however, means different things in different places, and it’s crucial to understand exactly how it affects you as a landlord before you invest. Even if you handle property management in Jacksonville, FL or property management in West Palm Beach where rent control is still up for discussion, it’s important to understand what rent control could look like if an ordinance was put in place in the state.
Currently, there are no rent control laws in effect across much of the country. This means you are legally free to set the rent at whatever price you want. You can also increase it however much you’d like to during lease renewal, or with proper notice in a month-to-month lease, and you are not obligated to offer a lease renewal to a tenant if you don’t wish.
All of these factors may be different in states and municipalities with rent control. There may be strict, legally stipulated regulations on how much you can charge each month, how much you can raise the rent in a given timespan, and when you can discontinue a lease. These regulations are collectively known as “rent control,” and while some investors indiscriminately avoid affected properties, others see them as an opportunity with long term benefits.
So what exactly does rent control mean for your investment portfolio?
Rent Control: Definition and History
Between World War I and World War II, major US cities experienced a considerable stall in development, and housing became scarce. With the market working in their favor, many landlords took the opportunity to charge outrageous rent, making housing unaffordable for many residents. These cities were the first to enact rent control regulations – and though there have been significant developments since then, the basic concepts are still the same.
Even though it’s been around since the 1920s, rent control is limited in scope across the country. Currently, 12 states allow local governments to set rent control ordinances, and only five of these places have cities with an existing rent control ordinance. More states may yet start imposing regulations as people across the country struggle to find affordable housing. In 2019 alone, two new states passed statewide rent control regulations, and others are discussing similar initiatives, like the possibility of rent control in Florida.
These regulations vary from place to place. While some of them only affect how much you can raise the rent each year for existing tenants or their qualifying relatives, others regulate precisely how much you are allowed to charge for rent, regardless of the existing housing market.
The rent control pros and cons are highly debated for tenants and property owners alike. Let’s review some of the considerations around investing in a rent-controlled property.
What Does Rent Control Mean for a Landlord?
There are three significant factors to consider before purchasing rental housing that’s regulated by rent control:
1. Rent is not affected by market rates
The primary purpose of rent control is to prevent long-term residents from being priced out of their homes. You may have to charge a price set by the city, or you may be limited in the amount you can raise the rent each year.
This means, in some cases, the city will determine exactly how much you can legally charge a tenant for a rental property (i.e. a fixed dollar amount) and how much you can raise the rent (e.g. 7.5% every two years). In other cases, just one or the other of these rules may be in effect. Note that these rent increases are often set by a local rent control board and can change from year to year.
2. Rent control is not subsidized
While many people confuse the two, rent control programs are entirely different from government housing subsidies, like the Section 8 program. Section 8 is a federal subsidy program that helps low-income families find affordable housing, and it does not require landlords to charge below market rents for their rental properties.
Rent control, on the other hand, regulates the amount property owners can charge for each unit, but it doesn’t offer them any relief for the cost of maintaining those rental units or keeping the building up to code. Owners will also not receive any help keeping up with the mortgage, taxes, and insurance on the building.
Renters generally don’t have to be considered low-income to qualify for rent-controlled or rent ordinance-protected housing. Many people are getting a great deal on rent-controlled housing even though they could easily afford to pay market rates. Some cities create exceptions to the rent ordinance, so landlords can charge fair rates if their tenants are extremely high-income.
3. Existing tenants have the right to renew
Most rental homes with rent control regulations require the landlord to offer a lease renewal and limit the grounds for eviction. There are a few instances when you can refuse to renew, such as unauthorized subletting of the apartment or failure to respond to a renewal notice on time.
Tenants have a tendency to cling on to rent-controlled or rent-stabilized apartments as long as they can because of how much money it saves them over time. Depending on the property, this could be a good thing or a bad thing for the landlord. If you won’t turn a profit on the property until all the existing tenants move out, then investing is a very big risk. However, if you’re already making a meaningful profit, then you won’t have to worry about filling vacancies as often.
The Bottom Line
If you are considering purchasing a rent-controlled property to add to your real estate portfolio, there is one major upside: rent-controlled apartments are generally much more affordable than buildings that are exempt from these ordinances. After surveying the price of newer apartment buildings, they can seem like a steal.
There are often numerous ways to convert a property away from rent-controlled or rent-stabilized regulations. Some cities will allow you to impose rent increases to reflect significant improvements to the properties. While not every rent-controlled property is a bargain, the ones that do have a lower acquisition cost can be very lucrative for a long-term investment strategy.
Realistically speaking, the local housing market and basic supply and demand determine how much you can charge for rent. No one is going to overpay if there are plenty of affordable options. Rent controlled housing may seem more limiting than properties with no restrictions, but it’s just a matter of the local government setting the rates rather than the local market. You will still need to use the same rent and expense projections to decide whether you should buy a property, regardless of it being rent-controlled or not.
If you’re struggling with this aspect of property evaluation, Great Jones can help. Our top-notch property management experts can help you validate rent and expense estimates for proposed purchases, either by working with your real estate agent or introducing you to local agents. Not only can we vet your purchase, but our team can also handle the hassles of day to day maintenance, collecting payment, and screening tenants to find the best fit for your property. Learn more about the property management services Great Jones offers today.