What the Growing Trend Towards Rent Control Means for Landlords
As a landlord, rent control is likely something that you’re in tune with, especially with it making headlines recently. In the past few months alone, Berlin has announced a five-year ban on rent increases, while California passed a law with the nickname the “anti-rent-gouging bill.” But before you panic, it’s essential to define what rent control is, what it’s not, and how it impacts you as a landlord.
What is Rent Control for Landlords?
Rent control is a government regulation limiting the price a property owner can charge a tenant to live in a specific unit. Municipalities usually enact rent control laws, and the details vary significantly by location. All rent control laws are intended to keep living costs affordable for moderate-income or fixed-income residents.
Although the term is thrown around quite liberally, real rent control –– where the rent price is frozen indefinitely –– is quite uncommon. Today, when people refer to rent control, they usually mean rent stabilization.
Even the salacious headlines about Berlin’s intent to “freeze” rent for five years is misleading. For many units, rent can be raised yearly 1.3% to account for inflation, while new builds are not subject to this rent “freeze.” The California “anti-rent-gouging” law that passed earlier this year is also a version of rent stabilization.
What is Rent Stabilization?
Rent stabilization efforts target specific property types within a city and allow for periodic rent increases. Even rent stabilization is not as rampant as the headlines would have you believe. According to a January 2019 study by Urban Institute, only 182 cities and municipalities in the United States out of approximately 89,000 have rent control policies. Thirty-seven states have laws that forbid local governments from enacting rent control measures.
How Does Rent Control Impact Landlords?
Now that you have a basic understanding of rent control, you may be wondering how it impacts you. Before you panic, remember –– unless your property is in a rent-controlled city in New Jersey, New York, California, Maryland, Oregon, or Washington, D.C., you have nothing to worry about.
Rent control policies are a mixed bag, for nearly everyone involved. While you may be assuming the landlord is the losing party in these rent-controlled cities, it’s not all bad. Rent control does have some benefits to the landlords since it reduces turnover to nearly zero, so your units will always be occupied and providing a stream of income.
An additional positive for landlords comes in the form of less development as a result of rent control. When the construction of units decreases, there is less competition among landlords to attract tenants, giving you a larger pool of potential tenants.
It’s important to note that most municipalities attempt to set the rent-controlled price at a rate that is fair to tenants and landlords alike. That said, the most obvious downside of owning income property in a rent-controlled area is the ceiling placed on potential profitability. Because rent control imposes limits on how, when, and by how much landlords can raise the rent, it puts a cap on profit potential –– no matter how high the demand.
That said, it’s been shown anecdotally and in studies that the most significant impact on landlords is the loss of an incentive to maintain and upgrade rent-controlled properties. Beyond the upkeep of your property, you’re still responsible for your property taxes –– no matter if your capped rent covers them or not. The problem is that rent control policies sometimes forget the impact of property taxes, which can often increase while rent must remain unchanged.
On the whole, rent control is a complex issue with noble intentions and mixed results for the economy, neighborhood, and indeed for the landlord.