What Is Rent Control And How Much Would It Impact Me As A Landlord?

WHAT ARE THE LONG TERM IMPLICATIONS OF REGULATING INCOME FOR RENTAL PROPERTY OWNERS

As previously noted, anti-landlord legislation is in vogue this season. With national, state, and municipal campaign season also kicking into full gear, there are a flurry of attention grabbing bills making headlines these days. In many cities this has taken the form of anti-landlord (or pro-tenant) legislation. There is no doubt that landlords came out of the Covid pandemic looking like the bad guys and local politicians are happy to double down when it comes to misplaced anger.

The biggest headline grabber of them all are bills aiming to create rent control. So what is rent control? What are its aims?...and most importantly, what would be the downstream effects if it were enacted in a city or town where you own rental property?

LEARN MORE: UNDERSTANDING THE RECENT TREND IN ANTI-LANDLORD LEGISLATION ACROSS THE U.S.

RENT CONTROL: WHAT IS IT? WHY DOES IT EXIST?

Rent control is essentially when a government, most typically at the municipal level, steps in to place limits on the amount a landlord can set rental prices at. They’re typically enacted with the intention of creating more affordable housing for lower-income residents. With real estate costs spiking across the board since the pandemic and subsequent inflation, the need for more affordable housing is not in question. The issue comes down to whether this is an effective remedy to look more closely at how it will impact other parties.

Not surprisingly, rent control and other governmental intervention in this arena are not historically popular. More than half of the states in the U.S. actually have laws that forbid local governments from enacting such legislation. However, recent economic trends have brought these issues back to the forefront.

LEARN MORE: IN SPAIN, RENT CONTROL LEADS TO RISING RENTAL PRICES

WHO ARE LANDLORDS?

When diving into an issue that elevates the needs of renters, it’s important to look at the other side of the equation: how will this affect those who own the properties? And more specifically, why are they charging so much more for rent these days?

Although it’s exciting to paint a picture of landlords as evil “vulture capitalists” ripping off renters to line their mansions with gold, the reality couldn’t be further from the truth. At Nexus Property Management® the majority of property owners we work with own just one or two multi-family homes and they’ve hired us because they’re too busy working their 9-to-5 job to manage the property themselves. We pride ourselves on providing a service for working class people who have chosen real estate as a vehicle to a comfortable retirement or means to pay for their children’s college rather than just relying on traditional mutual funds. Our clients are everyday people who understand that the ticket to their success is ensuring their tenants have a comfortable place to call home.

So if that’s the case, why are they raising rent prices so dramatically???

LEARN MORE: ARE RENTS TRULY ‘UNAFFORDABLE’ OR IS SOMETHING ELSE TO BLAME?

WHY HAVE LANDLORDS INCREASED RENTS?

Like everyone else in recent years, landlords have been impacted by inflation and it’s hit them from every angle. It has never been more expensive to operate a rental property. First off, if a property owner purchased the property in the last year or so, they need to raise more income due to the giant increase in interest rates. If they’ve bought in the last three years, they also have to contend with the recent skyrocketing of all real estate prices. Regardless of when they bought, increased home values have led to increased taxes and much higher insurance costs (often doubling in just 12 months!). And on top of that, the cost of maintenance has risen dramatically too. In short, the costs of owning and operating a rental property have never been higher. Most landlords are just getting by. They are doing their best to adjust to the hand that’s been dealt in recent years, in the same way that tenants are trying to navigate these more challenging conditions.

LEARN MORE: ARE RENTS TRULY ‘UNAFFORDABLE’ OR IS SOMETHING ELSE TO BLAME?

WHAT ARE THE UNINTENDED CONSEQUENCES OF RENT CONTROL?

In theory, rent control could create a greater quantity of affordable places to live for low-income families which is naturally a good thing for low-income families. But how would it impact other parts of the community?

SMALL LANDLORDS LOSE:

As mentioned previously, most landlords own one property…maybe two. If their ability to bring in much needed income is hampered they will most likely sell and give up on real estate investment or continue to own but cut back on variable expenses such as maintenance requests and other spending that increases the quality of life for tenants.

BIG LANDLORDS/ DEVELOPERS /REAL ESTATE HEDGE FUNDS WIN:

The irony is that regulation of rent because of the misconception that landlords are big greedy entities will actually benefit the big greedy entities that are out there. By making it more difficult for small landlords (i.e. teachers, police, tradespeople) to succeed in real estate, big time developers are more likely to add to their own portfolios and create local monopolies. Many of them have the financial means to knock down the three and four family homes lower-income families rely on to build something else much more profitable.

QUALITY OF LIFE FOR LOW-INCOME TENANTS:

With less income coming in, landlords have less ability to cover maintenance needs and other items that will add value for tenants. Slowly but surely maintenance will be deferred and the quality of these buildings will decrease dramatically. Look no further than America’s infrastructure to see what happens when spending is curbed for any amount of time. Landlords put so much of their income back into the properties they own…but not if they don’t have that money to spend.

WEALTHY RENTERS:

Not everyone who rents fits that low-income qualification, so it begs to reason that the wealthy who elect to rent will benefit from these programs too. In essence, rich tenants are being provided a subsidy allowing them to hold onto their cash and spend it elsewhere instead.

MUNICIPAL TAX ROLLS DECREASE…COMMUNITIES LOSE:

If the amount of rent a property brings in decreases, so too will the taxable income and value of that property. If the amount of taxes coming into the state drop significantly, which they could depending on how severe the rent control figures are, towns and cities that rely on state revenues could be in big trouble. Communities will have a harder time providing the services that many lower income families rely on.

LEARN MORE: GET READY FOR YOUR TAX ASSESSMENT TO SKYROCKET!

CONCLUSION AND NEXT STEPS:

The real estate markets, in general, are in a strange place right now, but like all markets, they’re ultimately cyclical. Government intervention in the form of increased interest rates is a contributing factor to the lasting friction that has slowed down this cycle and that too is an unintended consequence of policy meant to solve another issue. But we’re not here to blame government because the vilification of one group is ultimately how we ended up in this defensive position in the first place. We all want what’s best and in this case, it may not be easy to agree on what the best next step is, but it should be clear what it is not. Rent control is a short term fix and our readers and clients know much better than to sacrifice the long term for a short term win. Hopefully our elected officials do as well.

LEARN MORE: THE BEST LANDLORDS CULTIVATE RELATIONSHIPS

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Mick Lefort is the General Manager of Nexus' New Haven County Franchise Office and the Vice President of Operations for Nexus Property Management®, a National Property Management Franchise that manages all types of rental property from single family homes or condos to large apartment buildings and complexes.

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