We’ve spoken about the importance of real estate investment location before multiple times, for different reasons. With rent-control laws varying greatly depending on which market your rental property’s in, investors need to consider their effect. But what is rent control exactly?
Rent Control Definition
Rent control is the government regulation of the amount charged as rent for housing. It restricts a landlord’s ability to raise rents on existing tenants. So how does rent control work? It limits the rent an owner may charge for a residential unit; it also restricts the right of any owner to evict tenants.
Owning a rental property in a rent-controlled area isn’t the easiest thing. These units are subject to a host of regulations that affect how much rent can be raised, how often, and under what circumstances. As we said, some regulations even prohibit evicting a tenant from rent-controlled properties unless they are justified through a very narrow set of circumstances. During your search for what is rent control, you may have come across another term- rent stabilization. Are the two interchangeable? Is this the same as rent control? They’re similar, but not exactly. Let’s clear it up.
Rent Stabilization vs Rent Control
The two terms fall under rent regulation. Rent-regulated housing began in the US after World War I. The reason being to create a balance where owners can still earn a profit while tenants are protected from excessive rent increases. A real estate investor can differentiate between rent-stabilized units and rent-controlled units from three aspects.
The local housing board determines the rental rates for both types of rent-regulated housing programs. Owners of rent-stabilized units, however, may increase a tenant’s rent during the lease term with the tenant’s written agreement when adding new services, equipment, or capital improvements. Owners file an initial and subsequent annual statement of registration for each unit on a date indicated by the local rent board to qualify for rent increases.
Some municipalities regulate rental properties using both programs; they divide the two types by the construction date of the respective property. For example, in New York (where there is a high concentration of rent-regulated housing) buildings constructed before 1947 can be rent-controlled. Buildings developed between 1947 and 1974 (and buildings phased out of the rent-control program) which have more than six units fall under the rent-stabilization program.
In rent-controlled units, landlords have the right to ask their tenant to move for reasons not motivated by a desire to increase rent. Acceptable reasons are when they fail to renew a lease, owner-occupy or lease to a family member, convert to a condominium or cooperative (also called a co-op apartment) or perform repairs and renovations. Tenants in rent-stabilized units have a guarantee to renew their lease.
Investors typically want to stay away from laws which reduce rental income and limit profits. However, when you ask what is rent control, you need to know all of the effects of rent control to truly understand it.
Rent Control Pros and Cons
It is one of the more controversial subjects in the real estate investing industry. So naturally, rent control has its supporters and its opposers. Is rent control good or bad? It depends on who you ask. The two main groups affected are obviously, landlords and tenants. Here are the main effects it has on the real estate market as a whole.
- It’s a good thing for the community as it allows for affordable housing for middle and lower class tenants. This also diversifies the neighborhoods. There aren’t certain groups of people living in low-cost areas because they have affordable housing options.
- Rent control provides a sense of security to renters. With no unexpected rent increases to worry about, tenants can be at ease.
- Landlords can gain the confidence of knowing their tenants are motivated to continue renting their units. Play your cards right and you can have a rental property with high occupancy and tenants who meet their rent payments.
- The supply and demand of the real estate market won’t be able to take its natural course from government intervention.
- If prices are too low, the demand for these rent-controlled units will be too high compared to what’s available on the market.
- Landlords are renting out units to tenants at rates below the current fair market value of the unit. And they are still responsible for paying all the holding costs associated with the unit, which are all at today’s current market prices.
- Tenants could sometimes end up costing landlords and real estate investors. When landlords pay more for their buildings than they collect in rent, they can’t afford regular maintenance and repairs. Rental expenses can exceed rental income, resulting in negative cash flow.
- These regulations drive away investors because there is no incentive to invest in a rent-controlled market. Investors want to make a profit, and the risk of breaking even or potentially losing money on an investment in a rent-controlled market is not worth it to some.
So now you know what rental control means for both the landlord and the tenant. Considering the pros and the cons, is the real estate investment you choose to make worth taking on the restriction of rent control? Of course, you will not find rent control in all municipalities. That’s right, rent control is made all the more complicated by the fact that ordinances vary from city to city and state to state.
Where to Invest in Real Estate
Rent control is not a death sentence for your investment. There are multiple factors which come into play when choosing a market for real estate investment; rental law is just one. What cities have rent control? A couple of the biggest cities which employ rent regulation are New York City, San Francisco, Los Angeles, and Washington DC.
There are many states in the US which have no rent control, or actually have laws in place which prohibit rent control (37 states). For investors steering away from rent control, a couple of places to start your property search include Arizona, Hawaii, Illinois, Nevada, and Florida. Do you want to start searching for your next rental property investment in a US real estate market? Just click here to start looking for and analyzing the best investment properties in your city and neighborhood of choice.
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