If you own rental property in the US housing market, you are probably already familiar with the term ‘rent control’. Here, we’ll give you an in-depth look into this policy as well as talk about the different pros and cons of rent control for landlords.
What Is Rent Control?
Rent control is a government program that limits the amount rental property owners can demand for leasing a house or renewing a lease. The goal of these controls is to offer affordable rental housing options, especially for low-income individuals and families.
According to recent research by the Urban Institute on areas with rent control, only 182 municipalities out of 89,000 have rent control policies. Most of them are in Oregon, Washington D.C., Maryland, California, New Jersey or New York. Most states actually have laws that prohibit local governments from applying rent control measures.
Rent controls vary from one place to another. For example, California rent control allows landlords to increase their rental rate by only 5% every year, plus the Consumer Price Index (CPI). However, not all rental houses in California are subject to rent control. The law states that the local rent control laws don’t apply to condominiums, single-family homes, and houses built after February 1, 1995. Other rental properties exempt from rent control include short-term rentals, detached units, government-subsidized tenancies, and owner-occupied properties with less than four units.
So, is rent control good or bad? Just like any other law in real estate, rent control has its pros and cons. Every property owner in the US housing market needs to get familiar with the pros and cons of rent control for landlords.
So, what are the pros and cons of rent control?
What Are the Advantages of Rent Control?
While a lot of landlords and real estate investors assume rent control is all bad for a rental property business, there are actually a few good things that can come from owning a property in areas with rent control.
1. Higher occupancy rates
Since rent-controlled rental properties are a great deal for tenants, they might be more motivated to renew the lease agreement. This means that landlords can enjoy a better occupancy rate in the long-term.
2. Lower tenant turnover costs
Studies have shown that rent control laws limit tenants’ mobility and lowers population displacement from a state or city. Less movement of people from an area is good news for landlords since tenants will be retained for a longer time. This saves landlords the time and money required to advertise their rental properties to get new tenants.
3. Less competition
Rent control has been proven to discourage developers from putting up new units in an area. If real estate investors feel that rent control will limit their profitability, they are likely to avoid such cities or towns. Less supply is an advantage for landlords since the demand for existing rental units is likely to go up, thus attracting more potential tenants.
4. Fewer cases of eviction
Tenants are more likely to pay their rent on time to avoid getting evicted from the rental properties which offer favorable terms. When tenants pay their rent on time, landlords will rarely have a reason to write eviction notices. This allows rental investment property owners to save the time and money involved in filing an eviction lawsuit.
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What Are the Disadvantages of Rent Control?
1. Places a limit on rental profitability
Since rent control determines how, when, and by how much property owners can raise the rent, it puts a ceiling on the profit potential of a real estate investment property. Even in a hot real estate market, rent control can keep the prices below the market value. As a result, real estate investors might end up operating at a loss if overall expenses exceed rental income (negative cash flow).
2. Disregards property taxes
In many states and cities, property taxes are always rising. Sadly, rent control laws don’t usually take into consideration how changes in property taxes can place a burden on landlords. As a result, many landlords end up spending a high percentage of their rental income on property taxes.
3. Eviction is not easy
Rent control laws are designed to protect tenants. As a result, they make it very difficult for landlords to terminate tenancies. Landlords are required to have a just cause to evict a tenant, which could be the refusal to pay rent, tenant misconduct or significant damage to rental property. They must file a lawsuit and win the case before terminating the tenancy.
4. Poor housing quality
When it comes to rent control laws, housing quality is always a concern. Quite often, landlords are unable to make improvements to their rental properties since they don’t have enough income to support any upgrades. Poor housing quality could end up driving tenants away and increasing vacancy rates.
5. May help tenants who don’t really need assistance
As mentioned earlier, rent control is meant to help low-income families find a housing option that they can afford. However, some of the people that live in rent-controlled areas can actually afford to pay higher rents. This means that landlords lose the opportunity of earning more by charging higher prices.
6. Retains bad tenants
Just like rent control encourages good tenants to renew their leases, it also incentivizes bad tenants to stay. As mentioned earlier, rent control laws usually come with strict provisions which make it harder for landlords to evict tenants. Having to deal with bad tenants for a long time can be very stressful for landlords and property managers.
Rent control has become increasingly popular in recent years in many areas across the US housing market. This regulation has especially been reviewed in states and cities where stagnant wages and rising costs of living have created a housing crisis for elderly people and moderate-income residents. This is why everyone owning a rental property needs to stay up to date with rent control legislation in their area. Anyone thinking of being a landlord should weigh the rent control pros and cons to determine if investing in a regulated neighborhood would be profitable.
Looking for a profitable rental property in a rent-controlled area (or anywhere in the US)? Start your search here.