Rent Control and How It Affects Your Real Estate Investment

Rent control has been quite a controversial subject throughout the years, but what is its exact effect on the real estate investing world?

What Is Rent Control?

Rent control is a form of regulation and price control which limits the ability of a landlord/property owner to increase rental rates. This kind of rent regulation controls the amount landlords can charge when renting out a home, apartment, or other types of real estate.

Related:  Raising Rent Without Losing Tenants: 6 Tips for New Landlords

There are two basic forms of rent control. The first is referred to as the “first generation rent control,” and this type puts caps on rents at an amount below market rates. The second type, “second generation rent control,” allows the rent to be decided on when a new tenant moves into an apartment, but limits any increases to that amount in the future. So basically, rent control sets a price ceiling on the amount of rent being charged.

Rent control has different levels of impact on different markets in the country. In whatever city it exists, regulations typically include:

• Frequency of rent increases
• Timing of rent increases
• Limit the grounds on which a landlord may evict tenants
• Permit rent increases in special circumstances (such as renovation or improvement of a unit or building)

The Purpose of Rent Control

Rent control can be introduced into a real estate market to help regulate a variety of factors affecting the economy. It aims to tackle the constant issues of housing affordability in the United States. For example, rent control was first instituted in New York as a response to the effects of World War II.

Rent control in New York City is still existent, as it is in many other cities with low vacancy rates, such as Los Angeles and the District of Columbia. Rent control in California has been more popular recently. These big cities have attempted to experiment with rent control because high rental demand was resulting in too high of an increase in rent prices.

Other big cities like Chicago, Baltimore, and Philadelphia haven’t enforced rent regulations. Critics of rent control have been able to prevent, or remove it from their cities through the argument that it isn’t efficient for its purpose.

Owning a rental property is already a challenge of its own, but for those of you trying to understand the complications of rent control, you need to see both sides. Here’s what real estate investors should know about rent control and it’s effect on investment property.

Why Rent Control Is Good

• The basic idea of rent control is good- it has good intentions. These regulatory policies are attempting to offer affordable housing options for lower and middle-class renters.
• It allows for more diversified communities in bigger cities. With rent control, lower and middle-class renters can afford to live in the city. This permits more economic and social diversity, rather than a high concentration of the same people in low-cost areas.
• Tenants are more confident with their living status. Rent control gives tenants security and stability.
• In a way, rent control can better the relationship between tenant and landlord. Paying below market rental rates can motivate tenants to pay rent on time. This, in turn, can actually lead to more stable cash flow even though there’s less rental income.

Why Rent Control Is Bad

• Because rental rates are capped and tenants are happy, they’ll be renting the same unit for a long time. This leads to less available units, hence reducing rental supply. Rental demand will continue to be high which leads to increased rent prices in uncontrolled areas.
• Landlords won’t be able to match high rental expenses with the lower rental income in controlled areas.
• This means the government is regulating rent rates instead of letting it take its natural course alongside supply and demand in the free market.
• It will demotivate investors from investing in rental properties due to concerns of weak return on investment. At the end of the day, it just might not be worth the risk for some.

Is Rent Control Good or Bad?

So now you probably have a better idea of who rent control benefits and who it hurts. Tenants will typically be more satisfied knowing their city is rent controlled, whereas landlords and property owners will be discouraged. However, the consensus on rent control in the U.S. is that it’s not a very popular regulatory mechanism. Critics argue that it is inefficient, distorts housing markets, and causes unfair redistribution. Rental property owners should be able to decide how much to charge for rent according to market conditions.

Related: How Much Can I Rent My House For?

Where to Invest in Real Estate for No Rent Control

For those of you wondering what your options are for your next real estate investment, here’s a list of cities with no rent control and a good return on investment.

Columbus, GA

• Median Property Price: $155,523
• Price per Sq/Ft: $77
• Average Days on the Market: 184
• Price to Rent Ratio: 14.78
• Monthly Airbnb Rental Income: $2,295
• Monthly Traditional Rental Income: $877
• Airbnb Cash on Cash Return: 8.14%
• Traditional Cash on Cash Return: 1.75%

Dearborn, MI

• Median Property Price: $179,292
• Price per Sq/Ft: $121
• Average Days on the Market: 58
• Price to Rent Ratio: 13.62
• Monthly Airbnb Rental Income: $2,403
• Monthly Traditional Rental Income: $1,097
• Airbnb Cash on Cash Return: 8.35%
• Traditional Cash on Cash Return: 1.69%

Sonoma, CA

• Median Property Price: $819,192
• Price per Sq/Ft: $468
• Average Days on the Market: 82
• Price to Rent Ratio: 21.22
• Monthly Airbnb Rental Income: $7,872
• Monthly Traditional Rental Income: $3,217
• Airbnb Cash on Cash Return: 8.12%
• Traditional Cash on Cash Return: 2.08%

Honolulu, HI

• Median Property Price: $1,010,842
• Price per Sq/Ft: $767
• Average Days on the Market: 102
• Price to Rent Ratio: 31.55
• Monthly Airbnb Rental Income: $4,677
• Monthly Traditional Rental Income: $2,670
• Airbnb Cash on Cash Return: 4.42%
• Traditional Cash on Cash Return: 2.25%

West Palm Beach, FL

• Median Property Price: $410,710
• Price per Sq/Ft: $226
• Average Days on the Market: 111
• Price to Rent Ratio: 16.26
• Monthly Airbnb Rental Income: $2,129
• Monthly Traditional Rental Income: $2,105
• Airbnb Cash on Cash Return: 1.41%
• Traditional Cash on Cash Return: 1.22%

To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.

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Related: Invest in Real Estate in the 5 Most Landlord Friendly States