Rent controls are becoming a hot topic in many American cities. That said; are they coming to your market? More importantly, how should real estate investors be embracing this battle?
Rent Control Near You
Some states have laws designed to prohibit or preempt the institution of rent controls. Some are open, but even some states like Washington are coming under significant pressure to bring in rent control in high cost cities.
It’s important for real estate investors to know if their city has rent controls, and if specific properties they are considering fall under rent control laws. This applies to both fixing and flipping, and rental property investors. Rental increase limits can restrict the ability to increase income, and property values.
U.S. states with rent controls in place, according to Landlord.com:
- California
- District of Columbia
- Maryland
- New Jersey
- New York
Why We Have Rent Controls
The Puget Sound Business Journal says that a large number of residents are paying more than half of their incomes for rental housing. In 2015 this was just 20 percent of Seattle residents, but it gets even higher in other areas – even in Detroit. That seems pretty wild, considering Detroit properties have been selling for $100, $1,000, and in bulk at under $10,000 a unit. There are many other high cost areas across the country too.
Battle Ground Seattle
Seattle is becoming one of the most heated areas for the war over rent controls. Fierce town hall debates have pitted developers and real estate investors against those in favor of rent control. Despite the steep, uphill battle to get it, the crowd is out to prove a point: that they have power too.
Some see rent controls and access to decent housing as a basic human right – a human right that trumps investor profits. Others that oppose rent control believe it causes an economic hardship and is harmful to markets. However, it is interesting to note that rent controls haven’t trashed the hot real estate markets of New York or San Francisco. They have had rent controls for 40 to 70 years.
Why Real Estate Investors Should Like Rent Control
Why on earth should real estate investors embrace rent controls? Have you considered what will happen if the investment community fails to help keep a balance in rents?
Investors can choose to be a valuable part of the solution, or they can work against the grain. This doesn’t have to mean supporting self-sabotaging landlord-tenant laws. If tackled early enough, investors can help design and mold what it looks like. Otherwise it will be dictated for them.
Failing to keep a balance in living costs will lead to more wage hikes and laws. This might not stop at an ever increasing minimum wage, but ever lengthening paid vacation times, and more liabilities. Forget $15 an hour. Renters already need a minimum of $44 an hour to rent a mediocre apartment in Seattle, double that in San Francisco, and almost 5 times that in at least one Florida community. While all real estate companies certainly want to pay their staff more; having to choose between paying $100 an hour to minimum wage workers, or not hiring could put some out of business.
Seattle rents have risen 18 percent in the last 24 months, but that’s less than half the rise of other hotspots. This alone wouldn’t be an issue if wages and incomes were rising just as fast, but they haven’t been. If you are already paying half your income in rent, and it goes up another 20 percent next year, but your pay doesn’t; that a problem. Right now, expectations are that jobs and wages are going to kick in and catch up fast. If they don’t, hopes for continuing to raise rents at those rates may not be realized. That’s okay if you have already locked in low rate financing and have a nice spread, but not if you are in a negative cash flow situation.
Steady rental increases are good. They maintain profits and boost markets in a sustainable way.
Summary
Not all housing in a city needs to be affordable. There is room for high profit, high priced luxury units, and affordable properties for regular workers. However, that needs to be kept in balance. Real estate investors can help by investing on both ends. They can also pass on real estate education to help others invest and increase their incomes. Those that engage and get involved might find real estate even more profitable and rewarding.
