National Rent Control - Good or Bad?

Want to invest passively with a team that has over 4,500 units and 95+ years of experience? -? https://creefund.cashflowportal.com

At first blush, the thought of rent control makes investors crazy. Rent control adds uncertainty and risk to investing in apartments. With the current administration proposing a national 5% limit on rent increases, we thought it would be worth looking at the good, the bad, and the ugly of this idea. The proposal calls for "Corporate Landlords" with more than 50 units in their portfolio to limited annual rent increases to 5% or forego all current favorable tax treatment. The details are still unknown, but we can assume a national policy will be similar to existing policies.

?

GOOD: Owner point of view: In 2018, economists Diamond, McQuade, and Qian (DMQ) published a paper that looked at the effects of a 1995 rent control policy implemented in San Francisco. They discovered that post rent control, tenants were 8% less likely to move than before rent control. They noted that the supply of available apartment stock dropped by 15% over time as many landlords looked to cash out by converting their apartments to condominiums. The conversion to condos combined with people staying put pushed rents up significantly for open apartments. Also, tenants in a rent control situation are highly incentivized to avoid an eviction and face higher rents in the open market. In a rent control scenario, we would expect higher occupancy rates, lower evictions, lower turn costs and higher rent increases on new tenant leases.

?

Taking advantage of reduced supply and higher leases on trade outs still allows for value creation. As an example, operating expenses average 45% of income on a typical multi-family property. So, assuming rental income of $1M, costs would be $450K. If expenses increase 5%, costs will increase by $22.5K. At the same time, if we assume we get 5% rent increases on 80% of tenants who stay and 10% increases on new leases, income will increase 7% or $70K. At a 5% CAP rate, the value of the building increased $950K despite having rent control in place.

?

Tenant point of view: Rent control in the short term provides an insurance policy for tenants that rent increases will be capped at 5%. Having a predictable rent enables tenants to budget and not worry about being forced to move to a cheaper apartment.

For previous articles, videos, and more free educational content around real estate investing - Create a Free Account at - https://creecashflowclub.com/

?

BAD AND UGLY:

?

Owner point of view: Owners have to live with a cap on income growth while having exposure to unlimited expense increases. Property taxes and insurance typically account for a third of all operating expenses. We are currently witnessing multi-year periods of double-digit insurance cost increases and inflation in general, impacting all line items of the P&L. Also, with rent control there usually are restrictions on moving tenants out to rehab apartments, so the flexibility to increase valuations through a value-added strategy can be limited.

?

Tenant point of view: While tenants lucky enough to be grandfathered into a rent control apartment are in a very good position, people trying to secure a new apartment will be forced to pay much more than they would have due to limited supply. DMQ pointed out that the rent control policy of 1995 led to gentrification of San Francisco, ultimately making it unaffordable for average citizens. DMQ also found that owners of rent-controlled apartments had very little incentive to keep up with general maintenance. Tenants in rent-controlled buildings reported that the condition of their apartments and building deteriorated over time.

?

We do not favor government price setting because history has shown it creates many unintended consequences. If we were to get some sort of national rent control, it would reduce investments in the space, which would reduce supply and drive free market rents higher. With most of our deals, we are pricing in 3% per year organic rent growth. In the case of renovations, we factor in much higher rent growth. But in a rent control scenario, if the apartment is vacant, new leases can be at market. The biggest risk for a renovation strategy is low turnover on apartments, which would delay the work schedule. At the end of the day, the government will need to ensure that investors are incentivized to continue investing in multi-family. We doubt this will come to pass, but if it does, it shouldn't have a negative impact on our strategy.

Schedule a call - https://creecapital.com/contact/

Cash Flow Club - https://creecashflowclub.com/

CREE Capital - https://creecapital.com

CREE Capital Fund - https://creefund.cashflowportal.com

Rod’s Multifamily Bootcamp - https://www.multifamilybootcamp.com/july-virtual/?sl=lnkdo