The Truth About Rent Control
Updated: Feb 10
For many Americans, the monthly payment to pay their rent or mortgage is the largest expense they have in their budget. 37% of their take-home income is spent on housing for the typical American. Having affordable housing options is important for renters everywhere, but particularly those that live in expensive urban areas. Affordability is a major factor in quality of life, and impacts the amount of discretionary income people have for leisure and other non-essential things that most people want, like trips, dining out, and more.
Rent controlled apartments are desirable among renters for obvious reasons - but these units are becoming more difficult to find. In some cases, renters need to have lived in the unit for a certain period of time to take advantage of rent control.
While rent control is for the most part not a good thing for investors, the question remains - is rent control a good thing for renters? Let’s dive into it.
In an Econ 101 class in college, we learned that the price of any good or service is influenced by supply and demand. In theory, in a free market economy, rental rates are determined by how much a person is willing to pay to rent a particular apartment unit.
In some cases, rental rates are influenced by external factors, like government subsidies or price ceilings on rent. This has occurred in the form of rent control in certain markets in the U.S., like New York and California.
But what exactly is rent control?
In simple terms, rent control is a government program that sets price limits on how much property owners can demand in order to lease a unit or renew a lease. These regulations are usually implemented at the local level, and the complexities of these laws can be different depending on location. Rent control usually puts a cap on the maximum rental rate that landlords can charge, and on how much rent can increase each year.
The goal of cities that use rent control is to preserve a certain level of affordable housing for low- and middle income residents.
Despite the heated debate surrounding rent control, this type of legislation isn’t as common as you might think. It’s typically implemented in markets that have a high likelihood of rental demand far exceeding supply. This excess demand results in higher market rates for rental units. In a rent controlled building, any increase in rent must be in line with the guidelines set by the governing body that sets the legislation.
According to a 2019 Urban Institute study, only 182 U.S. municipalities had rent control legislation. These included California, New Jersey, New York, and Washington, D.C.. Over 30 states actually passed legislation banning the use of rent control.
Rent controlled units tend to be older. However, rent control laws can apply to newly built properties. In some cities, developers need to promise local governments that a certain percentage of units will be available for rent at rates below market. There are often also rules that require units to be offered only to tenants that fall within certain income ranges, ensuring that affordable units go to those who need them.
It’s important to emphasize that rent control regulations vary by location, so research into your specific market is essential in order to get the most accurate information.
Benefits of Rent Control for Renters
We would be remiss to not address the fact that rent control can offer multiple benefits to certain tenants.
Affordable Housing: Tenants are protected from uncapped rent increases, which can mitigate the risk of being displaced and being forced to move if they can’t afford new rents. It is true that in expensive cities, the wages of lower and middle income workers do not keep up with the rising cost of housing.
Displacement Prevention: Rent control also prevents tenants from being evicted without cause. If a tenant signed a lease on an apartment unit with rent control, the landlord has to renew each year (which makes this a potential con for investors if it keeps them from being able to implement their business plan).
Stable Neighborhood: Rent controlled units will often have less renter turnover, and as a result, keep long-term tenants. This helps to cultivate strong community bonds and residents are more likely to be invested in the security and quality of the neighborhood.
So if you’re a renter, rent control seems pretty good right now, right? Its purpose is to protect renters. But there’s more to this overarching economic policy, and it’s much more complex than most people understand. This legislation has inadvertent downsides that makes many economists dislike this form of government policy.
Cons of Rent Control
Many economists see rent control as counter-productive, and believe it does little to nothing to solve the housing shortage in the country.
Some main issues with rent control include:
Decrease in Supply: Many landlords would prefer to turn a building into condos or convert it for commercial use than conform to the strict rent control laws that negatively impact their ability to make a profit. If they can’t get fair market rent with rental housing, many investors pivot accordingly. This results in even less affordable housing for the community.
Less Investments: Rent control often results in less investments in additional rental housing. The U.S. currently faces a shortage of 3.8 million homes, and this has caused the price of housing and the homelessness rate to increase. Rent control only exacerbates the issue by reducing investments in new housing.
Quality: Investors will invest their money where they believe they can make a strong return. This is human nature. This explains why, in rent control units, quality tends to decline. This is due to the fact that investors won’t invest money to upgrade units if their return will be poor.
Long Term Costs: While rent control appears to benefit current residents in the short term, when looking at the long term impact, these policies tend to result in a decline in affordability, increased gentrification, and a decline in the neighborhood. With less investments coming into an area, the property and surrounding area will not be as maintained, and the natural wear and tear real estate endures over time will become more apparent.
Resource Misallocation: Once a renter is in a rent controlled unit, they are less likely to move out. This is regardless of any changes in their housing needs. For example, a rent controlled unit may end up having only one or two tenants living in a family sized apartment unit. Or, let’s say the residents increase their income to the point where they could afford different housing. If the intention is to help those who need it most with rent control policies, the policy would prove to be ineffective in scenarios like these.
It’s clear that although rent control makes sense in theory, it can have a back-firing impact when it’s implemented in a real market. This is why it’s important as multifamily investors to research a market before investing in it. Landlord friendly markets with no rent control are the most favorable for both investors and renters.
Like many other government policies, having good intentions is not always enough to produce the most favorable outcome for every party involved. Rather than trying to work around the rent control policies in a market, most investors go to markets where this is simply not an issue.
Rent control is a complex issue, but most investors know enough to avoid markets with rent control. As a wise investor once told me, money goes to where it is treated the best. And markets with rent control do not make for great places to invest in.
As we learned in Econ 101, when a price ceiling is introduced, this results in a lack of supply. Rent control results in even less available housing. For this reason, rent control is a counterproductive approach to solving the growing housing crisis in this country.