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Pros and Cons of Rent Control

We review the pros and cons of rent control and how it affects landlords and tenants.

The subject of rent control has become increasingly popular over the last couple decades. As rent prices continue to skyrocket across the country, more and more tenants get priced out of their homes and neighborhoods. This is why the majority of tenants are in favor of stricter rent control laws being passed.

But how do rent control laws affect landlords? To put it bluntly, the passage of these laws would dictate what landlords can charge for rent on their properties. It can be limited by an annual increase percentage or a flat rate based on the amount of bedrooms, depending on the law passed. This fact scares many landlords and investors.

So far, these types of laws have only impacted properties owned by corporations or older properties. In this article, we’ll discuss what rent control is now, where it’s headed, and the advantages and disadvantages to these laws being passed.

Update: For more information addressing the current state of rent control in San Diego, check out this blog. For our blog specifically addressing AB 1482, click here.

What is Rent Control?

Rent control, or rent stabilization, is the process of limiting rent increases on a property or building. Rent control laws typically set restrictions on the amount that rent can be raised per year. Because of this, these laws are commonly favored among tenants. Without restrictions on pricing, owners can increase their units however much they want per year. This could mean that one year your rent is $1200 and the next it’s $1800.

Currently, only a few states and cities have some form of rent control. Increases can either be limited by a flat percent (you cannot increase by more than 5% per calendar year) or can be limited by an actual price (a one bedroom in this city cannot exceed $1500). They can also affect things like how often the rent is allowed to be raised. Some states have laws forbidding any kind of rent control to be enacted.

Why Do People Want Rent Control?

The simple answer is this: rent control would keep rent prices lower. Tenants typically have to move more often without rent control laws in place because they end up getting priced out of their current homes if the area becomes more popular. This incurs more moving costs and more stress from having to move so often.

Rent control would also mean that lower income tenants have access to more homes. These types of tenants not only struggle to keep a home, but they often have difficulty securing a home in the first place.

Pros of Rent Control

Tenant Financial Savings

The biggest pro for tenants is the financial savings year over year. Most of us have been subject to a hefty increase at some point in our lives. Because rent control would limit the amount of legal increase, tenants are typically in favor of these laws. Some rental properties can increase 10% each year, making it difficult for someone to remain in that property without getting a significant raise or a job change.

Rent control can provide better financial stability for tenants as well. They can better plan for the future if they know their rent isn’t going to increase dramatically each year.

Higher Likelihood of Lease Renewal

Because rents are capped, tenants are much more inclined to stay in a property long term. Moving out of the property would mean risking a big increase in price for their next place.

This means that landlords won’t have to deal with vacancy every year because the current tenants will likely renew their lease. Vacancy periods tend to cost landlords a lot of money, in addition to having to turn the property over (almost $2,000 on average). By keeping the same tenants for a few years, you eliminate those costs.

Cons of Rent Control

No Incentive to Upgrade Home

Landlords will often update their home and appliances every few years to keep the tenants there or to attract new tenants. When a home has upgraded appliances and other features, you can often raise your rent price due to the added amenities. The same goes if you have a pool or an extra parking space.

With rent control laws in place, the incentive to upgrade the home decreases dramatically. Even if you upgrade all of your kitchen appliances to stainless steel and get all new carpet, you will still be limited to the yearly increase that the law permits. In this case, landlords are likely to keep the same appliances until they break down and then replace them with a similar or lesser model.

Prices Fall Below Market

Rent controlled apartments and houses tend to fall below market rents. The longer the unit is rent controlled, the further it will fall behind. This means that landlords won’t make as much income from their properties as they could be. One of the primary reasons that people invest in real estate is the long term financial benefit. With rents capped at a certain amount, it’s harder to reach their financial goals. They might not even invest to begin with.

Additionally, they’ll have less money to cover needed maintenance on the property and will likely want to defer it as long as possible. The needed repairs and touch ups when a property becomes vacant (as well as during tenancy) can easily detract from the monthly rental income.

Older Buildings

While rent control usually favors the tenants, they should keep in mind that most rent controlled properties are older units. While you might be getting a good deal on rent, you likely won’t have the same amenities that non-rent controlled apartments have. Current rent control laws mostly apply to units built prior to 1985. If you’re set on an upgraded apartment or newly built unit, you might be out of luck.

Discourages Building

Investors and developers lose the incentive to build new homes and apartments when rent control laws go into place. If the unit they want to build will be subject to these laws, why begin building in the first place? They won’t have the freedom to choose what they want to charge and it will take years to earn back enough revenue to make it worth it.

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Olivia

Content Marketing Manager at Good Life Property Management

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Hey guys, Adam Manley here, Business Development Manager at Good Life Property Management. We’re bringing you a short video series on Rank Control, a little bit about it, some of the pros and cons, and some of the recent legislation that has passed here in San Diego regarding Rank Control. To talk a little bit about the pros and cons, there’s generally two parties that are affected by Rank Control. The tenants and the landlords or the investors building are acquiring the properties. For the most part, generally, the pros are geared a little bit more towards affecting some of the tenants while there are some incentives and things for landlords and investors as well. Generally, some of the cons are going to be affecting the investors negatively and are a little bit more favorable on the tenant side of things. As a whole, what we generally see, some of the pros being as the first one is obviously that prices are controlled at a certain point. What this does is it caps prices from exceeding a certain amount. It makes them more affordable for certain tenants, which is great when you’re a tenant. Obviously, affordable rent is a huge issue here in San Diego. Having some type of rent control is seen as a very favorable thing from the tenants’ point of view. Another thing to consider is that when that rent is controlled at a certain point, the tenants aren’t going to want to lose that opportunity. We generally see tenants stay a lot longer, that results in less they can see. Also, when the tenants know that they’re getting a good deal, they’re a little bit more inclined to take better care of the property as well because, again, they are facing their decisions on staying as long as they can at that affordable price. What we see as some of the main cons for rent control are that it creates less incentive to create new buildings. If investors and developers and landlords know that their rent is going to be capped at a certain amount, it really kind of disincentivizes them to build these new projects where they’re going to be taking a loss for a substantial number of years before they’ll start generating profit on that. Another con, and this is generally from both sides, is that as I mentioned with new construction, there’s less of an incentive to build it. The properties that do have the rent control are generally some of the older properties here in San Diego. From the tenants’ point of view, they’re not going to be moving into the rit-seas place in town. From the owner’s point of view, they’re not going to be making as much money as they want. The last con that we really see is that when rent is capped, obviously the market isn’t controlling the price. Sometimes we’ll see these rents fall substantially below market because we’re not able to raise them anymore. Some of the pros and cons that we’ve kind of seen through rent control stay tuned for the next part of our video series on a little bit more of the local legislation and diving a little bit deeper into what rent control is.