A significant increase in housing rental costs in major American cities has reignited a decades-long debate on the effectiveness of rent control legislation in reducing homelessness. In light of the significant increase in homelessness in cities where the average cost of renting an apartment has risen exponentially over the past few years, this legislative stopgap, which aims to impose maximum rent price limits, has become more appealing.
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Therefore, when investors hear the term “rent control,” they may avoid investing in properties subject to these regulations.
But there are numerous benefits to purchasing rent-controlled buildings, and once you are familiar with the specifics of the state and local rent control laws in the area where you plan to invest, you can gain a better understanding of the rent price caps and possible exemptions.
Understanding how rent regulation operates
The objective of rent control is to make housing more affordable for low- and middle-income residents in tight housing markets. Although the regulations and statutes governing rent control may vary from state to state, the fundamental purpose of these laws is to place a cap on the increase in rent for as long as a tenant has the right to occupy a unit.
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In some cases, these laws may also place additional restrictions on rent costs and severely restrict or prohibit evictions of tenants from rent-controlled units.
However, rent control in its current form is viewed by many as an impediment to development, which could dissuade some investors from viewing these properties as lucrative investment opportunities. Not all rent-controlled situations involve below-market rental prices, and a savvy investor can discover many other sources of revenue within a property as well as multiple opportunities for bringing units to fair market value within the parameters of rent control regulations.
The Benefits Of Investing In Properties With Rent Control
While it is true that you may be limited in the amount of rent you can charge tenants in rent-controlled properties, local laws do provide clear and concise regulations that investors may find beneficial. Consider the many benefits of investing in rent-controlled properties before being persuaded by the fact that units are rented for less than the market rate. Even the most conservative investor may find a silver lining in a riskier-than-usual investment opportunity.
Discounted Purchase Cost
In my experience, the cost to acquire a property subject to rent control regulations is typically less than the cost to acquire a property of comparable size and occupancy that meets or exceeds the market rate. Investors who acquire rent-controlled properties typically intend to hold on to them for an extended period of time.
Long-Term Prospects
Investors who purchase rent-controlled properties do so with the knowledge that they will experience a significant upside in the future, thereby positioning themselves to enjoy a significant return on investment through an increase in rental income. The reason for this is that a property can regain its legitimate market value once all of the current tenants have moved out.
Rent-controlled real estate investments are ideal for investors who wish to purchase a property and include it in their portfolio for the foreseeable future.
Consistent Revenue Gains
There are two clear benefits to possessing a property subject to rent control. The first benefit is a radical reduction in tenant turnover. Less tenancy turnover reduces the risk of vacancies. When a tenant pays below-market rent, he or she is much less likely to vacate. This reduces the risk associated with reselling an uninhabited unit.
Landlords do not want to spend money advertising the vacant unit, vetting potential new tenants, and dealing with clean-up and renovations in order to re-market the unit. A low vacancy rate is advantageous for property owners. A rent-controlled building virtually guarantees minimal or no annual turnover.
Rental Units
If all or nearly all of the property’s units are rented, it could take a very, very long time to return those units to their current market value. A tenant must vacate the unit before it can be sublet for a higher price. Therefore, it makes the most sense to acquire a rent-controlled property with more vacant units. Once all current occupants have vacated the premises, the building as a whole can begin to command its current fair market rent.
Determine the length of time that the current tenants have resided in the rented units. If these tenants have been renters for an extended period of time, you should not expect them to vacate in the near future. It may be in your best interest to move on and find another property to acquire, as it could take years or even decades to make repairs and resell vacant units at market value.
Capital Rate Futures
This can be difficult to ascertain, but if you have the opportunity to return a vacant unit to the market at its current fair market value, you should evaluate the rent-controlled property you intend to purchase based on both the current and prospective cap rates. However, consider how long the current occupants may intend to remain in their units. If you anticipate that tenants will vacate the property within the next six to eighteen months, purchasing the property at a lower cap rate could be a wise and profitable investment. However, if they have no intention of departing within the next 10 to 15 years, the investment becomes less profitable, even with a higher cap rate.
Allow me to part with this…
Always do your research before making a significant financial investment, but this is especially important when investing in rent-controlled properties because the laws are constantly changing. Local statutes or regulations governing rent-controlled properties are frequently rewritten or altered with little notice, making it very easy to lose money.
