Setting up the right rules and regulations for renting a property to a prospective tenant may be a bit complicated if you don't know much about the current market conditions. In essence, some states allow landlords, property managers, and investors to charge as much rent as they want to existing tenants.
However, some other states may go under rent control regulations. In these cases, they may have to adjust their rent increases according to the local state's rent control laws instead of focusing on the rental market conditions.
Rent control is fairly simple, but it may affect you if you're planning on placing your rental units on the housing market. If you don't comply with rent control regulations, you may be exposed to legal issues with the federal government.
In this article, we're going to cover how rent-controlled apartments work. Additionally, we're going to take a look at how you may work your annual rent increases depending on the state you currently live in. While rent control was primarily created to protect tenants, it may also help landlords and property managers organize their housing costs more efficiently.
What "Rent-Controlled" Means
First, we need to cover what rent control itself means before we discuss how it affects the housing market in some states.
Rent control (or rent stabilization) is a program created by the government with the intention to reach more affordable rental housing in some states and protect tenants living in rental units with higher rents. Here, the local government places a limit on the amount the property manager can charge for the tenant's rent. Additionally, these rent regulations may place a limit on how much the manager can raise rents.
It's important to note that rent control laws may vary depending on each state and municipality. A good example of this scenario would be New York City. According to the Rent Guidelines Board in New York City, rent-controlled apartments that were built before 1974 had to contain more than six units and have particular maximum rent prices depending on the moment the tenant moved in.
Rent control isn't as common as people think. Only some particular cities, such as New York City, Washington D.C., New Jersey, San Francisco, Los Angeles, and other cities in California/New York/District of Columbia have these rent regulations. Still, it may be hard for a new tenant to find rent-stabilized apartments in those areas since other tenants are more likely to stay put rather than leave due to the low rent prices.
How Rent Control is Perceived
While rent-controlled units may seem like an excellent idea for existing tenants, they may not be as good for landlords, investors, and property managers. Rent control has always been a controversial subject to talk about since at least 37 states forbid rent regulation in their cities.
When Rent-Controlled Apartments Began
Some of the earlier instances of rent-controlled units appeared back in the 1920s, but these rules implied freezing rent increases altogether, which wasn't too practical. However, the idea for rent control laws came back in the 1970s with a more solid approach thanks to New York's rent control board.
The History of Rent Stabilization
Rent control laws have been around for several years in some states. While some of these states have rent stabilization rules for cities, not many of these cities apply them, meaning property managers may still do what they want while establishing maximum base rent.
However, Oregon became the first state in the U.S. to establish a state-wide rent control condition in 2019, which was only a couple of years ago. As expected, these rent control laws weren't received positively by investors in the rental market.
How Does Rent Control Work?
As mentioned before, the purpose of rent control appears to be making housing affordable for tenants. Still, there are several factors that may affect how rent control works in some cities. Keep in mind that rent control is more common in cities where finding a vacant apartment building is too hard or expensive, such as San Francisco.
If your local laws place rent controls over your property, you may not raise rental rates further than the maximum prices in rental listings. In essence, rent control rules forbid property managers to be flexible with their rent increases.
The reason why people dislike rent control so much is that rent regulation rules often cause landlords to keep their rental prices much lower than the current market rate, which is a big disadvantage for them.
Rent Control in New York
There are two primary rent control types, which we're going to cover further in this article. However, it's important to note that New York City is the only city in the country with specific rent regulation rules for apartments subject to rent control.
First, we have the regular rent control, which implies that rental rates may increase at a particular pace and may not exceed a maximum base rent. In most cases, that rent increase may only help the landlord cover the cost for the upkeep of the property. However, it's important to note that this rent control measure only applies to long-term tenants that have been living in the same property since 1971.
If the current tenant moves out of the property, the property automatically converts to "Rent Stabilization," which is the second rent control type in this city. This measure only applies to buildings constructed before 1974 that have six units or more. In these cases, landlords may set annual price increases for their tenants according to the current market rates.
Vacancy Control vs Decontrol
As mentioned before, there are two primary rent control measures for rent-controlled units in the country. The type of rent regulation you receive depends on the state.
This is often referred to as "true rent control." Here, the landlord or property manager may only increase the price of rent for their rental property according to the market rate set by the rent control board. Moreover, the landlord may only raise rent to the existing tenant a particular number of times each year.
In this scenario, the landlord can increase the price for their rent-controlled apartment to any amount they want when the old tenant moves out and a new one comes in. Overall, new tenants may not pay the same rent price as the other tenant.
Here, landlords can make a petition to their local rent control board for a rent hike based on any increases in taxes or housing expenses. As with vacancy control, the landlord may only increase the amount of rent to existing tenants a particular number of times each year.
Who Regulates Rent Increases?
Property managers can increase rent depending on how their lease renewals work in cities without rent control. However, the process works a bit differently for real estate subject to rent control policies.
In this case, landlords may only increase rent depending on each city's rent board. In most places, landlords have been able to make an increase from 0% to 4.5% for a one-year lease. On the contrary, Oregon allows a yearly increase of 7% plus inflation.
Rent-Control Pros and Cons
Now that you know how rent control affects a property according to the market rate, it's time to take a look at the general advantages and disadvantages. Remember that rent control doesn't have a good reputation nationwide since it mostly benefits tenants rather than landlords.
It's important to note that, in this particular case, rent control's advantages may be disadvantages for landlords and vice versa.
One possible advantage may be that it offers neighborhood stability in some cases. Rent-controlled apartments often translate to long-term tenants, which ensures a recurring money supply for the landlord.
Keep in mind that most benefits of rent control include lower rents within the housing stock. These price controls are an advantage for tenants since they can have a better idea of how much landlords can charge them.
Unfortunately, rent control is often seen as a poor measure that affects landlords. In essence, rent control reduces the supply of decent housing since the lower rental costs mean that the landlords don't have as much money to keep their property in optimal condition. Some landlords withhold from making repairs to make their tenants move out, which is considered illegal.
Aside from poor housing conditions, having a price ceiling may make landlords convert their rental units into market-rate condos, which takes them out of the housing stock; these landlords take that measure to deal with lost income from the lower rental prices.
Finally, property managers tend to raise the rent on their market-rate units if they're making less profit from their rent-controlled units, which directly affects the rate for housing units in the area. Some land developers also tend to avoid new construction in areas where there are many rent-controlled buildings since it's almost impossible to compete with such low prices.
Expensive Rent-Controlled Units
Theoretically, a rent-controlled unit (whether it's old or new construction) may be more affordable than most units in the market. Still, you may notice that some other units are still rising rents, making the overall price expensive.
Keep in mind that - under some rent control rules - landlords may increase the price for rent after the tenant leaves. Unless the tenant has a friend or family member on the lease to whom they can pass the deal, the new tenant may have to deal with a new rental price, which can be much higher than the previous one.
Typically, property managers have a limit regarding how much they can increase rent, so it's important that you check how much you can increase your rental prices in your local area.
While tenants can be evicted from your property, they enjoy many more legal benefits and protections if the property goes under rent control policies. In the case of the California state, tenants who live in rent-controlled buildings may only be evicted if they're found guilty of violating the lease agreement terms; these violations include nonpayment of rent, excessive wear and tear, and others.
Another reason why tenants may get evicted from the property is if you want to take your property off the rental market, which may be due to tearing the property down or making it a condo. Still, you may have to pay for relocation fees to help tenants move into a new place, and these fees may be extremely high, depending on where you live.
In the case of Los Angeles, landlords must pay from $8,500 to $21,200 in fees, depending on how old the tenant was, how much they earn, and how long they lived in the property. On the other hand, in cases where there's a state-wide law (such as Oregon), the relocation fees may be equal to one month's rent.
However, there are some exceptions to these rules. In case the landlord or property manager wants to move into their unit or offer it to a family member, they can ask the tenant to leave without any legal repercussions.
Additionally, you're legally able to make "cash for resort" offers to tenants in some cities. "Cash for resort" offers mean that you can pay tenants to leave the property as long as you inform them of their rights and send a notification of that agreement to the city. It's important to note that tenants have the right to not accept your offer and keep living in the unit.
Economic research has debated the effect of rent control over real estate for several years. Some financial experts say that rent control provides financial relief and stability for tenants, whereas others say that rent control can make cities much more expensive for new tenants and younger people.
Still, it's vital to note that rent control policies aren't the only thing that can affect housing prices. There are many cities in the U.S. without rent control policies that offer properties that are still highly expensive for tenants.
If you live in an area that enforces rent control guidelines, such as Los Angeles or San Francisco, you must first review what your rights and responsibilities are as a property manager in that city. Understanding how much money you can charge your tenants may give you a better idea of what to expect from your property in the future, profit-wise.