076- Hear me out: rent control is a bad idea

Words of wisdom from a property manager in California... I've been a property manager for over 6 years and we've owned rentals for a couple of decades. California is it's own challenging brand of special animal. The state of California put a rent control law into place on January 1, 2020, right before the world went on lockdown. In certain circumstances, I can see some benefits to rent control, but the majority of the rent control laws in today's world have more negatives than positives. This post is based on my experience as a property manager and rental owner. And unfortunately, like many things in our world today, it's the result of a few "bad apple" landlords that make it necessary for these type of laws to be passed.

At first glance, rent control might seem like a no-brainer to keep rent prices "fair" and stable for tenants, and ensure that housing remains affordable. The policy limits how much landlords can raise rents annually, which sounds great in theory. However, the reality is that rent control can create a lot of unintended consequences that end up hurting the very people it’s designed to help. Here’s a closer look at some of the major drawbacks:

Deteriorating housing stock- When landlords can’t adjust rents to keep pace with rising costs (hello annual property tax and insurance increases that far exceed the amount that rent can be raised), they often struggle to maintain their properties. I have property owners that have had their property insurance increase 50-90% due the insurance climate in California. Utilities costs are continuing to rise, for those multi-family properties where some, or all utilities, are included with the rent. Rent increases don't come close to helping cover these rising costs. With a potential negative cashflow, property owners may skimp on repairs and upgrades (due to lack of extra funds), leading to a decline in the overall quality of the housing stock.

Reduced housing supply- Rent control can inadvertently reduce the availability of rental units. Landlords may choose to convert their properties to other uses, like short term vacation rentals, if the rent restrictions are too stringent. Since January 1, 2020, when the most recent rent control laws took effect in California, my company has lost the management of at least 50 single family homes because the owners decided to sell. They didn't want to be landlords and deal with increasing difficulty of having a rental in the State of California. Now 50 units may not sound like many, but that's 50 sets of tenants that were displaced and had to find a new place to rent (at a higher price, of course). Additionally, new developers might be deterred from building rental properties in rent-controlled areas, leading to a decrease in the overall housing supply. Fewer available units can mean increased competition and, ironically, higher rents. Remember the laws of supply and demand from econ class?

Disincentives for moving- Tenants in rent-controlled apartments might be reluctant to move, even if their needs change. Why leave a rent-controlled unit when it’s a fraction of the market rate? This reluctance can lead to a mismatch between housing and the tenants who occupy it. For example, a single person might stay in a large, rent-controlled apartment long after they need the space, reducing the turnover rate and keeping others from finding a home. Or a single person in a rent controlled unit may allow other friends or family members to move in, which is a lease violation in most rental contracts. This can lead to a potential eviction which is not good for anyone.

More frequent rent increases- In the world of rent control "use or lose it," many landlords will raise rents as often as legally possible so they don't lose out on the ability to keep up with market rent. Here is a real example from my business. Owner A has a duplex where both 1 bedroom units are similar in layout and features. Unit 1 rents for $1000 and tenant 1 moved in 1 year ago. Unit 2 rents for $750 and tenant 2 moved in 5 years ago. The current market rent for a 1 bedroom is $1000. Based on the rent control laws we are able to raise rents 8-9%, once every 12 months. Even though the market rent of a 1 bedroom unit is around $1000, the landlord would still raise unit 1 to $1090 because if they don't, they "lose" that increase, even if the owner's rent increase policy is to raise rents only every other year. Rent control has just cost the tenant an extra $90 per month. And tenant 2 would still be paying quite a bit less at $817 for the exact same unit.

There has got to be a better way! I don't have all the answers, but there must be some solutions out there that make landlords want to keep owning rental properties, and tenants have opportunities to pay a fair rent amount. I think part of the problem is that many people think all landlords are big, bad monsters that only care about money. I can tell you, from my perspective, that very few landlords are actually like that. Like I said above, its the few "bad apples" that have made things frustrating and difficult for the rest of us.

While the intention behind rent control is admirable, the policy often leads to a host of unintended negative consequences that can outweigh its benefits. By focusing on alternative solutions that address the root causes of housing affordability, we can create a healthier and more balanced rental market. Affordable housing is a complex issue, and it requires innovative thinking and strategic planning to ensure that everyone has access to a place they can call home.