It is not news that rents are skyrocketing in many markets around the U.S., generating a lot of talk and some action around rent control. Rent control, or rent regulation, is a government program that places limits on the amount landlords can charge for rent in an effort to create more affordable options. The idea is to establish more stability within the housing market, however, rent control is a short term solution that may not provide enough benefit to outweigh the long term risks.
How does this impact investors?
While rent control has great intentions for tenants, it has the potential to simultaneously burden private investors and may even discourage future investments for the regulated area, leading to less growth and development. Inflation, rising interest rates, and the cost of building materials and labor has increased significantly over the last two years. Therefore, investors are required to charge higher rents in order to make any profit on their investment. Markets that have passed rent regulation policies now hold less incentives for investors and developers, so they are taking their money elsewhere. This would cause a slow or even stop in rehab and development, which overtime would cause harmful effects on the municipality.
Some investors are willing to stick it out and play the long game, however, others are retreating, selling their properties in rent controlled areas, and looking for new areas to invest in. However, there is no way to know for sure that rent control won’t make its way to those areas in the future.
Supply and demand is a major driver in the implementation of rent control. When not enough housing is available to fit the demand, rents increase. This is primarily an issue affecting apartments and multifamily properties, however, for the single family rentals (SFRs) impacted, investors are taking the opportunity to supply more housing by building accessory dwelling units (ADUs) on SFR properties. Even areas who have adopted policies around rent control are approving the addition/renovation of ADUs. Accessory dwelling units are a great way for investors impacted by rent control to still experience a good return on their properties.
No one invests in real estate assuming there is no risk. It is all about navigating the changes and patterns of the market and getting innovative with investment types and strategies.
If you’re planning to invest in multifamily, single family rentals, or accessory dwelling units, reach out to one of the experts at CALCAP Lending to discuss your financing options.