Affordable housing has become a buzzword in Washington. The battle cry includes more control over rents private landlords charge, eviction restrictions, less discrimination, and increased oversight of rental markets.
All that proposed oversight generally translates into fewer protections and higher operating costs for property owners. But before concluding that real estate is no longer a lucrative investment, let’s take a closer look at how President Biden’s proposed Blueprint for Renter’s Bill of Rights might impact real estate investors.
Currently, no federal legislation strengthening tenant rights is even close to passing. However, Biden is pressuring states and local municipalities to pass laws consistent with his objectives. Rent control measures are one piece of legislation that concerns investors because it could limit the amount a landlord can increase rents, regardless of how much costs rise.
Rent control measures are not a new concept. The first laws were enacted in the 1970s in areas of the country that continue to face affordable housing issues. While most laws are passed at the local level, Oregon and California recently enacted statewide legislation, impacting most private housing fifteen years or older.
Proponents advocate for rent control to reduce housing instability and increase affordability for low-income tenants. Laws restrict the number and amount of increases a landlord can charge. Sometimes, it also affects when a landlord can terminate a lease and how much they can collect from the new tenant.
California is a good case study because it passed a statewide law restricting rent increases that went into effect in January 2020. It permits landlords to increase rent by either 5% plus the inflation rate to a maximum of 10% per year. Increases can occur up to twice annually and only applies to buildings over 15 years old.
As of 2022, new construction projects remained strong, and rent growth reached 12.7% in April 2022 (year-over-year), below the national average of 17.8% but over the 10% rent control cap.
On the other hand, New York City, which enacted some of the country’s strictest rent controls and lease termination laws (and did not exempt new construction), saw housing values fall by 20% or more shortly after the new law went into effect.
Studies show that the long-term effect of rent control is lower affordability and gentrification of lower-end neighborhoods, the exact opposite of its original intent.
How Rent Control Impacts Investors
Many high-growth areas across the country have strong landlord protections and fewer affordable housing challenges. Large and mid-size cities across the south and southeast do not have the cumbersome legislation seen in states like New York and California. These areas are also experiencing high population growth and are more affordable, making them excellent places to invest in multifamily.
However, room for investor profits is largely in the details, even among municipalities or states with tenant protections. Cities want to reduce homelessness and housing insecurity but also support development. If they create too many roadblocks, investors will avoid the state or city exasperating the housing crisis. Those two objectives mean most laws that protect tenants do not alienate investors and builders.
At McKee Capital group, we reduce investor risk by targeting landlord-friendly states that do not impose unrealistic restrictions and legislative burdens on landlords. To learn more about real estate syndications and how we choose property locations to protect investors, watch our introductory video.