Rent control has become quite the hot topic for real estate professionals. For those of us in the multi-family property industry, this conversation is even more apparent. While rent control has become prevalent in cities, some states have gone as far to institute statewide rent control to increase stabilization. With these recent changes in mind, you might find yourself wondering how rent control may affect the value of your multi-family property.
To many property owners, the effect of rent control will be minimal since landlords tend to encourage long-term tenants, which decreases turnover expenses and vacancy losses. With that said, here are two factors associated with rent control that may affect the value of your property, for better or worse.
For many years, listing brokers priced properties on pro forma rents. In an ideal real estate world, interested buyers would be lining up and willing to pay good money because rents were on the rise. The property may not even be generating income, but the possibility of profitability exists given the market.
Now, consider what buying a property looks like now when rents are controlled—if tenants are paying below-market, it will take a buyer a long time to generate profit. Many buyers will be hesitant to invest in a property where they cannot see quick growth.
The need for affordable housing, and housing in general, continues to rise. However, rent control has been historically proven to slow necessary development needed to meet housing demands. What this means for the multi-family industry is that there may be a decrease in the amount of units being developed.
A lack of development is a bit of a double-edged sword. If you’re in the development side of the business, rent control may affect you rather negatively. As an investor or an owner, you may appreciate a halt in development. After all, less development means less competition, and therefore increased value.
With any change in the industry there are bound to be both negative and positive side effects. However, the increasing restrictions surrounding tenant and landlord laws have pushed many long-term investors out of the market. The key to surviving these changes most often relies on investors and owners ability to read their market and adapt accordingly.
The most noticeable difference multi-family investors might see lies in the pace of the market. Slower doesn’t always relate to a poor investment—to make it work, you might just need a little patience and smart financial planning.