{"id":110691,"date":"2019-05-13T14:30:09","date_gmt":"2019-05-13T20:30:09","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=110691"},"modified":"2021-03-16T14:53:51","modified_gmt":"2021-03-16T20:53:51","slug":"rental-owners-concerned-rent-control","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/rental-owners-concerned-rent-control","title":{"rendered":"Rental Owners Everywhere Should Be Concerned About California’s Push for Rent Control\u2014Here’s Why"},"content":{"rendered":"

It\u2019s not just the weather that travels from west to east across the continental United States. Everything from Tony Hawk’s skateboarding to the humble Cobb salad got its start in California, eventually drifting eastward.<\/p>\n

For better or worse, the West Coast has a long history of setting trends and then spinning them out across the country. More recently, California has been pushing its historically low cap rates<\/a> into neighboring states like Arizona and Nevada, much to the delight of incumbent local investors.<\/span><\/p>\n

The burning question for rental property owners today is: <\/span>will statewide rent control regimes be the next West Coast export?<\/b><\/p>\n

Oregon Leads the Way in Rent Control<\/h2>\n

In unlikely fashion, it\u2019s actually Oregon that\u2019s leading the charge with a first-in-the-nation statewide rent control bill passed earlier this year. Senate Bill 608 was signed into law in February and immediately capped annual rent increases at the consumer price index (CPI) plus 7 percent. The only exemptions are for buildings less than 15 years old and subsidized below market rentals. <\/span><\/p>\n

In practical terms, that means most Oregon landlords will be limited to raising rents, on average, a maximum of 8 to 10 percent per year. Notably, the new legislation does not include vacancy control, so Oregon rental property owners will retain the right to set rents as they wish once an existing tenant vacates.<\/span><\/p>\n

What\u2019s perhaps most notable about the recent action in Oregon is that while the legislation potentially sets a dangerous precedent for property owners, it\u2019s also relatively mild in its actual restrictions. Even 8 percent annual rent increases can add up fairly quickly, and with compounding, can result in a 26 percent bump in just three years. <\/span><\/p>\n

All things considered, the result could have been worse for Oregon property owners. Time will tell if the new regulation delivers enough stability to the rental market to short-circuit support for more drastic rent controls.<\/span><\/p>\n

Related: <\/strong><\/em>6 KEY Attributes that Affect the Risk Level of a Rental Market<\/a><\/em><\/p>\n

California Starts Down Two Paths to Rent Control<\/h2>\n

Not to be outdone by its slightly damp neighbor to the north, California legislators are now proposing a slew of new regulations aimed at protecting existing tenants and increasing the housing supply across the nation\u2019s most populous state.<\/span><\/p>\n

AB 1482 advanced out of assembly committee on April 25 and promises to cap annual rent increases at CPI plus 5 percent statewide, except where more restrictive local rent control laws remain in place. In areas with existing rent control, including Los Angeles, San Francisco, Oakland, and other cities, the more restrictive local regulations would continue to prevail.<\/span><\/p>\n

Related: <\/strong>What Is Rent Control\u2014And Is It Bad for Landlords?<\/a><\/em><\/p>\n

If AB 1482 becomes law, rental property owners from San Diego to Yreka will see their ability to increase rents for existing tenants<\/a> capped at roughly 6 to 8 percent per year, with no exceptions for single family homes or newer construction. Of all the rent-control or “anti-rent gouging” bills currently being considered by California lawmakers, AB 1482 is probably the one with the best prospect of becoming law.<\/span><\/p>\n

Taking a slightly different tack, the California Senate is currently considering SB 50, which would wrest control of certain residential zoning regulations from local cities and counties. It\u2019s a complicated package of legislation that\u2019s designed to force higher density housing construction near rail and bus transit corridors. <\/span><\/p>\n

While there are notable carve-outs for smaller cities and beach towns, many of California\u2019s urban centers would see a significant uptick in higher density new construction near transit. Under a separate provision, communities throughout the state would also be unable to prevent the further subdivision of many existing duplexes and single family homes into three- and four-unit properties<\/a>.<\/span><\/p>\n

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What\u2019s Behind the New Legislation?<\/h2>\n

Taken together, AB 1482 and SB 50 can be seen as roughly representing two camps of thought regarding solutions to the continuing housing affordability crisis that grips not only California, but also an increasing number of urban areas across the country. <\/span><\/p>\n

On the one side, organized and well-financed tenant advocates are beginning to gain some modest ground in their efforts to bring rent controls to increasingly large swaths of the country. It\u2019s likely they will succeed in California, in one form or another before the end of the 2020 election cycle. <\/span><\/p>\n

Early results from the legislative push for more rent control in California will certainly influence what happens in other parts of the country, where rents are rising and tenant rights groups are gaining political influence.<\/span><\/p>\n

On the other hand, housing advocates (and developers) are also gaining traction, advancing the argument that restrictive land use policies are a significant source of upward pressure on housing costs, especially on the West Coast. Many California communities are so united in their distaste for residential growth and its negative perceived impacts on schools and traffic that it has become nearly impossible to get approval for even fully conforming new housing developments. <\/span><\/p>\n

This is likely to change significantly over the next few years, as a direct result of SB 50 or from whatever similar bill rises to take its place should SB 50 falter this year.<\/span><\/p>\n

Taken together, there is a decent chance that this two-pronged approach may yet move the California housing market back toward a more sustainable balance in time to avoid more draconian restrictions on rental property owners<\/a>. Six years of steadily rising rents and a continued shortage of new home deliveries has resulted in a pressure cooker environment around all things housing related up and down the West Coast. Letting some steam out now may be the best hope for avoiding a major blow up.<\/span><\/p>\n

Related: <\/strong><\/em>What Property Owners and Managers Need to Know about Risk Management<\/a><\/em><\/p>\n

Emerging Risks for Rental Investors<\/h2>\n

Changing populations and emerging legislation nearly always bring new risks (and rewards) to forward-thinking real estate investors. Let\u2019s take a closer look at a few key implications of the forces at work in California, on the assumption that they will eventually impact other markets around the country.<\/span><\/p>\n

First, let\u2019s acknowledge that California has not been the most lucrative place to own rental property if you\u2019re primarily focused on current income. Cap rates are notoriously low in core urban areas along the coast and are only slightly better inland. <\/span><\/p>\n

If you bought rental property in California from 2009 to 2015 and you\u2019ve been able to raise rents to market, your yield is probably a bit more respectable now and you\u2019ve undoubtedly also seen significant appreciation. If you bought more recently or have not raised your rents, it\u2019s a different story.<\/span><\/p>\n

If your current rents are close to market, then the annual increase caps contemplated under AB 1482 probably won\u2019t hurt you much in the near future, given that market rents have now leveled off in nearly all parts of the state. <\/span><\/p>\n

Ironically, it\u2019s the investors who had the option but chose not to raise rents in recent years that will bear much of the burden of the new legislation in the short run. This may be perhaps the most prescient lesson to landlords in other states<\/a>, where rent control initiatives are just beginning to gain visibility. (Read: get your rents closer to market while you still can.)<\/span><\/p>\n

What lies ahead is somewhat uncertain. It may take years before we know how the emerging rent control regime will impact investor demand, cap rates, and associated valuations.<\/span><\/p>\n

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Some questions you may want to ponder include:<\/strong><\/p>\n