Can Upcoming Rent Control Initiatives Make or Break Your Investments?

by | BiggerPockets.com

Does the recent upsurge in rent control initiatives and advocacy mean I could be making more selling my current residential investment property? Does that seem upside-down? Don’t forget, there are two sides to every coin.

The Scoop

Lawmakers and rent control advocates are currently working to repeal state laws forbidding rent control to revive the practice in states across the country. Illinois, California, and Washington are gaining some foothold in their efforts to reinstate the practice in an effort to control housing costs. In Oregon— in spite of a narrowly defeated 2017 measure — the concept is gaining ground in cities with drastically increasing rents and limited housing availability. This is especially the case in the lower-income ranges.

Related: Why It’s Time to Consider Adding Rent-Controlled Properties to Your Portfolio

Any undergraduate student enrolled in a Microeconomics 101 class will tell you that people respond to incentives. Rent control seeks to place an artificial price ceiling on a good or service (in much the same way that minimum wage places a price floor on wages). On paper, this policy caps rent prices so investors reach an artificial max limit, while renters enjoy a cap on the costs they’ll incur. However, like any economic policy, there are always unintended consequences. In the case of rent control, this policy changes the incentives for investors to invest in the market.

The Downside

By placing an artificial ceiling on the revenue stream of the investment, rent control also places a limit on how much most investors are willing to invest. Having limited gain potential while maintaining complete risk of loss means investors will contribute less in these markets as they seek higher returns elsewhere. People respond to incentives. Investors are less likely to both purchase properties and perform repairs and maintenance at the level they might in other markets. It also means many investors will simply take the next exit and invest in other markets.

The Repercussions

As funds flee potential rent control markets, investors will seek opportunity in other markets with less government interference. This creates a golden opportunity for investors in non–rent control markets to sell at a higher price.  If rent control dies in these select markets, I predict a bit of a price correction downward in non–rent control markets.

If you have considered selling your investment in a location that investors fleeing rent-control areas might find attractive, now may be the time. The largest exodus is most likely to occur before the election in November. Perhaps you are considering a 1031 exchange, retirement, or a host of other reasons. Now is a great time to sell.

Related: How to Raise the Rent on Your Tenants as Painlessly as Possible

Another attractive option is selling your current property in an area further into its growth cycle and leverage that property into areas of newer growth. In many newer-growth areas, the ratio of rents earned to initial capital investment dollars may be significantly higher than your current property. This allows you to multiply your investment by distributing that capital into multiple properties in these areas of reduced initial investment entry. The result is a more diversified investment portfolio across multiple markets and property types. This strategy can seriously improve your cash flow and IRR.

What do you think? Is rent control a blessing or a curse?

Share your opinions below!

About Author

Andrew Propst

Andrew Propst has over 18 years of experience both in residential and commercial real estate management. Currently Andy is the CEO of HomeRiver Group (the parent company of HomeRiver Boise) and a Business Developer for HomeRiver Boise, a Certified Residential Management Company (CRMC®), in Boise, Idaho. Andrew has illustrated throughout his career his resolute commitment to delivering first-class results for clients, as well as consistently improving efficiencies and operations across his companies. Industry knowledge and a keen focus on technology has been a major priority for Andy. He has obtained four of the leading industry designations: Certified Property Manager® (CPM®) from the Institute of Real Estate Management (IREM®), Master Property Manager ® (MPM®) Residential Management Professional ® (RMP®), both from the National Association of Residential Property Managers ® NARPM®, and Certified Commercial Investment Member (CCIM®) from the CCIM Institute.

Volunteerism has been a major focus and joy for Andy, from service on the National Board of Directors of NARPM® for six years as a Regional Vice President, to National Treasurer, National President-Elect, and then his election as President of The National Association of Residential Property Managers (NARPM®) in 2015. Currently, Andy serves as immediate Past President for NARPM® and continues to offer ongoing counsel and insight to the Board of Directors of NARPM®, using his extensive knowledge and experience within the industry. Andy has also had the privilege of serving on other local and national real estate boards.

Andy also took a recent swing at Hollywood. As the Associate Producer of the Saratov Approach, Andy helped fund, write, promote, and deliver a national theatrical release of a full-length motion imageture that won multiple awards and returned an Internal Rate of Return (IRR) to its investors of more than 1000%. The feature was based on the true story of Andy and his missionary companion, Travis R. Tuttle, and their dramatic experience of being kidnapped and held for ransom by the Russian Mafia in March of 1998. Andy also wrote and help produce, The Story Behind The Saratov Approach: A Fireside Event in 2013, which is now available on DVD, Blu-ray, and Netflix, along with the “Saratov Approach.”

As well as his commitment to his business interests and wide real estate pursuits, Andy’s family is #1 in his life. Married to his beautiful wife, Shonda Propst, for 17 years, Andy and Shonda adopted their first son, Samuel Propst, in 2008. Further, the Propst family welcomed another new addition with their adoption of Brooklyn in 2011. Originally from Oregon and now proud to call Idaho home, Andy is also bilingual, being a fluent speaker of Russian, alongside English.
HomeRiver Group
HomeRiver-Boise

9 Comments

  1. Christopher Smith

    I have several properties in CA East Bay while more and more of the San Francisco and San Jose communities are contemplating greater rent control laws (either adopting new laws or strengthening old ones). My properties have benefited greatly for years from the gross incompetence and adject mismanagement attributable to Bay Area housing policies (to specifically include rent control).

    However, not sure I would ever sell no matter what happens as long term prospects here are just too good to risk selling even if prices were to unexpectedly spike upward in reaction to changes in existing or proposed laws. I just hope those who are behind these market destroying scheme’s stay as far away from my area as possible, because one thing that history has unequivocally taught us is that these “do gooders” will utterly destroy whatever it is they put their hands on.

  2. Edward Synicky

    One more reason to not invest in California. I have 1031’d almost all of my properties, in all cases my cash flow has gone up considerably and I still have sufficient appreciation, not Ca style but then no precipitous drops either. I have lived in California my entire life but the cost of living, the tax structure, and government interference has lead me to invest outside of the state. I think it is now time to also move my personal residence to Nevada and spend all of the state tax I am presently sending to Sacramento for the bullet train to buy items to improve my families life.
    Last person out turn off the lights.

  3. Katie Rogers

    ” Investors are less likely to both purchase properties and perform repairs and maintenance at the level they might in other markets. It also means many investors will simply take the next exit and invest in other markets.”

    Perhaps people seeking to be homeowners will have a chance to buy instead of being continually outbid by investors if investor flight causes a correction in house prices.

    • Sjalome Blijheid

      No they won’t. Right now many people have the road open to buy. Do they buy? No. There is reason why most capital is concentrated with few and it’s because the rich keep the little guy out. Many people rather go shopping then tie their money up in a mortgage. Take a look at the credit card debt. It just says a lot of people buy junk with no appreciating value that they cannot afford. Many pay more for rent than they would in mortgage payments, but they prefer it that way. I respect that and I also turn a respectable deaf ear to their complaints of how hard life is.

      • Katie Rogers

        In my community, if you are looking to buy a home for your family, now is a bad time. Prices are overheated relative to the intrinsic value of the house. Rich investors, especially hedge funds, who routinely overpay just to park their clients’ money somewhere, do keep the little guy out. That is my main point. Then agents use houses they know were overbid as comps for the next house on the market in their continual quest to push homebuyers to overpay.

  4. Michael P. Lindekugel

    the idea of rent control in WA State is primarily because of seattle. But, there is no shortage of housing. its a shortage of affordable housing. there is 7% vacancy in the luxury apartment market. landlords are giving 1-3 months rent concessions. there are 58 construction cranes in Seattle which is 1/3 more than the next highest city. none of it is affordable housing. the high tech renters are beginning to seek roommate arrangements. soon, there is going to be downward pressure on rental rates. with the recession expected to hit 2020 Q1 there could be a few investors in foreclosure with a glut of housing.

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