By Mercedes Shaffer l Published in AOA Magazine
Rent control policies have long been a topic of debate, with proponents arguing for tenant protection and affordable housing, while opponents claim rent control has the opposite effect. In California, where the housing crisis is particularly severe, statewide rent control limits rent increases to 5% + CPI, with a max of a 10% annual increase. Let’s put aside the idea that government shouldn’t be usurping business owner’s rights by setting rates and limiting profitability. Most property owners would say that a 10% max increase is very reasonable, especially given that in most years the market has naturally limited housing providers to about 3-5%. However, the combination of inflation on goods and services, and escalating utility bills, has made it increasingly challenging for property owners to maintain profitability, let alone have funds to reinvest in property improvement.
Why Would Anyone Want To Raise The Rent More Than 10%?
When inflation was between 2-3% per year, a 10% rent cap seemed tolerable. In addition to having to pay my gardeners, contractors, tradesmen, and even material costs 15 – 40% more than in 2022, I just received a notice from the Sanitary District letting me know that my sanitation bill will be going UP 17%! The increase in utility costs is not isolated but rather indicative of a broader inflationary trend. Rising prices in the energy sector often reverberate throughout the economy, affecting the cost of goods and services across sectors. As utility expenses rise, so do all costs associated with maintaining a property, and let’s not even get started on the skyrocketing cost of property insurance. Although government is regulating what I can charge, they are not playing by the same rules or absorbing any of the risk.
Local Rent Control Can Be Even More Restrictive
Rent control laws in California vary by city, with each city council setting their own regulations. These laws typically limit the amount housing providers can increase rents on existing tenants to 3% or sometimes less, and often require just cause for eviction. While these policies aim to provide stability and affordable housing, they usually have unintended consequences for both tenants and property owners. Owners can’t afford to stay in business so the properties are sold for redevelopment, or left derelict due to lack of funds to reinvest or removed from the rental market - exacerbating the existing housing crisis.
Some cities that have more restrictive rent control laws, such as Santa Ana, have a process where an owner can contest the low rent cap if they can prove that it has a detrimental financial impact on the owner. Given the steep rise in inflation, it seems that every property owner would have an easy time proving this.
Impact on Investors
For rental property owners, the combination of rent control, inflation, and rising utility costs can result in a challenging financial landscape. The inability to adjust rental prices to match increasing expenses can lead to diminishing profits or even losses and financial ruin, forcing property owners to sell their apartments when they had intended to keep the investment properties forever and pass them along to their heirs.
Effects on Tenants
While rent control aims to protect tenants from excessive rent increases, it can actually dimmish the supply of housing and compel owners to be even more selective about the creditworthiness of rental applicants. As property owners face financial pressures, they have less incentive to invest in property improvements or maintenance, leading to a decline in housing quality. Additionally, limited rental supply due to mom-and-pop owners exiting the market often results in corporate private equity giants purchasing apartments for redevelopment. They have the financial resources to make the kinds of broad sweeping changes that eliminate affordable rental housing altogether. In San Diego, Blackstone recently bought a portfolio of 66 low-rent apartment buildings and tenants who haven’t had their rent increased in years, are nervous about what changes this may bring. I am seeing an increase in the amount of owners who want to cash out now, before the inflation-to-rent price equation gets even more unbalanced.
Conclusion
Rent control in California has been a topic of contention, with concerns about its impact on housing provider’s profitability. The combination of inflation and rising utility costs places additional financial strain on a property owner operating under rent control regulations. More fundamentally, it’s the government stepping in to take control of a business, without assuming any of the risk, which infringes on everything that the free market stands for. Your vote counts, so vote for candidates who oppose rent control, and exit cities with tough rent control ordinances so that your tax dollars aren’t supporting them.
If you’re considering buying, selling, doing a 1031 exchange, or cashing out while prices are high AND deferring taxes, call me at 714.330.9999 or email me at InvestingInTheOC@gmail.com to learn about your options. I’m Mercedes Shaffer, a real estate agent with Coldwell Banker, helping you build wealth one door at a time. DRE 02114448
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