And we’ve come to one of topics that all landlords and real estate investors complain about: RENT CONTROL. When we hear rent control, we automatically think about big cities like New York or Los Angeles or Washington DC. Areas with rent control laws always manage to make the list of least affordable areas to rent apartments and alternatively of the locations with most profitable real estate investing opportunities. So what is rent control? And how can real estate investors make money in rent control areas? Let’s find out!
Related: Washington DC Real Estate Investing: Should You Jump In?
What is rent control?
Basically rent control is a legally obliging regulations that limits and controls the amount of rent a property owner can charge for his/her property. It doesn’t allow the landlords to raise the rent by more than a certain amount each year. In fact, it’s a law and it protects every tenant that lives in a rental property under the program. According to the rent control law, your rent can only be raised once a year and can only be increased by a certain percentage. In specific, the amount of the annual rent increase cannot be more than the rate of inflation plus 2% and your rent can never be increased by more than 10% in one year. For tenants who are over 62 or have a disability rent can only be raised by the rate of inflation and never more than 5%. So, with all these protections for tenants, you are probably already asking yourself: How can landlords make profit in areas with such regulations?
Is rent control good for investors?
You might be surprised, but rent control regulations offer such a great opportunity for real estate investors since these regulations decrease the supply of rental units and increase the extra number of tenants in need of rental properties. So, this allows investors to negotiate with future tenants who are in search of rental units. Investors also have the opportunity to find income properties that have been deteriorated due to the owner’s inability to raise income effectively. This allows investors to force them to sell at a discount.
Related: Becoming a Landlord: 5 Guidelines to Being Fair to Tenants
How to make money under rent control?
The question here isn’t about just making money but rather about making money in a smart way by being a better owner of a rent controlled property than the previous owner (i.e., the seller). Learning from previous investor’s mistakes is by far the best learning strategy and can ensure you better success. So, here are a few methods that you can take advantage of when doing real estate investing in rent control areas in specific:
1. Apply for hardship increases
Landlords are not the bad guys here simply because they want to make some money from their investment property. After all, those impose rent control regulations want to protect vulnerable tenants while still providing landlords with the opportunity to receive a fair return on their investment and eventually benefit from their property. That is why for any investor who thinks about investing in a property with below market rents should apply for hardship increase because rent control allows raises for special hardship cases. An annual net rate of return less than 7% allows investors to apply for hardship increases.
Related: 6 Rental Renovation Tips to Know Before Spending Any Money
2. Reduction of turnover expenses
There are various ways to decrease your expenses – one of the two determinants of cash flow from an investment property along with income – including by considering the repairs that you do on your property. Regular repairs such as painting and cosmetic rehab that you would normally have to do in non-rent control areas can be reduced to a minimum in rent control places as long as the property is in a rentable state by local regulations standards. Reductions in turnover expenses allows landlords to increases the bottom line cash flow and have the negotiation power with tenants when it comes to these repairs.
3. Capital improvements
Real estate investors can increase rent in areas with rent control by doing certain capital improvements to the unit or property. This means that you should always aim to make your property stand out from other units by doing different maintenance and repairs and adding some amenities. For example, add items such as a laundry and a dryer machine, parking space or self storage space and include its charge use within the tenant’s monthly rent. Through this you can increase your cash flow and asset value. The trick is to make such improvements at the minimal possible cost.
A final word
When we think about rent control, we form this image in our minds that the residents living in rent control units are living the life. We imagine that they are living in really low cost apartments far below the market value. And when we think about landlords who own those rent control units, we imagine them as not making any money from their property. It is important to realize that both the tenant and the landlord are in one way or another affected by rent control. Tenants are faced with limited housing stocks, while landlords might end up losing more money than they gain. However, real estate investors in such locations don’t have to be at a disadvantage. Just those interested in investing in areas with rent control must carefully study the situation and evaluate how profitable the property will be for them. Don’t forget to use the tips above to increase your profitability in such locations. If you decide that real estate investing in rent control areas is the right choice for you, check out Mashvisor for available properties there.