Many areas in the country continue to experience an increase in rental rates year after year as the demand for rental units increases at a higher rate than the supply. In fact, nearly half of all households in the U.S. spend at least a third of their monthly income on rent. This has led to the legislation of rent control measures in some areas. But what exactly is rent control and what is its effect on property management? If you are a property manager concerned about the changing laws, read on.
What Is Rent Control?
Rent control refers to a government program that sets a limit on the amount charged as rent by a landlord leasing a house or renewing a lease. It consists of restrictions on how much the rental rate can be increased annually. The purpose of rent control is to provide affordable rental housing to lower- and middle-class tenants in society. Rent control rules allow cities to maintain social and economic diversity rather than forcing low-income residents to live in specific low-cost areas. Unprotected units in an area with a low supply of rental units will often charge higher rents.
How Does Rent Control Work?
Rent control laws usually tie rent increase to a range of permissible increase percentages referred to as “caps.” As a property manager, you are not allowed to exceed the rent increase cap during the lease renewal process. A percentage of the current inflation rate or the consumer price index (CPI) is often used to establish a rent increase cap for the year. However, rents are often allowed to revert to market rate when the renter relocates.
Rent Control in the U.S. Housing Market
Rent control laws were first introduced in the U.S. in the 1920s, which were generally unworkable. However, the system became popular again in the 1970s in a more moderate form. Today, there are some states in the U.S. that have adopted some form of rent control. Such states include California, Oregon, New York, Maryland, and New Jersey. There are some locations that support state-wide rent control regulations while others have laws varying by city or municipality. However, many states forbid rent control altogether.
A state-wide policy in the U.S. was first enacted in Oregon in 2019. Oregon rent control laws limit rent increases each year to 7 percent plus inflation, which comes to about 10%. California rent control regulation took effect in 2020 and restricts rent increases to a maximum of 5 percent plus inflation annually. New York rent control allows rent increase of up to 7.5 percent every two years. It’s important for a property manager to understand the unique laws of the area he/she is in.
The Effect of Rent Control on a Property Management Business
Like any other social issue, rent control has its pros and cons. As a property manager, it is important to understand how rent control will impact the property management industry. Read on to get insight into how these policies may affect your property management business.
Rent Control Cons
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Low property management fees
Rent control can have adverse effects on property management, especially multifamily property management. If you have too many rental units with rent below market value, property owners may not gain enough profit. With limited cash flow, the owner may not be able to afford to pay you the desirable management fees. With low management fees, your company will also be unable to provide high-quality property management to ensure customer satisfaction. This often leads to more tenant complaints and even legal battles.
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Risk of losing clients
Some rental property owners may not be able to afford to hire a property manager without the ability to raise rental rates to cover the costs. If this is the case, the role of a property manager may be at the brink of elimination. Some property owners may opt for self-management or decide to convert the rent-controlled properties into a more lucrative option. For instance, they may decide to use the space for commercial use.
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Fewer new property management opportunities
Rent control also discourages real estate investment in new rental properties in areas with strict rent control laws. This reduces the supply of rental properties to manage. Reduced property management opportunities will, in turn, limit your potential of making money as a property manager.
Rent Control Pros
The biggest problem for property management companies is making a profit when managing rental properties that fall under the rent control rules. So, how can property managers take advantage of rent control? Even though rent control makes it tough for a property manager to maximize profits, there are still a few benefits:
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Low tenant turnover
Rent controlled properties usually have a low turnover since tenants are aware that moving out to an unprotected property usually means that they pay higher rent. Therefore, established renters are likely to stay put to avoid paying more. A property manager doesn’t have to spend a lot of time marketing the units to get new tenants.
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Tenants can be motivated to pay rent on time
Since tenants will be paying below-market rental rates, they can be motivated to pay rent on time. Even though the rental income will be less, there will be a stable cash flow.
How Can Property Managers Deal with Rent Control?
What can rental property managers do when raising rents is not allowed in their real estate rental market? If rent control is something you are worried about, here are a few tips to help you deal with it:
1. Use property management software
As rent control grows, you need to be agile to stay competitive in the property management industry. In other words, you should be able to adapt quickly to changes in the real estate market. This is where technology can be of great help. A good purpose-build property management software will enable a property manager to efficiently track rent control factors so that they know how much to charge for rent. This way, you will be able to keep up with rent caps, meet the demands of property expenses, and hopefully make a profit. For instance, it could track the date of the previous rent increase to make sure that scheduled rent changes comply with state and local rent control laws.
Using a property management software eliminates the risk of human error since it can handle complicated formulas. A tool that captures data on vacancy rates, rental applications, rent growth, price tiers, and other real estate market trends helps property managers to identify patterns and respond quickly and efficiently while remaining in compliance with regulations. This way, they are able to stay competitive in the marketplace and achieve their financial goals. It is also important to use software that supports a diversified portfolio to enable your property management company to maintain stability in a dynamic market.
Related: 7 Best Property Management Tools for 2019
2. Reduce expenses
Under rent control, a property manager should optimize cash flow by looking for ways to reduce expenses. You have to look for ways to reduce costs such as reducing regular repairs like painting and cosmetic renovations.
3. Take advantage of hardship exceptions
Some cities have provisions that allow property owners to apply for hardship increases if the investment property is losing money. As a property manager, make sure you read the fine print and ensure your client takes advantage of every possible exclusion.
4. Manage profitable rental properties
In areas with rent control regulations, it’s important for property managers to focus on managing profitable investment properties. Property managers can use Mashvisor’s Investment Property Calculator to calculate the potential rental income and cash flow of an investment property before they choose to manage it. To find profitable rental properties to manage, you should also focus on working with experienced real estate investors.
5. Use Mashboard
One way property managers can deal with the risk of losing business is finding positive cash flow investment properties for their existing clients and leads with Mashboard. With this Mashvisor tool, you’ll be able to get more profitable rental properties under your management and grow your rent roll.
Start out your 7-day free trial with Mashvisor now to easily find more properties for your clients.
Related: How to Quickly Become the Best Rental Property Management Company in Your City
6. Work in different locations
While managing rental properties near you may be easier, you might want to broaden your horizons. This will help to diversify the properties you manage and reduce risk. Some cities may offer better opportunities than others.
The Bottom Line
The adoption of rent control presents new challenges for property managers operating in regulated areas. If you are running a property management company in 2020, make sure to understand the rent control regulations in your state, city or municipality and how to operate within them. Property management firms need to employ creative solutions to maximize the rental income as much as possible when raising rents is not permitted. This will also give rental property owners the confidence to hire you. The best property managers know how to maximize the returns of the properties under their management.