Rent control is a form of leasing regulation that requires landlords to limit how much they can charge tenants for the privilege to have a property unit. The goal of most programs to provide affordable housing options in cities where the free-market system would price many low-income individuals and families out of the market.
There are two different forms of rent control that you can find in the United States right now. The most stringent definition of this term refers to a circumstance where the rental requirements of the tenant is almost frozen indefinitely. This option is very uncommon because landlords do have the option to manage property taxes and other expenses through the payments they receive.
Rent stabilization is the other option that tenants can find in this category. This form of control establishes a smaller, set percentage by which a landlord can increase the rent each year to offset the rising costs. Tenants can then budget for the expense in advance because they know how much they will pay over each leasing period.
If you get to be one of the lucky renters in one of the few American cities that have rent control legislation in place, then here are the pros and cons to expect.
List of the Pros of Rent Control
1. It caps the amount of money that can be charged for rental increases each year.
When rentals are governed by the open market, then the price increases the tenants face each year can be exceptionally high. In places where people are moving to in droves, it is not unusual to see monthly increases rise by $800 or more. That can make staying in a property virtually impossible for some families on a limited income. Rent control caps the amount that a landlord can increase the amount that is due each month, ensuring that both parties know exactly what they can budget.
For tenants who can find themselves in a rent-controlled property, they can save hundreds, if not thousands of dollars each year since they are free from the open market influences of supply and demand.
2. Some communities limit the reasons why you can be evicted with rent control.
When you rent a property as your primary residence, then the lease or contract that you sign with the landlord governs your behavior, actions, and decisions. If you violate one of the terms of the agreement, then you open yourself to the possibility of facing an eviction proceeding. Tenants in this situation have been evicted for noise complaints, failing to pay utilities placed in their name, or because a visitor stayed with them for too long.
Rent control communities often limit the number of reasons why someone qualifies for the eviction process. Most landlords can start this process if you fail to pay your rent. This structure might limit the other reasons or give you more time to correct a problem that you might experience while living on the property.
3. Landlords can still take advantage of the open market rates.
One of the best examples of rent control in the United States comes from Los Angeles and its Rent Stabilization Ordinance. This legislation applies to every building containing two or more units that was ready for occupancy on or before October 1, 1978. Existing tenants cannot receive a rent increase demand of more than 3% each year while they remain in their unit. At the same time, landlords can extend an offer to new applicants based on whatever rates the open market will support.
That means the rent control program in Los Angeles protects existing tenants, but it also allows landlords to take advantage of changing economic conditions.
4. It encourages a higher occupancy rate in the building.
Rent control offers one substantial benefit to landlords. When a rent-controlled apartment or home becomes a better deal for a tenant, then they are increasingly motivated to continue renewing their agreement. Over time, this can create a building full of tenants which do not cause any trouble and always pay the rent on time because they do not want to risk trying to secure a new property under open market conditions.
If you can legally increase your rent expectations as a landlord to keep up with your expenses, then rent control can make it a lot easier to manage your building and turn it into a reliable cash flow opportunity.
5. Rent controls can apply to month-to-month rentals in some communities.
Most cities which offer rent control options typically legislate some related protections that can benefit the landlord-tenant relationship. In California, Santa Monica and San Francisco both offer renting considerations that stop the ability to terminate a month-to-month lease with only a 30-day or 60-day notice. Although both cities still allow a landlord to evict someone for a justifiable cause that includes non-payment or a violation of the lease agreement, the tenant gains some flexibility in their lease if they forget to renew it.
List of the Cons of Rent Control
1. Rent control removes the efficiency of the open market system.
When a rental market is efficient, then the eventual prices will find the level where are landlords and tenants are willing to do business with one another. If the local government imposes rent control laws on specific units in the community, then it automatically removes the sufficiency from the marketplace. This disadvantage occurs because a percentage of the tenants can rent their units at a price that is below the median.
If you are not one of the lucky people who can get into one of the rent-controlled units, then you may find yourself paying significantly more each month then you would get this legislation were not in place.
2. The rent controls laws in the United States usually apply to older buildings.
Although rent control laws can help tenants manage their housing expenses more reliably from year-to-year, they are usually forced to live in buildings that are older and often in less stable neighborhoods. That means you could end up paying more because of the added cost of your utilities thanks to fewer energy efficient technologies in the building. Landlords can still benefit with this issue because they can offer market rates on an older building to increase their profit margins well still offering rent-controlled units which promote a stable revenue stream.
3. There can be severe restrictions on what, if any, rent increases are permitted.
Landlords face to common issues with this disadvantage. The first problem is that you are on able to charge the rent maximums that’s your current market allows. If the market supports a 6% increase, but you are only permitted to raise rates by 2%, then you are losing a significant amount of revenues each year. You’re leaving all of that extra money on the table, which can leave your units significantly below market value if your occupancy rates remain high.
Because rent control laws also limit your ability to evict tenants who are taking advantage of this legislation, you are frequently stuck with that household until they decide to leave or violate their leasing agreement. It is not even possible in some jurisdictions to raise the rent on such a unit because you want to improve it.
4. It reduces the mobility of the tenants to avoid a significant rent increase.
The National Multifamily Housing Council argues that rent control is a significant factor in population movement because it discourages people from trying to find a better option. When a tenant is in a unit governed by rent controls, especially in a large or an expensive city like Los Angeles or New York City, they will often want to stay in it. This disadvantage can lead to older individuals choosing not to downsize or younger families deciding to manage a smaller living space because it saves them some money.
This structure hurts the poor because they are often forced to travel considerable distances to employment opportunities since most rent-controlled units are located in high-priced at city centers.
5. There can be housing quality issues found in rent-controlled units.
Housing quality is always an issue when dealing with rent control legislation. Landlords are discouraged from making improvements to their properties because they do not have the income stream to support any upgrades. Even down a tenant in an open market would pay a higher cost for an improved property, they still benefit from the better features that are available to them in their living quarters. The same incentive is not present when the government limits how much a landlord can raise their rent.
6. It can decrease the number of tax revenues available.
Rent control is also linked to a decline in overall property tax revenues in the cities where this legislation is active. The price limits restrict the number of unit upgrades that landlords initiate every year. That means the assessed value of each property remains consistent, which would not necessarily happen in an open market economy for rentals. Because this lowers the final market value for landlords, it results in a lower property tax bill for them as well.
When Cambridge decided to end rent control in 1994, the property values grew immediately afterward. Between 1994-2004, they rose in value by over $2 billion collectively. Tenants might benefit from a lower monthly charge, but the real cost of this legislation always falls on the taxpayers and the property owners.
7. It can harm real estate investors who might need specific returns.
The presence of rent control in a community can also lead to a sharp reduction in profits when the legislation stays in effect for an extended period. This disadvantage can cause enough financial harm that it can even cause a loss for some real estate investors. Because the rent control keeps the prices below the current market value in that community, but the income of each investor from this property will eventually fall below what their overall expenses happen to be. Even with cost of living increases offered in some jurisdictions, this disadvantage will eventually catch up with property owners if they do not experience tenant turnover.
8. There are higher administrative costs to administer the rent control program.
If rentals are allowed to exist in an open market, then the local legislature does not need to have any oversight of the amounts that the landlord chooses to charge. Rent control changes this process. Because this effort is government-based, local authorities are charged to create an established system which can handle complaints, determine costs, and inspect properties to ensure that everyone stays in compliance with the system. These expenses come out of the pockets of local taxpayers.
9. It doesn’t eliminate the various fees that are charged.
Rent control creates a new business opportunity where real estate managers and property agents can charge consumers a finder’s fee for locating and securing a controlled unit for a family. This cost leads to an additional expense that comes before signing the lease agreement of the uni. It is a charge that can sometimes outweigh the initial savings for 1-2 years, which further reduces the incentive to move somewhere else if there is another opportunity to pursue.
10. Rent control is only available in a handful of locations right now.
If you live in the United States, then the only places where rent stabilization and control exist are in specific cities in New York, Maryland, New Jersey, and California. There are also rules in place for those living in Washington, D.C. as well. It probably comes as no surprise that these are also some of the most expensive places to live in the country. This lack of availability means that finding an appropriate place that meets or exceeds your expectations may be impossible to locate in some regions. If you’re a new tenant, it won’t even seem like a good deal since the price you’re quoted will be similar to what the open market rates.
11. It can help tenants who don’t really need to receive the assistance.
Surveys in markets where rent controls exist or were available in the past find that many of the tenants who stay in this affordable housing option can actually afford to live elsewhere. The original purpose of this legislation was to help soldiers returning from World War II to find a place to settle after returning home. Now it has morphed into a system where seniority it the primary definition of success. Those who have a genuine need to live in a unit they can afford in the United States are still forced to turn to programs like Section 8 to receive stipends or grants that can offset some costs.
A Final Thought on These Rent Control Pros and Cons
Rent control is a theory which works well at times when the cost of living in an urban environment exceed what the local wages are. This legislation gives families an opportunity to find a place to live that is close to their employment without requiring a significant portion of their income. Landlords can also benefit by increasing their rent when tenants move out and having a secured occupancy rate because the cost to live in their building are so competitive.
There are significant disadvantages is to consider with the system as well. When rent control affects the availability of properties in a community, then it can lead to numerous added expenses that cut deeply into the savings that tenants can achieve. When you combine this issue with the lack of money available to upgrade aging units, it may not always be advantageous to seek out this type of lease.
Forbes even called rent control one of the worst economic ideas of the 20th century.
The pros and cons of rent control are essential to consider because finding a cost-efficient place to live involves more than an apartment. You must also look at transportation expenses, commuting issues, and other local factors that can quickly take away your savings. Sometimes the benefits outweigh the disadvantages, but this is not the case for every property.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.