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What Real Estate Investors Need to Know About Rent Control

The rise in rent control legislation in 2019 is becoming a blaze in 2020, as elected officials wrestle with the concept of affordable housing in communities across the country.

What does that mean for you as an investor in multi-family properties where rent is your main source of income? Should it be keeping those in our industry awake at night?

Probably not—at least for now.

Impact of Rent Control Legislation

Oregon got the ball rolling in February 2019 when it passed a state-wide rent control bill that capped rent hikes to 7% annually. Next came New York with a 7.5 % cap and California with a 5% cap. In 2020, many experts expect that Illinois and Washington will offer similar legislation, and rent control may become a buzzworthy topic in the 2020 presidential campaign.

The impact of this legislation was almost immediate in the investing community. According to the Rental Housing Journal, “The reform caused multifamily investments to dip in many of these states’ major markets. In New York City, for example, multifamily investing has fallen 9.2% over the year, while Los Angeles saw a 9.8% drop.”

NREI wondered whether New York’s bill made value-add rehab multifamily projects too difficult to pursue. And in California, investors pushed for higher cap rates on deals because of the legislation, Real Capital Analytics found.

A recent survey from the National Multifamily Housing Council shows that 58% of multifamily investors say their jurisdiction has already imposed rent control or is “seriously” considering doing so. Real Capital Analytics indicated this was the case in 12 of 58 markets they study. As a result, NMHC found that 34% of those investors had already cut down on their investments and nearly half were considering doing so in the near future.

A Picture of the Full Market

But rent control is not killing the overall multifamily market. New York still saw $9.4 billion  of multifamily investments through 2019, according to CoStar. The change is even more of an emphasis on Class A properties. This is a trend throughout the industry, and rent control is just the latest reason for many big investors and commercial brokers to focus on Class A properties.

This larger trend is one that investors must be aware of. Each investment group will need to decide whether to compete on Class A deals in the biggest market, or whether they want an alternate strategy. And the passage of rent control legislation may put another tally mark in the column of secondary and tertiary markets for some investors.

While rent control is a trend, it’s not everywhere—as RCA’s 12 of 58 stat reveals. So investors need to  know what is happening on the state and local level in terms of legislation. Some markets may move to rent control. Other markets may look favorably on value-add projects that stabilize existing housing stock and provide solid workforce housing options. Know what market you’re investing in and cater your strategy to the market.

This kind of knowledge—not avoiding rent control—is the real competitive advantage for real estate investors.

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