Too many disincentives for landlords will prevent new rental units from ever making it to the real estate market.
6 min read
Opinions expressed by Entrepreneur contributors are their own.
Oregon recently made real estate history, becoming the first state in the union to implement rent control statewide.
I know the Oregon real estate market well since I grew up there and bought my first rental property when I was 14. Given that, I know that Oregonians mean well with this new law; they want to control the out-of-control cost of living in their state.
But I have to disagree with rent control as the solution. In fact, this effort to help and support the state’s most vulnerable residents will unfortunately negatively impact them the most.
Why? Because rent control simply doesn’t work. Rather, it drives down construction, discourages investment in new rental properties and generally disrupts the rental market in fundamental ways.
And this is far more than just an Oregon story. Similar rent control bills have recently been considered in California, New York and Colorado as well, and the city of Chicago is working on its own related regulations.
It won’t work in any of those areas either.
Related: 6 Amazing Tips on Turning Real Estate Into a Real Fortune
Today’s real estate market is complex and interconnected.
Home ownership is on the decline and rents are ever increasing. In fact, according to a report from the Terner Center at UC Berkeley, there were 600,000 fewer “owner-occupied” homes in 2016 than there were in 2015, signaling a shift in ownership of suburban homes due to the foreclosure crisis.
There are simply more renters today than in the past, and the supply of new rentals isn’t keeping up with this demand. That’s what’s driving rental affordability at the moment — there just isn’t enough supply.
Tenants become the victims when landlords have their hands tied.
Rent control only makes this disconnect worse by creating disincentives for builders and landlords, preventing new rental units from ever making it to the market at all.
Worst of all, it eats away at today’s already old rental stock, eventually impacting tenants’ quality of life. Because it costs money to own a rental property – there are ongoing maintenance costs, management costs and of course rising property taxes to pay.
What happens when landlords are unable to raise their rents in order to keep up with those costs? They stop investing in their properties, and eventually they become more and more dilapidated. No more big improvements, no more preventative maintenance, no more updates.
The focus shifts instead to maximizing the rent they’re able to get out of the property, the end result is run-down, cockroach-infested buildings and homes that no one can afford to fix up because rent controls have cut off their source of capital. In that situation, everybody loses.
Related: Learn How to Make Smarter Real Estate Investments
Workarounds are emerging.
We’re already starting to see the negative impact of the new law on tenants in Oregon, as more and more property managers are talking about removing first-time tenants after 11 months under “no cause” provisions that end after the first year of occupancy. By doing so, they’re still able to evict tenants for “no cause,” effectively allowing them to sidestep rent controls and raise their rent on the next tenant based on market rates.
Just like that, tenants have lost one additional month of a place to live, all to satisfy the demands of the new rent control law.
That may be the best-case scenario too, as tenants with longer-term leases are suffering even more, as landlords reduce their capital expenditures on properties in order to make sure they enjoy a positive return on their investment.
It’s the economically disadvantaged who get hit the hardest by rent control. Already, I’ve been receiving numerous solicitations from real estate agents wanting to assist me in selling my Oregon rentals. Who would I sell them to? It won’t be landlords, but instead those renters who can already afford to buy. This will further reduce the number and quality of rentals in the area as nicer rentals are sold. It will also push apartment owners into converting to condos and further reducing supply for the most vulnerable.
It doesn’t have to be this way.
There’s a smarter solution. In fact, there’s a functioning model for affordable housing to copy that’s currently being used in Singapore. I know we have a subsidized, mixed-income model in the U.S., but it is not pervasive enough or market-driven enough. In Singapore, developers are incentivized with property tax credits in exchange for setting aside a portion of their rental units for low-income families, offering them reduced rent as part of the deal.
Related: ‘Million Dollar Listing’ Real Estate Expert Ryan Serhant on How Small Businesses Can Make a Big Impact
These aren’t your typical “low income” units either. Under the terms of Singapore’s system, the rentals are required to be part of their general inventory and cannot be isolated, lower quality or otherwise different. The city then regulates all rent, so landlords receive only one rent check from the city.
The system accomplishes a couple of different goals:
- It mixes wealth within neighborhoods. As a result, there are no exclusive wealthy neighborhoods in Singapore and no impoverished neighborhoods, because everyone lives side by side regardless of income.
- Neighbors don’t know who’s who. Incomes can vary by household, but they all still live right next to each other. It’s a true melting pot.
By subsidizing rents in this way, Singapore allows the local rental market to function organically, with landlords making all of the decisions about screening their own tenants, rents being set by demand and the market growing as needed. The only difference is that those tenants who meet certain economic criteria are eligible for assistance and able to live in any residential building in the city. Everything else goes for market rent.
For tenants, this ensures a certain standard of care and quality for the properties they are living in.
For landlords, it allows them to bring in tenants of different incomes to commingle in the same neighborhoods and buildings, without giving up the power of market rates. Those market rates and tax credits incentivize more building, which increases supply and helps keep rents from skyrocketing.
It’s a model that works in Singapore, and it’s one that’s worth considering in this country as well. Because rent control isn’t the answer for landlords, tenants, or the communities they live in.