The Effects of Rent Control: Ballot Measure 21

Well, election time is here.  And not only does that mean political battles between positions for the White House, but also for a chance to vote on state and local initiatives. Real Estate is no exception.

So, let’s talk about Ballot Measure 21.  Here is what it states on Ballotpedia.org:

The ballot measure would replace the Costa-Hawkins Rental Housing Act (Costa-Hawkins), which was passed in 1995. Prior to the enactment of Costa-Hawkins, local governments were permitted to enact rent control, provided that landlords would receive just and reasonable returns on their rental properties. Costa-Hawkins continued to allow local governments to use rent control, except on (a) housing that was first occupied after February 1, 1995, and (b) housing units with distinct titles, such as condos, townhouses, and single-family homes.

What is it talking about?  Basically, with the Costa-Hawkins Act, it prevents local governments to extend rent control to other types of properties. This ballot measure will effectively remove that, allowing cities to extend rent control should they choose to.  Now, this article is not to persuade you to either side of the argument, but just to state a few facts to help you in creating an educated decision from a real estate investing perspective here in the Los Angeles area.

Before we can get into it, what is the basics of rent control?  Here are two aspects of the policy (and of course consult the City of LA and/or an attorney for up to date information):

1. Limited rent increases.  For the City of Los Angeles, it is tied to the Consumer Price Index.  Because of COVID, it is all halted.  However, the previous year was 4%.  Typically, it is between 3%-4% increase each year.
2. A tenant can only be evicted for specific reasons.  So even if the lease is over, the landlord cannot terminate the lease and remove the tenants unless it falls under certain circumstances (such as missed payments or if a close relative were to move in). 

Let’s start with housing.  As reported back in February, Los Angeles County alone is short roughly 500,000 rental units (as reported by NBC News).  That’s a problem.  There are only two solutions for this: (1) the Government buys up properties specifically for rentals and/or builds or (2) the private section (like you and me) invest in real estate to create more rental housing.  Because the City only has so much money and so many resources, it will generally fall on people like you and me to invest.

Now, the reality is, you cannot force someone to invest in real estate here or anywhere.  Especially with this thing called the internet, it so much easier to invest out of state.  You can view properties online, schedule FaceTime/Zoom walk throughs, and even view the neighborhood through Google Street Scene.  So, if someone wants to invest in real estate and lives in Los Angeles, it doesn’t mean they are forced to invest in the City they live in.  This is key to know and understand as this wasn’t the case back in 70’s when rent control started in Los Angeles.

We also need to factor in actual economic results of rent control.  Let’s look to our neighboring major city in California, San Francisco.  They enacted rent control in 1994.  Here is a quote from the Chicago Policy Review:

A recent paper from economists Rebecca Diamond, Tim McQuade, and Franklin Qian adds key evidence regarding the costs and benefits of rent control to this debate. They investigated the effects of a 1990s-era expansion of rent control in San Francisco. Their results indicate that rent control did help older, more established tenants, especially those from minority backgrounds, stay in their apartments for longer periods. However, it may have had the opposite effect for younger tenants who had more recently moved in. Furthermore, over time the authors found that rent control reduced the overall amount of rental housing and may have accelerated gentrification.

In other words, rent control helps those tenants that are already in rent controlled units.  That’s because they are already there before the landlord has an opportunity to raise rents, etc.  However, because of rent control, people are less likely to move (and lose their lower rent).  This keeps supply down.  For example, I hosted an open house years ago and I asked someone if they were interested in buying.  Her response?  “Why would I buy when I’m paying $850/month in rent?”  This means for anyone who is looking for new housing (such as people moving or young people moving out of college/home) will be limited.  The basic law of supply and demand comes in.

Now, let’s look at the rents in Los Angeles, which already has their own form of rent control.  Rent control took effect on October 1, 1978.  A recent study reported by The Los Angeles Times showed that rents rose 65% over the last decade.  This of course varies neighborhood by neighborhood, as some saw even higher increases.

Let’s put this together:

1. We can’t force someone to be a landlord in Los Angeles. 
2. It is easier now to invest out of state, where landlords don’t have to comply with rent control.
3. Rent control has not helped new tenants.

Although this article may seem one sided, unfortunately these are the facts.  I manage a Landlord page on Facebook (as I currently have two rentals), and landlords are talking about selling their properties or no longer desiring to investing in Los Angeles.  The answer was not because of property prices.  It was the laws that are in place and working with tenants who aren’t paying or even have difficult tenants (pre-COVID).

It will be interesting to see how this plays out and it is up to you on how you would like to vote.  All I ask is that you do the research, talk to people, and make an informed decision.