The verdict is in, Rent Control is going statewide in California, following the likes of New York and Oregon. At this point, the Governor just needs to sign off as a formality, as he has already promised to sign. Some are happy and others not. However, from the investors I know and the forums I’m reading, one thing is for sure: Mom and Pop Investors are selling off and moving on to other investments. Those owning condos and homes as rentals are leaving the rental market. Even though rent control doesn’t currently apply to single family homes (unless the property is in a corporation), they don’t want to take the risk that comes with difficult evictions and capped rents.
Keep in mind that this prediction is based on three things. The first is that although you can force someone to comply with laws in a specific industry, you cannot force someone to participate in said industry. This means that the government can apply any and all the laws they want, but that is only assuming people are going to stay in that field. This happens across many industries. One example is after the housing crash and the new Dodd-Frank mortgage laws came into effect; many local banks ended up closing their doors. They could not afford the staff required to keep track of all the regulations.
The second is that the choices landlords make are business decisions. Their goal is to make money. Whether it is to put food on their table or for their retirement. If there is something hindering that goal, then they pivot and change course. Just like if an employee isn’t making enough money, then they ask for raises or change jobs. The same applies here.
The third is it doesn’t matter what you and I think about rent control. It doesn’t matter if we need it or not, each individual person is going to do what they feel necessary. People behave on part logic, part emotion. Because of this, landlords and tenants are going to react in their own way. The predictions below are based on what is most likely going to happen based on behavior.
Because of this, I believe there are a few things that will happen:
1. Homeownership with increase in the short term. Because these investors are selling, that increases inventory, thus giving tenants the opportunity to buy. This won’t happen all at once but will over the next few years as leases expire and tenants move on.
2. However, this won’t last, and rental inventory can and will decrease, thus leaving apartment buildings and the like the primary option. Eventually, that inventory will run out. As areas such as Los Angeles become more desirable with people moving in, there won’t be the inventory to support it.
3. Landlords will be forced to raise rents every year to the max possible, regardless of the tenant/landlord relationship. The law going into effect states that the max is 5% plus inflation (currently at 3.3%). This means, in order to keep up with cost of maintenance (including labor), property management cost, etc., the landlord must raise rents. I know investors who previously wouldn’t raise rents because they liked the tenants. Vacancy is your biggest expense. Because of the previous point regarding low inventory, the tenant will not have anywhere to go, thus be forced to pay up.
4. Just because rent won’t go up as high as before, doesn’t mean tenants won’t pay more. Be prepared to see an increase in laundry facilities or the landlord submetering the utilities. They will get creative in how to increase revenue without having to raise rents.
Time will tell, but based on what we are seeing today, this is what I believe will happen.
What are your thoughts? Do you think that statewide rent control was the right answer? Let’s start the discussion!
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