By Athena Savoglou
Rent control is a term at which real estate owners and investors cringe. Rent control laws describe a set of statutes that limit the amount rent can be raised by a landlord. They vary from strict rent limits to controls on how much and how frequently rent can be raised.
In the 1930s, the Supreme Court of the United States ruled rent control to be a state issue. In other words, the federal government leaves it up to each state to decide whether they will allow their municipalities to implement any degree of rent control. Today, various states across the country allow rent control, including California, New York, New Jersey and Maryland. The regulation exists in varying degrees, the most prominent being in cities like New York City and Los Angeles, where the majority of rental units are rent controlled in some way.
However, the Pacific Northwest, and Idaho in particular, is more owner and investor friendly. Rent control is virtually nonexistent in the region, so there is more leeway to adjust rent rates based on economic factors like the real estate market, supply and demand, etc. The minimal regulation gives owners and investors more freedom in their business decisions and greater opportunity to maximize profit on a rental property. Additionally, with increasing incoming population migration, a great quality of life and career opportunities, rents are continuing to increase in the Greater Boise Metro Area.
Rent Control Broken Down
Rent control laws are different in each city where they have been implemented. Some cities have certain rental units on which basically no rent increase is allowed, while others only put caps on the amount of rent increase year over year with no hard cap. Two of the country’s most prominent cities, New York City and Los Angeles are great examples of the differences in rent control regulations.
New York City
New York City rent control has many layers, which boil down to “rent control” and “rent stabilization.” Rent control describes a situation in which rent is basically frozen in time, with units sometimes going more than a decade without any increase. In New York, rent controlled apartments are the most coveted and hardest to come across, with only about 1% getting the benefit. This is due mainly to the fact that the parameters of a rent-controlled apartment are very specific and, as time goes on, improbable. First, the rent-controlled apartment must be in a building constructed prior to 1947. Next, a tenant must have lived in the apartment uninterruptedly since 1971 (that’s 48 years!). The only exception to the continuous living requirement arises in very particular cases, where a family member may have the right to succeed the original occupant and remain the beneficiary of rent control. However, this family member must also be residing in the apartment for a certain amount of time when the original tenancy ends. For a “non-traditional” family member to succeed the rent-controlled tenancy, it is a harsh case-by-case basis determined by the housing authority (read: roommates need not apply). Aside from these cases, once a rent-controlled tenancy ends, the apartment is de-regulated and can be returned to market rent (i.e. a $900/month apartment may suddenly become a $4,000/month apartment).
Rent stabilization is much more common in the big apple, with about half rental units getting this benefit. This regulation refers to a cap on the amount a landlord may increase rent each year. This regulation applies to buildings with six or more units constructed prior to 1974, and monthly rents below $2,774 (as of 1/1/19). Additionally, deregulated rent-controlled units often transition to rent-stabilized if certain tax qualifications are in place. The exact percentage that rent may be increased is debated and determined yearly by the city, but usually remains below 4%. The only way a unit may become destabilized is if the rent rises above $2,774, or if the tenant in one such unit exceeds a certain statutory income for more than two years in a row.
Los Angeles rent control is similar but somewhat less complicated than New York City’s. The city’s Rent Stabilization Ordinance was passed in 1979 and covers multi-family buildings constructed prior to 1978. The law places caps on rent increases and grounds for eviction, among other factors. The rent increase caps have been limited to 3-8%, but, like New York, the specific cap is subject to yearly change.
By the mid-nineties however, the city was running into dissonance from real estate developers, investors and owners, who felt that the Rent Stabilization Ordinance was overbroad and put an undue burden on them. Therefore, in 1995, Costa Hawkins was passed – a bill that served to pull back some rent control provisions and increased protections for landlords. Although rent stabilization is still in effect, now landlords may raise rent to market once a tenant moves out. Additionally, there may be no rent control on single family homes or buildings built after February 1995. Now, the two bills are enforced in tandem; however, there have been some recent initiatives to repeal Costa Hawkins, which would again open the doors for rent control to be more widely applied.
As you can see, rent control is a very complicated issue, giving tenants power to obtain or remain in a unit they may not otherwise be able to afford. While this is a huge benefit from a tenant’s perspective, the regulations greatly restrict a landlord’s freedom to rent according to the market and have an adverse effect on the resale value of their investment property. Major cities like New York and Los Angeles have adopted varying forms of rent control, not without flak from real estate owners and investors. Although dissension from landlords has been successful in reigning in some extreme rent control provisions, rent control is still a prominent factor in the residential markets of these cities. Bottom line, from an owner or investor standpoint, buying real estate in non-rent-controlled areas and cities is very often a less expensive and fiscally safer choice.