26 Aug Rent Control is Wrong
Rent Control is Wrong. Have you ever wondered what happens if the local municipality imposes rent control on apartments? This was a recent topic of discussion on one of the forums I follow.
First we need to agree that rent control in any form is a grievous injustice. My friend Jane Garvey has written an excellent article “91 Ways to Create More Affordable Housing”.* Her article is right on target and should be required reading for every politician.
Rent Control creates irreparable harm to the community wherein it occurs. Rent Control drives out investors! It sends needed resources out of town as they invest and improve the housing stock in other less restrictive communities.
In short the search for “affordable housing” will become more difficult. This will be the result of the government’s intrusion via Rent Control. It will have the exact opposite impact of its intention.
What defines an Apartment
For this article, buildings with four or more individual living units will be defined as apartments. Single Family Rentals (SFR) Duplexes and Triplexes will be exempted from the rule.
The exemption is based upon my assumption that five to fifteen percent of all two and three family homes are owner occupied. This is not a number we can easily determine. It would vary from city to city and even vary by socio- economic demographics within a particular city. Let’s just agree that enough owner occupants show up at the town hall meeting. So many so that all 1, 2 and 3 family units are off the table at this time.
Rent Increases
Once the news gets out all owners of apartment buildings will give maximum and immediate rent increases to existing residents. Those first rent increases will be issued to those residents on month to month agreements. These rent increases will be issued weeks even months before the laws effective date. After the law is effective is too late to ensure investor profitability.
Secondly the investors will review their time based leases. After review and if at all humanly possible, they will issue maximum notices of rent increases for those residents whose leases are renewing within the time frame prior to the laws effective date.
Loss of Included Services
Any included amenities or services that made renting from one owner or another more attractive will be terminated at lease renewal. The residents will be charged separately for these items as soon as legally and physically practical.
Sub metering of water, sewer, gas and electric on older structures will become a more common occurrence. Freebies like cable TV or internet will be removed from all renewing lease agreements.
If legally possible, these amenities “might” be provided under a separate special rental agreement that is not part of a lease. That makes it time to consult an attorney. Don’t have one, go to www.Skidis.Biz and check out our favorite legal needs provider.
Declining Sales
Sales of Apartment buildings will stagnate almost immediately. The demand will subside due to those pesky government restrictions preventing the operating of your business at a profit. This will also cause a drop in real estate prices for apartment buildings. On the other hand it will result in a spike in other areas of real estate.
Declining Housing Stock
First the actual number of apartments available will start to decline. Apartments damaged and destroyed by losses covered by insurance will not be rebuilt. Investors with total losses will pocket that money and move on. Essentially these properties become vacant demised land which in turn reduces the city’s Real Estate Tax revenue.
Real Estate Taxes
The decline in property values will not be reflected in real estate tax bills until AFTER numerous sales have occurred. You will need to learn how to protest real estate taxes and win.
Rent Control is wrong because it does not allow for increasing expenses of operation such as labor, insurance and here in Illinois especially real estate taxes.
Tax & Demo
Most major cities have ordinances on the books for insurance companies to honor real estate tax and property demolition fees. This means that the real estate taxes will be brought current and demolition costs will be paid by the insurance company before the investor receives a penny.
What do you think will happen if the municipality does not have a good tax and demo ordinance in place? Unscrupulous owners will quit claim the properties to a nonexistent entity, file the new deed at the courthouse and walk away from the hazardous rubble pile left behind. This means the city will need to take current tax revenues and deal with it. Eventually the government will seize the property for back taxes.
Declining Vacancies
Vacancies in apartments will be almost nonexistent since the residents know they are in a better position than in a SFR. Residents will thumb their noses at the apartment owner and try to get the owner to commit an infraction for which legal or civil action can be commenced in order to receive a payout or even get free rental.
Declining Maintenance
As profits drop so will maintenance. It will eventually become unaffordable for the owner. The same will happen for improvements and upgrades. There will be no incentive to add to the rental units or make them more attractive.
As maintenance declines start thinking of the rat infested buildings we see on television in rent controlled New York.
New Apartment Construction Will Stop
Rent Control sets the limitation on making and earning a profit. Without a profit potential, no one will step up and start building new apartment buildings. Why build new buildings on the guarantee of eventually losing money in the future.
Condo Conversion
Some unprofitable apartment buildings that are in decent condition will be parted out as condos. The apartment manager will be retained for a while. They will be paid a management fee and deal with maintenance issues.
All maintenance and upkeep costs can then be easily passed directly to the resident owners with an assessment from the Condo Association. That doesn’t mean that the condo owners will have the money to pay for the repairs. Just that the Condo Association can place a lien and eventually foreclose and resell the condo again.
Before shutting down an apartment building and converting it to condos, seek competent legal advice from your lawyer.
Single Room Occupancies
The need for Single Room Occupancies (SROs) will increase.. The number of apartments available for rent will decrease. This means that the existing apartment housing stock will become less and less available due to shrinkage. SROs used to be called boarding houses. Expect that type of rental to make a comeback.
The reason for SROs is that men, women and even couples will be unable to locate an affordable apartment due to their scarcity. These renters will not have the means of renting a single family home without the acquisition of one or more roommates. This means they run the risk of getting stuck with a huge debt if their roommate(s) lose their job or otherwise fail in their part of the lease agreement.
SROs will become a huge and affordable alternative. Large two story duplexes will be converted into SROs where the owner pays for and monitors all utilities. All second floor kitchens and common areas will be converted into additional bedrooms. The savvy investor will want to convert an old two story flat with a 3/1 on each floor into an 8/8. This means eight bedrooms, eight individual bathrooms, one kitchen and one common area. Check with local housing code and ordinances before attempting this. They may have already outlawed it.
Since this is NOT an apartment individual rooms will rent for $300 to $1,500 a month depending on the location.
Rent Control is Wrong
The reason Rent Control is wrong is that it takes the property of one and gives it to another. Rent Control is Socialism. Rent Control is wrong because it removes the incentive to be a great owner, landlord or property manager. In my opinion Rent Control is Wrong because it violates the “Takings Clause” included in the firth amendment to the constituion. The Fifth Amendment of the United States Constitution includes a provision known as the Takings Clause, which states that “private property [shall not] be taken for public use, without just compensation.” The politicians may not have seized the property but they have effectively seized the income from the property and disbursed it among the public.
Summary
Can we agree that Rent Control is Wrong? So the next time some bleeding heart or politician claims rent control is the answer, what will you say? You can use this article to point out the negative aspects of that poor choice. But don’t forget Jane Garvey’s more positive article on some great alternatives to rent control.
Good Luck and Good Investing
*Here is a link to Jane Garvey’s article which is mentioned above. https://mailchi.mp/ccia-info.com/91-ways-to-create-more-affordable-housing
Join Illinois REIA Today https://ilreia.memberflow.com/membership-plans
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