Can Landlords Profit Under Rent Control?
Two of real estate investing’s “dirty words,” the phrase rent control can give investors pause when they learn a building they’re considering falls under a city’s rent control ordinances. However, while rent control does preclude absolute maximization of a property’s potential to generate profit, the ordnances can leave room for an owner to derive a profit from their investment, if they manage it carefully. So, can you profit under rent control? Yes—if you’re very strategic.
A Degree of Profit is Built In
In most cases, rent control marries annual increases to the rate of inflation in the region in which the property exists. The idea of rent control is to help make sure affordable housing is available to lower-income residents, while also ensuring the owner of the property a profit on their investment. Many of rent control’s detractors tend to overlook this when they rail against their ability to make the maximum amount of profit from the property.
Many Buildings Are Exempt
Additionally, opponents of rent control tend to omit the fact that older buildings are usually the only ones subjected to the rules. New construction (aside from having a certain number of units set aside for below market rate occupancy), is not affected. This is also true for townhouses, condominiums, duplexes and single-family residences offered for rent. Owners of those types of buildings are, by and large, free to charge whatever the market will bear under rent control. If you need help understanding the various rent control laws in your area, read our rent control cheat sheet we’ve posted on our blog.
Lower Turnaround Charges
For better or worse, tenants in rent controlled units tend to stay put. This means you won’t have to pay to paint, refurbish carpeting, or incur the other costs associated with getting a unit ready to rent after a tenant moves as frequently. You also won’t spend money to market that unit, because nobody’s moving out. In some cases, if the unit has been well kept, you might even avoid performing certain aspects of the turnaround procedure, as long as the unit is in good condition when new tenants do move in.
While it might seem the city is against you as a rent controlled landlord, there are provisions within the ordinances allowing for rent increases under certain circumstances. While it’s true you’ll have to seek approval from the rent board to implement them, they are available. In most cases, an annual net return of seven percent or less usually qualifies a landlord for a hardship increase. Adjustments are usually granted if you can show the property is losing money at the imposed ceiling.
Conversions and Improvements
Adding a coin-operated laundry room to the building can provide an additional revenue stream—ditto charging for off-street parking privileges. You can also add storage spaces and offer them at an additional charge. None of these are usually subjected to controls. Larger studios can be converted to one-bedroom apartments, which can be rented for more money. Two smaller one-bedroom apartments can potentially be combined to create a larger one, which can be rented for more money as well. In other words, a bit of creative thinking can go a long way toward improving profitability—even when operating under rent control ordinances.
Bottom line, rent control doesn’t mean running your property at a loss. It simply means the amount of profit you’ll make will be governed. Yes, that does hold the potential to be frustrating, but you can profit under rent control.
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