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Strategy Saturday
SS55: What is Rent Control and Why Does it Hurt Tenants?
January 2, 2022
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SS55: What is Rent Control and Why Does it Hurt Tenants?

Rent control is a topic that is continually reported on throughout the mainstream media but many people don’t know what this actually means and who is actually harmed in the process. Charles discusses how rent control has adverse consequences when it is enacted in a municipality.

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Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing what is rent control and why does it hurt tenants? Now, rent control is a topic that’s getting a lot of media attention and is promoted in certain circles as a solution for affordable housing, which is the exact opposite consequence of rent control. Now, most states have a statewide ban on rent, but some states do allow it. Now, as I explain rent control in its consequences, I wanna make it clear that we need to have more affordable housing in the us. And I’m very much in support of that. But rent control is not the correct path to affordable housing. Now, rent control it limits the amount the landlord can raise rents on tenants annually. And that’s usually to noted as 3% or 5%, which sounds great when you hear it, but it does not work.

Charles:
Now there’s a number of issues with rent control. Starting off with if landlords cannot raise rents, they’re not gonna improve the property. If you can’t increase your, the rent to cover your other fees that are happening, do you think you’re gonna reinvest more money into it? If you’re unable to capture that money back, no way investors will not invest in an area if their returns are capped and they will invest in another area, thus reducing new rental units in new inventory, in the market with rent control. Now, if I can only earn for sample 6% on a developing apartments in a rent control area, but 12% I can earn in a non control area. I’m gonna choose the non run control area to invest into. So which hurts the rent control area, because you’re not adding new inventory. Now money flows where it is less restrictive.

Charles:
Now investors will convert apartments to condos in order to avoid running control laws, which reduces inventory and raises counts. And that’s a very normal thing that happens and happen all through San Francisco. Because if I’m, I’m just not gonna rent anymore, I have these apartments. And usually when you’re converting apartments to condos, first off, the owner’s gonna get some sort of a benefits usually used to be historically like 30%. So if you had a unit that was a hundred thousand dollars after you convert into a condo, the whole building in the condos, you’re now getting that of value like 130,000. I’m not sure if that holds water anymore, but you’re getting an additional benefit by making each apartment a condo. Plus you’re able to avoid the whole run control laws. Now, a cap on rent increases while the landlord’s other expenses every year are increasing, you know, insurance taxes, utilities management this, this incentivize eyes is the landlord to spend money on their property in a normal market.

Charles:
Landlords want to keep their tenant as long as possible. And they do that by servicing them. There’s something broken. They get someone over there. They make sure that the lawn’s cut, the landscaping’s done. They make sure there’s no problems. Everything works in the apartment in a rent control market, landlords want over because once they get turnover, they can reset the rate. Now incentivizes landlords to be slum Lords, right? If you want someone to leave, you just don’t do anything. You’ll collect rent because they they’re gonna pay it because they wanna stay in the landlord, the, the apartment, but you’re just not gonna do anything. And little by little you’re hoping that they leave. So you can reset rents, which is not, which is not how landlord tenant relationships should work. Now. Converting apartments to Airbnbs has never been easier in today’s day and age and reduces housing inventory.

Charles:
So if I have a pro, if I have an, if I have a small all apartment building, I might just switch ’em all to Airbnbs. Now I don’t have to worry about the rent control in the area without having to invest money into moving them into a condo and having to sell ’em. I’m gonna change the use of that property if it becomes rent controlled. In, in a couple different examples in San Francisco pre 1995, all small multifamily properties were exempt from rent control, but 1995 only buildings built after 1980 were exempt. Now this made an incentive for investors to convert apartments, to condos or demolish the building and rebuild. Now both instances tends lose because there’s less inventory, meaning that the other places, there’s more people going after less units, because the place that they’re just living in just got thel. So you could put up these multimillion dollar condos now in Melbourne Australia not a single housing unit was built following world war II for nine years because of rent control laws made it unprofitable.

Charles:
So you had to investors that weren’t gonna develop. Why am I gonna develop if it’s not profitable, why would we invest there? We’re gonna go somewhere else where capital is less restricted in the 1970s in Washington, DC. It solds rental housing stock decline from 199,000 units to less than 176,000 units because fewer people were willing to rent their homes because of price controls. So this is something I saw a lot coming from central Connecticut, we had a lot of two and three family houses. And I remember one like the second house I bought the, the landlord next to it had a duplex and he never rented the top floor. He had paid off his union. He didn’t wanna deal with any of the laws. And he was like, no, my house is already paid off. I, you know, I just pay my taxes and insurance that takes it because it’s that person doesn’t wanna deal with the Connecticut you know, know Connecticut residential renting and apartment laws and everything like that.

Charles:
They’re just gonna leave it vacant. It’s been vacant, probably. It was probably vacant for years and years beforehand. And it’s probably still vacant today. Now in Santa Monica, California in 1979, the number of building permits plummeted by 90% from just a few years earlier again, because rent control laws made UN profit able to construct new housing. So it’s really important that more housing supply will help communities plagued with high rents, not less inventory, but don’t take my word for it, research it online. And I highly suggest a book called economics in one lesson, and I’ll put that link into the show notes, but I hope you enjoyed, please remember to rate, review, subscribe, please submit comments and potential show topics at globalinvestorspodcast.com. Look forward to two more episodes next week. See you then

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

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