Is 5% Rent Control Really Happening?

By Amanda Cruise

 

You might have heard the recent buzz around a proposed 5% rent control plan. You might naturally have questions like why is this being proposed? Will it happen? And what would be the impacts if implemented? We’ll get into all of this. I was also part of a Best Ever Roundtable discussion on this topic recently. Check out that podcast if you’d like to explore the topic further.

What is Being Proposed and Why?

The week prior to stepping down from his re-election campaign, the Biden administration released information on a proposed rent control plan. The goal is to help with housing affordability, which is very important, and in short supply right now as the costs of everything has shot up in recent years.

Here are the plan’s highlights:

• Cap rents at 5% annual increases
• Impose on landlords with 50+ units
• Landlords who choose not to stick under 5% increases would risk losing valuable federal tax breaks (for example, depreciation)
• Notable exceptions: new construction & properties with substantial renovations

What Would Be the Impacts of Rent Control?

There have been many studies on how rent control is bad for tenants and the economy. Here are a few specific things I’d predict if this plan went into effect:

• A decline in valuations of stabilized assets (those not requiring substantial renovations)
• More value-add projects, as these projects would mean exemptions from the 5% rent cap
• Negative impacts to tenants including lack of investment in properties by some landlords to prevent expenses increasing by >5%
• A reduction in manufactured home communities, which are a critical component to affordable housing, because capping rents would mean less profitable communities. This would likely lead to more communities being demolished to turn into town houses, etc.

Alternatives to Rent Control

Fundamentally, it’s so hard to find affordable housing because there is a massive shortage of housing right now. Depending on the source, it’s around 4M homes we are short in the U.S. right now. Incentivizing building more supply is the best way to bring housing costs to an affordable level. Examples are zoning changes, building incentives, and tax incentives. Governments that incentivize building do see more development. Look at Austin and Phoenix right now where there is an oversupply due to massive building over the past few years – rent pricing are actually coming down to meet market demand.

Will Rent Control Happen?

Let’s keep in mind this is an election year with a very competitive race. Let’s also keep in mind the majority of Americans are, or have been, tenants. A nationwide cap on rents is meant to win over the general population, regardless of whether it could or would be implemented. I do not believe a proposed nationwide rent control ban will be put in place. Hopefully I don’t eat my words in a year or two!

 

Please reach out if you have any questions at Amanda@VoyageInvesting.com and if you’re looking for ways to put your money to work passively, make sure you join our Investor Circle.