Heated Debate: Will Rent Controls Cause The Next Financial Crisis
Will new rent control trends tip us into the next financial crisis?
The economy and property markets appear to have remained resilient to rumors of any recession or downturn. There may be some weak spots in markets like NYC and Manhattan, but they appear isolated for now. Still, could even harsher rent controls finally break things?
New Rules for NY Landlords
New York’s Governor Cuomo just signed new rent control legislation making it even harder for landlords to raise the rent and to oust tenants who don’t pay the rent. They’ve also capped the ability to recoup the costs of making improvements for tenants. Now landlords won’t be able to raise the rent more than 2%, even when making substantial improvements.
The Downside of Rent Regulation
Yes, we need affordable housing. Property taxes are crushing affordability for owners and renters. High state income taxes on top of that mean smaller net incomes and mean housing costs are a much larger percentage of effective take-home pay.
Unfortunately, when laws prevent the rent from being raised to keep up with rising taxes, or to fund improvements to properties, both landlords and tenants suffer.
One of the biggest issues is the risk it presents to lenders. If the rent can’t be raised, and improvements can’t produce a return, lenders don’t see any upside, and they don’t want to risk taking those properties back. A 2% rent increase is likely a negative return for owners. Especially, given property taxes alone in some places are rising by double digits per year. So effectively, the government is raising their rent by double digits but trying to prevent landlords from making up the loss.
That is going to mean operators and builders going bankrupt when they can’t refinance. It is going to mean losing properties when living conditions become squalid and dangerous. It is going to mean less rental housing inventory that is livable.
Ultimately, that is going to result in higher rents, higher taxes, and loss of investments. This is especially for high tax states. If they think they are bleeding people now, just wait till they have to hike taxes further to cover these issues.
Want a crystal ball? Just compare the affordability and rents in these cities with rent controls versus those that don’t, and you’ll see the results. It’s common sense. Those with them are actually those with the worst affordability and homeless issues. There are plenty more places to live and invest that is more affordable and secure for investors.
What to Do as an Investor
It may be a scary time to be a real estate investor in NYC, Seattle, and parts of California right now. The side effects of regulations like these may have some ugly consequences. Fortunately, there are plenty of places without these controls and which are unlikely to institute them. They are more affordable already, attracting new population, have reasonable taxes or no income taxes. Lenders are more likely to loan in droves in these areas now, and investor interest will grow. It’s good for those in early who will benefit from the lift.
ABOUT THE AUTHOR
Bill Zahller is the Managing Partner of Park Capital Partners, LLC and resides in Asheville, NC. As a Multifamily Real Estate Investor and Syndicator, he founded Park Capital Partners, LLC in 2016 after 14 years involvement in real estate investment. He works with accredited investors and professionals who are interested in real estate investment, diversification, and financial freedom.
Bill has been flying since high school. His father was a Naval Aviator and Captain for TWA. Bill has been flying professionally for over 25 years, 23 of those at his current company. He has accumulated over 12,000 hours and 7 Jet type ratings. He has also held Instructor, IOE Instructor and NRFO pilot positions with a large fractional flight company. He is currently flying the Global 6000 in a long range mission capacity. This keeps it interesting – one week its Beijing or Sydney; the next Rio or Rome.
Bill is also the founder of the Asheville Multifamily Investor Club. Visit www.ParkCapitalPartnersLLC.com for more information.