May 06th, 2016

DOES RENT CONTROL DESTROY PROPERTY VALUE?
© by M. Mitch Freeland
 
Free market supply and demand dictating prices of rents are completely side tracked when city governments place price caps on rental rates.  This practice will typically cause prices of rental properties to drop over the long-term or cause slow growth to make it unappealing to investors and future development.
           
Rent control is nothing more than a socialist act.  It restricts the owner of a building to charge what the market demands.  Most liberal cities have areas of rent control.  In fact, it is a way of social service; local governments adoption in support of renters. This is in direct responds to the so called “defiant rich” and once powerful landlord.
            
Rent control has several effects on property values. Most economist agree that it is not a constructive measure, and that it has the opposite effect of rents in surrounding areas and only benefits those who are “sitting tenants” in the controlled area.
            
Rental rates rise in the uncontrolled areas and around the controlled area.  This is because of short supply of rentable units caused by controlled area tenants remaining for very long periods of time.   Rent control also has a way of creating pressure on investors to invest in communities far outside of controlled areas. 
            
At the same time, new investment in multi-family housing in controlled areas is diverted to other areas.  Investors do not want to be stifled by building in rent controlled neighborhoods.  A study has also shown that current controlled buildings are not maintained by landlords because there is little need to attract new tenants; there are typically tenant waiting lists for controlled units.
            
In fact, nearly a third of controlled properties are in a state of severe disrepair.  On the opposite side, only 8 percent of non-controlled  properties are deteriorated. (Walter Block, “Rent Control,” The Concise Encyclopedia of Economics,  The Library of Economics and Liberty)
            
There are a number of obstacles investors must overcome in rent controlled areas. The problem to increase cash flow is one of the most important concerns.  A landlord cannot raise rents even during times of high inflation or when demand warrants it.  Because of this, and many other growth options, property values have had a tendency to not appreciate as well as property in uncontrolled areas.  Naturally, there are simply fewer investors interested in buying in a rent controlled area.
            
Whenever government places controls on rents, it has proven to be a loosing proposition for investors.  Even in areas were there is a perception that rent control may be instigated in the future has caused investors to stay away.  Therefore, investors should stay clear of rent controlled areas. As noted by even a socialist economist, Assar Lindbeck:
 
“In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”  (Walter Block, “Rent Control,” The Concise Encyclopedia of Economics,  The Library of Economics and Liberty)

This article was derived from the book The Real Estate Hustle by M. Mitch Freeland and John Freeland.  To learn how to make money in real estate by taking advantage of government initiatives get your copy of The Real Estate Hustle, available at Amazon.