Rent controlled units make the city affordable for low-income and middle-income renters. At the same time, it impacts the revenue of the landlords. Read this article for rent control 101.
It is common to increase the rent to keep up with inflation and market rates. However, many cities place limits on rent increases. Some even have rent-controlled units to keep the rents affordable. This typically happens in urban locations that are gentrifying rapidly.
In general, rent increase limits refer to a certain amount or percentage up to which a landlord can increase the rent of the property. These limits are imposed by the local government. After all, without some specific restrictions on pricing, owners can increase the rent however they want. This is what prevents the rent jumping up 50%, say from $1200 a month to $1800 a month the next year. Rent-control on the other hand is usually in place in larger cities. Simply stated, rent-control puts a cap on the annual rent increase based on certain parameters.
The underlying aim of setting these limits is to keep living costs affordable or within reach for lower-income people. That is also the key reason why different countries such as Canada, Germany, Ireland, Britain, and the US have rent-controls.
While many places have rent increase limits, some cities have rent-controlled units. The government sets the limit on rent increase for these units.
The application of rent-control is different for various states within the US. For instance, in New York, rent-control is only for tenants who have been living continuously in their houses or apartments since 1st July, 1971, in a building that was constructed before 1947. When a rent-controlled apartment is not occupied, it might become free of regulations or transfer to the present rent-control policies. Also, there is an exception for buildings with less than six units.
In NYC, rent-control is determined on the basis of the maximum base rent. For each unit, a maximum allowable rent is determined, and every two years, the rent might be increased up to 7.5 percent by the landlord until the maximum base rent is achieved.
In San Francisco, rent-control is in effect for renters living in buildings built before 1979. The allowed percent increase in rent is mandated by the government. This results in landlords not keeping up the property. Under such circumstances, the renters can ask for a rent reduction. On the other hand, when the landlord improves the property, they can petition to increase the rent. The maximum allowed increase under such circumstances is 10%.
In Ireland, rent-controlled zones cannot increase prices by more than 4% per year, regardless of the age of the house. In a radical move to make the city affordable, Berlin has imposed a five year freeze on rent increase. Paris initiated, stopped, and has re-initiated rent controls. Other places like Singapore and Hong Kong don’t have rent-control at the moment.
Rent-control laws are enacted by municipalities, and they vary significantly from each other. For example, in the US, different states have different regulations about rent increase limits.
In fact, in the US, rent-control is not that widespread. Recent research performed by the Urban Institute determined that only 182 municipalities out of 89,000 in the US, have regulations for rent-control. Furthermore, 37 states have certain laws that forbid governments from enacting rules and guidelines on rent-control.
Some states that have rent-control policies and laws include Alaska, Delaware, Hawaii, Maine, Nevada, and Ohio, among others.
Now that we discussed rent-control, as a renter, you might wonder how to get a rent-controlled apartment. They are difficult to find because they are quite rare. Even in the states that have rent-control, such apartments can be quite challenging to find. Typically tenants don’t move out of the place as they benefit from a lower rent for a long time. Homeowners can raise the rent only when a new renter moves in. If you are a renter wondering whether you should move out or stay from your current place, we discuss the pros and cons in our blog.
Generally, cities that tend to have rent-control have rent boards that are responsible for setting policies. The landlord and tenant laws are specific, and leave no room for misinterpretation.
For tenants, rent-control is certainly a good thing. For instance, with rent-control in place, tenants are allowed the opportunity to save a significant amount of money while renting at a lower than market rate. Since rent-control limits the amount of money that can be increased, tenants generally favor these laws. With rent-control policies in place, tenants who earn less have access to more houses.
Typically, tenants often move more and shift to other houses when there are no rent-controls. Because rent increases are capped, tenants can easily stay in a rent-controlled house for a long period. This also implies that landlords don’t have to manage the yearly vacancy of houses.
It is important to note that just as rent-control has some benefits, it has some drawbacks as well. For instance, landlords are unable to upgrade their houses with rent-control laws in place.
For the landlord, rent-controlled houses or apartments generally fall below the rents that are considered in the market. It implies that landlords don’t make as much profit as they would make when their houses are not rent-controlled. As a result, the houses are not always well-maintained. Also, resale of these houses is difficult as only a limited pool of new investors would be willing to take on something that cannot produce positive cash flow for a very long time.
Rent-control offers a way for low-income and middle-income people to live in the city. Without this, they will be displaced. This displacement reduces the competitive edge of the cities as the local employers cannot find affordable labor. On the other hand, as an investor, it is hard to justify investing in rent-controlled units – you are subsidizing someone’s lifestyle at your expense. Depending on which side you are on, you may see this as a benefit or a disadvantage. Know the details of the house before renting or investing to avoid surprises.
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