Real estate investing involves the analysis of a myriad of factors that may affect the overall success of your project. Some of those considerations include: price, location, opportunity for adding value, type of neighborhood and rents for similar properties, just to name a few. But, for this blog we want to briefly focus on the issue of rent, and more specifically the impact of rental control legislation on the analysis of any real estate investment opportunity.
Any economist will tell you that the price for a product or commodity is determined by the intersection of supply and demand. Real estate is not different. More important, the determination of rental rates is also, in the non-controlled marketplace, determined largely by the free market forces of supply and demand.
Historically, it was the “free hand of the economy” that dictated market rates for rental property. However, social economists might tell you that the difficulty with the pure free market driven rental rates can create certain social distortions for people in need of homes at reasonable rates. In many jurisdictions across North American, and most certainly in Ontario, there is legislation that can control rent prices.
In Ontario, for example, the Residential Tenancies Act, limits the percent a landlord can increase rent on an annual basis. Usually, the rate follows closely or a little below the rate of inflation. But, it does not usually rise or fall in accordance with the normal expectations of free market supply and demand.
We are not here to argue that the existence of rent control legislation should be a major factor in your real estate investment analysis. Any of the other considerations in your decision may outweigh the potential deleterious effects of rent control. However, particularly in an era of high inflation the effects of rent control in preventing you from keeping rental rates commensurate with the market. Imagine your property with rent at $1,000.00 and it only increasing by 2% (or $1,020) when the market actually demands a 7% increase (or $1,070). Now, compound that problem over several years.
Mada Partners always considers a wide myriad of factors in assessing every real estate venture we consider. Rent control is an important factor for our business. For more than a half decade, we have focused on investing in the United States, and particularly in Philadelphia. One of the key factors in our decision making is the fact that Philadelphia is considered to be a more landlord friendly environment from a rental rates perspective.
There are a few things you need to know about rent control and real estate investing.
What Is Rent Control?
Rent control is a term that refers to laws which limit the amount that landlords can increase the rental rates of their properties. Some cities have rent control laws, but only for certain types of properties and tenants.
Rent control laws vary from city to city and state to state. In some cities, only buildings built before a certain year are subject to rent control laws. In others, only certain neighborhoods or districts are subject to rent control. Regardless of where you invest, your best bet is to stay up-to-date on all state and local regulations so you don’t get caught off guard by any unexpected rules or restrictions.
Here are three ways investors can benefit from rent control laws:
1) Rent control laws force current tenants to vacate the property. Rent control laws require landlords to increase rent only by a certain amount each year. The law also requires a landlord to provide a reason for removing a tenant from the property.
2) Rent control laws help protect tenants from unreasonable rent increases. Some landlords may try to increase rent by an unreasonable amount in order to get rid of the tenant. In most cities, the only way for a landlord to remove rent control status is if the tenant agrees to leave or if the landlord demolishes or substantially renovates the unit.
3) Rent control laws protect tenants against discrimination and harassment. Landlords are not allowed to discriminate against tenants based on race, gender, religion or national origin. They also cannot harass them based on their sexual orientation. These protections ensure that all tenants have equal rights when it comes to renting an apartment or house
To learn more about our real estate investing activities and how you might partner with us, click on this link to set up an exploration meeting with one of our partners.
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