Understanding Rent Control for Your Property Management Business
Rent control has been a hot topic for 2020. With moratoriums in place on both evictions and rental rate increases, many property managers are concerned about the financial implications of their operations.
The first rent control laws were passed in the 1920s but failed just a few years later due to the economic hardship brought on by the Great Depression. Rapid inflation in the 1970s brought back calls for rent control. Many states now have some form of rent control laws on the books to dictate how often landlords can raise rents and how much. Currently, the District of Columbia, Oregon, New York, and cities and towns in California, Maryland, and New Jersey have rent control or rent stabilization policies.
As most property managers know, the imposition of rent controls and eviction moratoriums creates a specific challenge to the property management business model. In particular, current constraints that delay evictions for non-payment have tied the property manager's hands for how to deal with problem tenants.
By understanding the pros and cons of rent control, you can effectively manage your properties and tenants.
The Cons of Rent Control
Fewer Property Management Clients
When investors buy a property, they may steer clear areas with strict rent control laws, instead choosing to invest in properties located where the rules are less severe. These newer investors may not turn to a management company initially, deciding instead to do the work themselves. Rent controls weaken the housing market overall because they discourage rental housing development and deter investment in maintenance and rehabilitation. When investors see constraints on their profit potential, they are more likely to shift their investments to jurisdictions without rent controls.
Low Property Management Fees
As a property manager, you may raise your fees each year, with the expectation that your landlords are also likely to increase their rents similarly. In that scenario, you'd gladly take on new clients and more properties to manage. But with rent controls in place, the landlord's rate of rent increase is capped, thus also capping the management company's fees. If a management company raises fees, even when the landlord cannot make a similar rent increase, it could be in danger of losing clients to another property management company.
Pros of Rent Control
Tenants know about rent-controlled properties, and they know that if they plan to move, they may not find an available property under rent control. Rent stability may encourage tenants to renew their leases and stay in place.
Stable Cash Flow
When tenants have assurance their rent will remain manageable, they typically have a better record of timely payment. This predictability helps the property manager predict month-to-month cash flow, but carries the downside of making it less likely that a bad tenant will move.
As a property management company, how can you continue to run a profitable business with rent controls in place?
Keep a Sharp Eye for Opportunities to Reduce Your Expenses
Technological tools can help you reduce your workforce and reduce staff overhead but still ensure competent management. A good management system will help the property management company cut down on employee hours. These systems, such as Appfolio, Avail, and Mashvisor, specifically support tenant management.
Take the Best Advantage of Increases You Can Legitimately Put in Place
An excellent rental rate evaluation tool can provide you with reliable data about market rents in areas where you have properties under management. This information can help you determine if your properties are renting below-market rent, sitting at average rates, or perhaps already higher than average. Data like this gives you a leg up to better advise your clients about whether or not they can raise the rent. If rent control policy in the area allows for a 5% annual increase and they currently rent within the average range, they can consider a rent increase of up to 5% as long as the increase doesn't price them out of occupancy.
You May Need to Look for Clients in Non-Rent-Controlled Areas
Property managers may need to reach out and extend their services to landlords who are not in a rent-controlled area. This might be more difficult if your entire city or county is under rent control, but it is worth investigating to improve your company's profit potential.
Consider Working Outside Your Area
As you successfully adopt online tools to help with management, you grow your capacity to manage properties further away effectively. If you want to extend your range of service, first put together a solid list of maintenance and repair professionals in the new area, people you can turn to in the case of a repair emergency. You could also hire a local on-call manager or employ video calling with the tenant, or any online platforms and apps to manage better properties from a distance.
Keeping your property management company profitable amid rent control and eviction moratoriums can be difficult – the key is to be flexible and creative, and take good advantage of technology if you haven't done so already. If you can find ways to cut expenses, attract better clients, or additional service areas, you will build your advantage over less forward-thinking property management companies.
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