How Rent Control Laws Hurt Tenants
California is about to get a real world lesson in how rent control laws can't solve a housing crisis.
Every time we walk past lumber racks in a home-improvement store my wife or daughters start giggling about all the "fine pieces of wood."
It's an inside joke that goes back to my first rental property in a small Mojave Desert town. I bought it "as is" in an online auction (although I saw it in person first), and remember the horrified look on the faces of my family when I took them to see it. Think of the term "uneasy silence."
Half of the roof had blown off from vicious desert winds. The house had broken windows, broken everything, trash strewn everywhere. It looked like something out of the movie "Road Warrior," given that it sat amid tumbleweeds, sand and cactus. Anyway, I lovingly fixed it up on a shoestring budget. When it was done, I popped for a pricey but fine piece of wood to create the mantelpiece. I was proud of it—and still get teased.
This is not the newspaper version of "Fixer Upper," but a look at rent control. Gov. Gavin Newsom is likely to sign an anti-rent-gouging bill that caps annual rent increases at 5 percent plus inflation and limits the ability of landlords to evict tenants.
The debate has centered on the plight of tenants, who face soaring rents as California's self-imposed housing crisis deepens. Opponents note that landlords will exit the market, builders will stop building apartments or turn rentals into condos, and owners will defer maintenance. Owners and renters will become adversaries as regulators and tenant boards turn a simple market transaction into an us-versus-them situation. Rent control obliterates housing markets wherever it is imposed.
Personal stories trump economic arguments, so today's column offers my perspective as a small-time landlord. It's a story other investors share, and sheds light on why government caps will make the housing situation worse. They're not looking for sympathy, even when tenants mistreat the property, don't pay their rent, or when unexpected things happen. In my case, a small earthquake cracked the toilet line and flooded my Mojave Desert house the day tenants were supposed to move in. It's a business with costs, risks, and rewards.
But here's a clue of what's going to happen. I've rarely raised rent or charged late fees and am lackadaisical about rules. Now the state is going to tell me how much I can charge and make it tough to evict any bad tenants. Most landlords will now raise rents to the maximum allowable limits every year and strictly enforce the terms of the lease. Many will sell their houses to single-family owners, which will take them off the rental market.
Currently, I'm under market rate with most rents because I rather keep good tenants than risk finding new ones. With rent control, landlords lose the ability to raise rents when they choose, so we need to be diligent to keep rents at their peak given that the previous year becomes the baseline. If we are lax on enforcing the lease, then it's hard to suddenly declare that to be a "just cause" for eviction. Since the state will control our profits, we'll need to maximize profits wherever we can.
I'll probably turn management over to management companies, which are far less lenient when a tenant has a tough month or less likely to authorize what I did recently—insulate a house and install new ductwork to help a tenant get utility bills to an affordable spot.
This is a side business. It's partly a labor of love. Most of my homes are historic properties in working-class communities. After I renovated an Art Deco mansion on a city park, neighbors hugged me because turning an eyesore into a professional office building helped upgrade the surrounding block. As an aside, a 2020 ballot initiative would remove Proposition 13's property-tax limits from most commercial buildings, which could obliterate my earnings on that property. California gets you coming and going.
At what point does it make more sense to stick one's money in a mutual fund? That fund doesn't call you at 2 am when the toilet is overflowing. When small landlords leave the market that means fewer single-family homes for rent. It makes renters more dependent on big apartment companies, who can afford the staff to manage the regulatory hassles. It also means fewer opportunities for middle-class people to buy and rent out real estate, which remains a great path to wealth creation. Not everyone has a government pension, you know.
It's about incentives. You get more of what you encourage and less of what you punish. California's rent crisis is caused by insufficient supply, which is the result of a system that imposes a punishing level of regulation and fees on builders and developers—and now on landlords. It will mean fewer properties for rent and fewer landlords who proudly design the fireplace mantle.
This column was first published in the Orange County Register.
