Rent control, a nightmare to avoid

On September 10, 2013 by Phil Champagne

With the prospect of higher price inflation coming, I’d like to bring up a potential risk of what might happen more often in some cities in the US and across the world, particularly in places with a more socialist view such as San Francisco…

Save rent control, vote no on 98 rally at San ...

Save rent control, vote no on 98 rally at San Francisco City Hall (Photo credit: Steve Rhodes)

To many investors in real estate, I’ve just stated the obvious in my title. Every cities or countries that have implemented a rent control have ultimately destroyed the availability of good housing. Rent control has always been implemented only on residential housing since the government doesn’t feel it needs to be involved in commercial real estate where the lease contract is between two businesses. But when it comes to housing, what better way to get more votes than to promote a new law that will freeze rent increases or limit their growth. One example is in San Francisco where a tenant’s rent can be adjusted by only a small percentage yearly. Only when tenants move out that the unit can be rented at market rate.  This article from the San Francisco Chronicle reports:

Tommi Avicolli Mecca, who works for the Housing Rights Committee of San Francisco, said he and his roommate split the $1,100 rent on their Castro district two-bedroom apartment. He has lived there for 17 years and said the apartment would probably rent for $3,000 now. And without rent control, the landlord could keep raising the rent, meaning few people who make the city unique could afford living there, he said. (See )

So there you have it, this owner is forced to charge about 1/3rd of the rent he would normally charge. It is important to note however that market rates are higher than they would be if it wasn’t for rent control since they reduce investment in multifamily properties in San Francisco has been drastically reduced over the many years that rent control has been in place. In addition to the rent control, such cities usually also have high regulations preventing new housing development or making it a much more expensive undertaking than it otherwise would be. Removal  of all government restrictions would attract tremendous investment and after a few years San Francisco would have plenty of high quality housing. I strongly suggest you read the above-referenced article, you will find the story of a heart surgeon making $500,000 a year who wants a pad in SF and gets to enjoy the benefit of rent control likely subsidized by property owners with an income substantially lower than his.

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