T r I c k o r T r e a t ?
Rumors of Rent Control
Rumblings about rent control earlier this month from the Minneapolis City Council set off investment property owner's smoke alarms across the Twin Cities. Surely this must be a trick–it's certainly no treat.
The council ordered a search for a consulting firm to study rent control/rent stabilization as a part of the city's housing and development plans as a whole. The city has no draft proposals or elements to pore over at this time. The search is slated to be completed by March 15th.
The announcement prompted us to look into the rent control/rent stabilization issue to see where others have been, and where we may be headed. Although we are still 'in-process' filtering fact from fiction, we'll be keeping an eye on the policies, trends and public sentiment that will affect the properties we manage for our clients as well as the ones we own ourselves.
The Great Divide
47% of American renters spend more than 30% of their income on housing. That's a sizable chunk out of anyone's income.
More than half of Minneapolis households are rentals. Add to that fact that the two largest demographic groups in the city of Minneapolis are:
1. Renters earning less than 30% of the Area Median Income 2. Homeowners earning more than 100% AMI.
These numbers roughly boil down to: renters earning less than $30K/year and homeowners earning more than 100K/year.
There isn't enough housing and prices keep rising.
As new residents move into our city to fill the jobs that a good economy enjoys, property values and rents go up. Older, less expensive neighborhoods become the target of higher-income residents and new high earners moving into the city. This inflow of energy, money and home improvement ends up gentrifying an area with coffee shops, artisanal bakeries and juice bar/yoga studios. Sounds kinda nice!
However, higher property values and rents are driven by robust growth also push out the existing lower-income earners forcing them to find a home elsewhere or lose a place to call home altogether.
Grab the Rent Control Remote
Hear from both sides of the argument. A Potential Conversation Between the Two Sides.
A LANDLORD Might Say...
Rent control will deter investment into rental housing, whether that be improvements on existing structures or building anew. Why would I invest money into an asset that has no return (or a lowered return) on that investment?
A TENANT Might Say...
The idea behind rent control is to help those with lower incomes and meager means to continue to afford a property that has been or would have been priced out of their affordability range.
Nice gesture, but that sucks for a landlord/investment property owner. Why should I be penalized due to a good economy?
It's not that big of a hit, you can afford it. Besides, it's not like your rents won't rise at all.
That's an undue burden that I have to carry. I don't like it. I worked hard to obtain this investment property.
Your tenants work hard cleaning toilets.
Skip rent control. If you wan lower rents, curb city spending and lower property taxes. Rent control is not the solution.
Increasing a once affordable rent beyond my ability pay is no solution for me.
There has Got to be Another Way Possible Alternate Solutions
Build more housing. But that will take time. Expand subsidized housing using federal subsidies like the Section 8 program. Allow tax breaks for investment property developers who build affordable homes.
Nice, but uninspired. What else do you got? Rent control disconnects rental units from the housing market and the price fluctuations that affect rents. Connecting rent control to market forces rather than city regulation might be a possible solution for some demographic groups.
For instance, elderly citizens could have rent governed by changes in the social security payments they receive. Another avenue may be linking rent controls to vacancy rates as a means to help alleviate the situation in the short term while providing market incentive to grow out of the rent control spectrum and back into a more equitable and financially stable housing market.
We’ve Only Just Begun
It will take some heavy lifting to impose rent control in the city of Minneapolis. For starters, rent control is against Minnesotan law. To enact rent control, it would take a citywide referendum to allow it to move forward. With over 50% of the households in the city of Minneapolis designated as renters, that ballot question may be easier to pass than most.
With thoughtful city regulation, investment, and a keen eye to navigating the challenges ahead, landlords and tenants can move forward in a win-win situation. There will be challenges, and probably a little horse-trading, maybe even a little crying, but there will also be new opportunities for growth and a healthy return on investment regardless of what happens.
I believe there are opportunities in every (well almost every) situation. Rent control, should it happen, will be no different. With solid strategies and proven processes in place, we will monitor, plan and prepare for future realities.
We'll be keeping an eye on the local rental market, government regulation, and the issues shaping the future of the Minneapolis housing market. We invite you to follow the story.