The Disadvantages of Rent Control

Rent control is a set of laws, which is adopted by a local or state government, designed to protect tenants. The most common factors that rent control laws regulate are the maximum rent price, how much rent can go up when re-signing a lease, and what options are available to tenants who live in rental properties that need repairs.

Rent control has been found to help tenants in certain situations. However, it has also been found to have some drawbacks, which can affect both the landlords and the tenants living in rent controlled properties.

Reduces Housing Availability

Rent control has been found, in many circumstances, to reduce the availability of housing. Traditionally rental fees are directly proportional to the demand for housing and the availability of housing. As the availability is outweighed by the demand, the prices go up, which encourages developers to create new rental properties (and investors to purchase more rental properties). Eventually this process drives rental prices back down while meeting the local needs.

Harms Investors

Rent control, especially when left in effect over an extended period of time, can lead to a sharp reduction in profit, and in some cases even a loss for investors. This occurs because the rent control can keep rental prices below the market rental price. Overtime this can lead to a situation where the investor’s income is below the costs associated with owning the rental property.

Reduces Maintenance on Existing Properties

Rent control over time can lead to reduced maintenance, and even abandonment of rental properties by investors. This occurs as a result of continually reduced profit margins, which eventually make it necessary for the investors to either significantly reduce costs or abandon the property.

High Administrative Costs

Due to the fact that rent control is government based, the local government must establish systems which handle the process of determining costs (and dealing with complaints). This adds additional expenses, which must be covered by taxes.

Decrease Income Tax Revenue

In many situations, rent control can lead to a decrease in income tax collected from landlords for their rental properties. This occurs because it reduces the profit taken in from landlords by a considerable margin, leading a lower overall income.

Decrease Property Tax Revenue

Rent control can lead to a decrease in property taxes. This occurs because rent control leads to a higher percentage of depressed and abandoned properties. Overtime this leads to a lower average property value in the controlled area, which reduces property taxes.

Higher Entry Costs

When rent control affects the availability of properties, this can lead to an added expense for leasing a rental property (and signing a lease agreement). In many areas where rent controls are used extensively, it becomes necessary for those interested in renting a property to pay what is known as a finder’s fee. This can often outweigh the savings, which may be experienced by renting in a rent controlled area.