Historically speaking, independent real estate investors who held for the long-term walked a relatively straightforward (although bumpy and slow at times) path toward achieving asset appreciation and long-term wealth. This path would often look something like this: An investor would purchase a piece of property that would potentially generate enough cash flow to cover the expenses, including principal and interest on the mortgage, insurance, property taxes and maintenance costs. Over time, the property would (hopefully) increase in value, income (rents) would rise, and certain tax advantages, like the ability to deduct operating and depreciation expenses, could be utilized to improve cash flow.
However, the steady march of new government regulations, the impact of COVID-19, and some basic real estate economics have helped some real estate investors recognize that the real estate investments they own have become less profitable and could even worsen to the point where investors could actually lose money each year.
The Growing Impact of Rent Control Before and After COVID-19
While this may sound like hyperbole to some, our firm is actively working with numerous apartment owners across the country, and we hear firsthand some of the challenges and pressures property owners are facing. Even national media are picking up on this trend. For example, a recent Wall Street Journal article cites that apartment owners and investors are leaving California and the Northeast for places like Florida, Texas and the other Southern states where warm weather, business-friendly governments and laws, lower taxes and fewer regulations seem like a breath of fresh air.
Reuters recently lamented that beset by COVID-19 and its fallout, many smaller local landlords are offloading their properties and selling to national institutional investors, and CNBC recently reported that at least 60% of single-family rental homeowners are owed back rent and are being forced to sell their rental properties to recoup losses. Finally, CBS announced that as a last-ditch effort to claw back tens of billions of dollars in unpaid rent, a national group of landlords is suing the federal government for back rent.
However, even before COVID-19 rolled across the nation’s multifamily rental real estate investment market, landlords were seeing new rent-control legislation start to encroach on their investment real estate portfolios, and squeeze owners’ profits. When COVID-19 arrived in the United States, cities across the country started expanding rent-control laws and eviction moratoriums at an alarming rate, directly exposing landlords to financial peril. Legally speaking, the term “rent control” can be defined as any statutory rule that regulates the timing or frequency of increasing tenants’ rent, the services landlords must provide tenants, and the limited ability of landlords to evict tenants.
Today, multiple cities, states and jurisdictions are under some form of strict rent-control …….