Making Money, in the Age of Rent Control

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It’s no secret that rent control regulations in New York City, California, and throughout the U.S. are dramatically changing the landscape of multifamily investing and making a major impact on the commercial real estate industry.

While some investors are staying away from rent-controlled property, others are seizing the opportunity of strong returns and steady incomes that these assets offer.

In this article we’ll review rent control regulation and discuss how knowing which properties are affected can help investors choose whether or not to invest in property with rents controlled.

NYC rent control review

Recently we wrote about New York’s rent regulations that were signed into law on June 14th and the impact on loans and lender portfolios. Here’s a quick recap of what the new rules do:

  • Ends previous high-rent/high-income rule: if rent exceeds $2,774.76/month or occupant income is more than $200,000 two years in a row, unit rent is still regulated
  • Abolishes vacancy “bonus”: 20% rent increases on vacant units are eliminated
  • Rents below the legally permitted rate are frozen for the duration of the existing tenancy
  • Rent increases due to major improvements are capped at 2%
  • Improvements limited to $15,000 per unit in any 15-year period
  • Renovations limited to three per unit every 15 years

Potential advantages of rent controlled investments

While these NYC rent control rule changes may translate into lower NOI and less room for capital improvements, there are also some potential advantages of investing in property with rent control:

  • Prices on rent controlled properties can be lower than those without rent control
  • Because of the perceived stigma of investing in property with rent control there’s less competition and lower odds of getting into a bidding war
  • Less competition also means a lower cost of acquisition for rent controlled property, leaving investors with surplus capital that they might not otherwise have
  • Tenant turnover is lower, reducing the expense of unit turns and creating a more consistent revenue stream

How to invest in property with rent control

As with any other commercial real estate investment, it’s important to conduct in-depth due diligence on the market, building and tenants, and the lender and owner profiles.

Data from CrediFi lets investors locate properties that may be underwater due to high LTVs and identify lenders that have increased exposure to property affected by rent control rules and regulations.

When analyzing potential rent-controlled investments, some of the other factors that could help or hurt ROI include:

  • Unit size: as a rule of thumb, units with 2+ bedrooms have a lower turnover rate than studios or 1-bedroom units.
  • Existing tenants: if the same tenants have lived in the property for years and rents are far below market value, the odds are they won’t be leaving anytime soon, making incremental rent increases much more difficult.
  • Investment strategy: investors with a long-term, buy-and-hold strategy may find rent controlled buildings make a good addition to property portfolios due to the more predictable cash flow of rent controlled investments.

Where to find rent controlled investment property

A recent article from Real Estate NJ suggests that investors who are reeling from rent control laws in NYC may want to look across the river in New Jersey. Brian Hosey, a VP with Marcus & Millichap and the firm’s regional manager for New Jersey, sees about one-third of the brokerage’s investors coming from New York City.

Nate Kline, the chief investment officer and principal with One Wall Partners (an investment and management firm focused on transit-oriented workforce housing) learned from Freddie Mac that northern New Jersey has surpassed Brooklyn to become the agency’s most active market for the Small Balance Loan Program.

In New York City alone, CrediFi has identified over 60,000 properties that have historically been rent regulated. Investors can access CrediFi’s robust data base to track property details, financing, and ownership of these buildings affected by the new rent control legislation in NYC.

Investing in NYC property with rent control: Yes or No?

Investing in rent controlled property in New York City – or anywhere else in the U.S. – isn’t for everyone.

It takes time and effort to research and understand the risks and rewards of investment property with rent control. However, this asset class can be a strong addition to the portfolio of the buy-and-hold real estate investor seeking a predictable revenue stream.

CrediFi makes it easy for commercial real estate investors to dive deep into the data by:

  • Identifying potentially distressed properties and motivated sellers with high LTV loans in need of refinancing or restructuring
  • Zeroing in on specific properties and lenders with high exposure to assets affected by rent control regulation
  • Gaining insight on markets throughout the U.S. to help clients diversify geographically and by asset class

Click here to learn more about our multifamily rent regulation property data and to download a free sample report.

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Alex Veksler has 16 years of finance, data analysis and project management experience. He is a former vice president at Morgan Stanley, where he worked on product control of equity and fixed-income derivatives products as well as various projects involving finance and technology, such as revamping risk attribution and balance-sheet systems for profits and losses. Alex has previously worked at hedge funds, most recently as a director at Exigent Capital. He has a bachelor’s in computer science from Yeshiva University and an MBA from New York University.

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