Renting out your apartment can be a cost-effective way to earn a few extra dollars. So, if you have an extra room, feel free to find someone to live there. However, as you become a landlord, there is one thing you will need to learn to live – rent control and the gross rent multiplier.
What is rent control?
Rent control is more or less like price control. Typically, the government (federal or state) will impose a special law that limits how much you can raise rents on “existing” landlords. The program is common in densely populated cities where it may be difficult for these tenants to find affordable housing. It could also be necessitated by a calamity or a terrorist attack in the city that destroys a large number of housing units.
Rent control is initially put in place because the supply of housing units cannot be considered “elastic.” In simpler terms, if there is a shortage of housing, this shortage cannot be immediately solved even if rent was increased. Without rent control, landlords would raise rental rates whenever they wished. Cities that are desirable for all would only become affordable to the wealthiest in society. So, by imposing rent control, the government will be preventing extortion and exploitation of tenants without doing harm to the landlord.
You can still find houses that are under rent control where tenants pay far less than they would do in the current economy. For example, there are a few units in the country that are renting for about $400 some of which could easily rent for $1,500.
However, it’s also important to note that most rent control programs come with exceptions and exemptions; so not all houses in the city will be affected.
Impact of rent control on rent management
Tenants with rent control tend to live in their houses longer because they are shielded from “exploitive” rent increases. When tenants are not moving out of their houses, an artificial scarcity of housing units is created. The number of available apartments will reduce which may in turn drive up the prices of available houses. This can considerably hurt landlords’ potential earnings.
Rent control has also been blamed for illegal practices such as unauthorized subleases. What happens is that a tenant who’s protected by the rent control program can decide to sublease part of the house to new tenants at rental rates that are far higher than what is paid to the landlord.
What you need to do is to lower your base rent
Base rent or minimum rent is the amount paid to live in the property before you add additional expenses. You can lower the base rent in several ways;
Make a few notable improvements – for example, you can add amenities that tenants can’t bring with them such as microwaves, dishwashers, and washers/driers.
Offer gifts – this will not always work but it’s still worth a try. Instead of lowering the rent from $1,000 to $900, for example, offer the tenant a laptop worth $500. This way, rather than lose $1,200 over the 12 months, you’ll only lose the $500 and keep $700.
Ask for additional security deposits – for instance, you can ask for pet deposit.
Alternatively, you can;
Take advantage of section 8 – it imposes stricter tenant responsibilities and renters can actually be removed from the property if they fail to pay rent.
Consider working with a property management company.
Summary
To be on the safe side, do NOT preserve the minimum rent for future increases as this has been proved to negatively impact on GRM.
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