I heard from a friend at work that rent control is bad; is that true? First of all, let me explain that what people call “rent control” is called rent stabilization by city governments. That’s because they feel enacting a governmental limitation on the amount or frequency of the amount an owner can raise the rent creates stability and predictability for the renters in the city. This is to help renters stay living in an area where rents are going up faster than the average income, for example Santa Monica.

So is rent control bad? Well, that depends on who you are.

If you are the tenant and you know that the increase in rent is limited to 3% or the CPI (in the city of Los Angeles), then it’s great for you because it makes it a predictable budgetary item. And if you are lucky enough to have gotten into your apartment in the 1990s then you might only be paying $1000 per month for a unit that currently would rent for $1500. Or in Santa Monica, you might be paying $1200 for a unit that now would rent for $2700. If you can’t afford $2700 in rent, then you are living in a neighborhood that you can’t really afford, except for the fact that rent control kept your rent lower than the market demands.

Some argue that this is creating affordable housing.

If you are the landlord, rent control is not so great for the same reason. If the market rents increase at more than 3% as they often do the owner is limited to the 3% or CPI, limiting the cash flow and therefore the value of the property (since investment properties’ value is largely based on its cash flow). If your cash flow is limited, then you may not have the money it takes to fix up the property or be proactive with repairs or upgrades to the property. You might just do the minimum fix-it stuff, making your property less and less desirable because of this “deferred maintenance”.

Why 3% – this is Los Angeles’ rule and it comes from the lowest number available at the time that they made the law. The CPI had always been very high and so this was the lowest they could imagine. The CPI has not been that high since June 2001, when Eit slipped below that level (data from Bureau of Labor Statistics – one of my faves).each city sets its own rule as to whether to have controls in place and how they are calculated. As an investor you have to make sure.

So it’s probably bad if you are an owner who wants your investment to grow in value to its full potential. It’s good if you are the renter and don’t mind the property not being kept up as well as the ones in the neighboring city that does not have rent control and allows the owners to enjoy the highest income possible which in turn, we assume, allows them to take care of problems as they come up.