Does Rent Control Mean it is Time to Cash-out of Oregon Real Estate?
Last week, Oregon Governor Kate Brown signed into law state-wide rent control. The law states in any 12-month period, a landlord cannot raise rent more than 7% plus consumer price index. For 2019, the rent control has been set at 10.3%. The law goes further to restrict no-cause termination for a very small set of reasons. Lawmakers argue this was a necessary component of rent control otherwise landlords would simply evict current tenants only to find new ones at a higher rent.
With these new laws, some investors talk about selling their Oregon real estate and moving it to another state or to another investment vehicle altogether. Is it time for the buy-and-hold real estate investor to get out of Oregon or is there still some potential?
As everyone knows, prices are set by the market, supply and demand. The reason rent prices are high is because there is a low inventory of rental units. If there were more rentals than renters, prices would plummet. It isn’t uncommon for lawmakers to try to fix high market prices by passing laws that attempt to control price while ignoring supply and demand.
The question for the future Oregon rental market is, how will the newly passed laws effect supply and demand? Because many investors may be getting out, it may be a good reason to stay in. If the new laws make Oregon an unpopular place for buy and hold real estate investors, they will sell their properties which will decrease inventory, ironically driving rental prices up. The new laws may also drive rent prices up since the new law allows for a 10% rent hike and restricts the ability to move out tenants who have occupied the unit longer than one year. Landlords who do not want to keep their tenants but have no legal option move them out will raise rent the maximum allowed limit. All these factors will likely put upward pressure on rent prices.
Whether Oregon real estate is a worthwhile investment for buy-and-hold investor or not depends on how well it is managed. Unfortunately, many overworked property managers run on auto-pilot for most of their properties and fail to do regular evaluations of their property’s investment performance. Some aren’t even doing regular annual rent raises. When rents fall behind market, tenants know they are getting a deal and they will not move because moving is too expensive. A property manager will not be able to move these tenants out and won’t be able to raise rents more than the cap in order to “catch up.”
Proper budgeting for capital expenses, while always important, will be even more important now. Under the new laws, the only time a landlord can reset the rent is after a tenant moves out who has been there longer than a year. This will be the time to make improvements. If a tenant moves out who has rented for less than a year, the next tenant’s rent price can’t exceed the rent cap. Therefore, unit improvements might not see their full cost-benefit potential. Getting behind the market in rents will make it impossible to make those improvements and still maintain a high preforming investment.
In my view, Oregon real estate is still a good investment for now. The only question will be, how will the lawmakers try to fix the problem they’ve created?