Why the 5% rent cap increase won't happen [Market Updates]

Understanding the Biden Administration's Rental Rate Proposal

This past week, the Biden Administration shared a plan to limit rent increases to 5% per year. The headlines make it sound simple, but there's more to it. Let's break it down and see what it really means for investors.

Key Parts of the Proposal

1. Who It Affects

The bill is for landlords with 50 or more units. If you only have a few rentals, this doesn't affect you. But if you invest in syndications, it likely does. Most syndications involve big properties that are more than 50 units. 

2. The Actual Restriction

The proposal doesn't ban rent increases over 5%. Instead, it says that if you raise rents by more than 5%, you'll lose important tax benefits like depreciation. So you still could raise rents by more than 5% but it’s not likely investors would sacrifice depreciation for it.

3. New Buildings

New buildings are not affected by this cap. This is to address critics that will say this impacts new supply.

My Thoughts on the Proposal

As a landlord, I know there’s a problem with housing costs. But will this proposal fix it? I don’t think so.

In the past, places like San Francisco tried similar rules, and it didn’t make housing cheaper overall. Rent prices just went up in other buildings not impacted by rental increase limits.

I believe in letting the market decide. Minneapolis, for example, saw rent prices drop by building more homes and making it easier to get building permits. This way, there are more homes available, which helps lower prices naturally. 

Why the Bill Won’t Pass

It still needs Congress to say yes, and they usually get stuck on things like this. This bill feels like it’s more for getting attention during elections.

Plus, politicians use the same tax benefits this bill wants to remove, so they’re unlikely to pass it.

Even if the bill passes, it won’t hurt our investments. We plan for a 3% rent increase, so a 5% cap is still okay for us.

Final Thoughts

While this proposal has made headlines, it likely won’t have a big impact.

For passive investors in carefully planned growth projects, there’s no need to worry as most won’t plan for more than 5% rent increases anyways. 

And, politicians have a bad track record when introducing regulation that impacts their ability to make money, so I feel safe using the same tax benefits as they do.

Hope you found this breakdown helpful!