by | 23, Apr 2022

Is Rent Control Going To Hurt Or Help?

In this weekend’s episode, Anthony and Dan “the boba tea” man are giving an update on the St Paul rent control situation.

In November, St Paul voted to enact rent control starting in May. Well… that timeline is approaching fast! In just a few weeks, rent control will begin to be enforced.

But here’s the question… who’s going to enforce it? There are so many aspects to the city’s plan that don’t quite make sense.

We unpack all of this and more on this week’s episode of Multifamily Investing Made Simple, In Under 10 Minutes.

Tweetable Quotes:

How are they actually going to enforce this bad boy? Rent control requires a whole lot of bureaucratic muscle.” – Anthony Vicino

What they’ve come up with now is they’re saying that you can self-certify, that you are exempt from the increase for whatever reason.” – Dan Krueger

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** Transcripts

Rent Control

[00:00:00] Anthony: hello and welcome to multifamily investing needs. Simple to podcasts. It’s all about taking the complexity out of real estate investing. You can take action today. I’m your host, Anthony Pacino of Invictus capital

[00:00:23] Dan: joined by dance. If enough. Tapioca ball for our listeners who aren’t, I’m having my first bullet to you right now live for you five years.

It’s like, you’ve never had Boba number in your life. It doesn’t look like something I would want.

[00:00:39] Anthony: How is that even possible? It looks exactly like something. I want bears inside of foggy

[00:00:46] Dan: drink bottles in the bottom. I’ve never had the urge to man. I don’t know about the balls, but the tea is good. I got, I’m not saying

[00:00:55] Anthony: you’re living your life wrong, but like not doing it right here.

I haven’t

[00:00:57] Dan: finished it yet. This could be completely [00:01:00] different feedback in about 10 minutes. Okay. So, okay.

[00:01:02] Anthony: Honestly, Boba tea is about as good as it’s ever going to get in the first couple of steps. It doesn’t get better. It doesn’t

[00:01:08] Dan: age. I’m not going to get up and like walk three blocks to go get one of these.

[00:01:13] Anthony: What would you get up and walk through blocks for a lot of

[00:01:15] Dan: things. Like what, um, most.

[00:01:19] Anthony: Most that is incredibly vague, but not, I love

[00:01:23] Dan: to eat this. I don’t know. I mean, I’d get up and walk a couple blocks for a burger for pizza, for sandwich for a lot of things. Okay. But this one got delivered. So I was like, Hey, I’ll take it for a shot.

All right. Should we get wasted?

[00:01:35] Anthony: Let’s talk about what the people came to hear about, which is rent control and also kind of tangentially a contrarian investing advice. Um, So as a lot of you guys know, you know, if you’re, if you invest with us or. If you’re just curious about investing macro economics in general, like last year, one of our core markets that we invested in St.

Paul, [00:02:00] Minnesota enacted rent control. Oh God. It was a real is a real pain in the butt for so many reasons. And we did a really deep dive into rent control. And why generally we weren’t like super concerned about it or anything like that. Um, but all that’s to say is the, the vote that went through was a November.

Rent control got passed and it goes into effect starting May 1st, which is coming up really, really quickly. And one of the ongoing questions that everybody’s had is how are they actually going to enforce this bad boy? Rent control requires a whole lot of bureaucratic muscle. If you think about how you’re going to actually enforce this and the city of St.

Paul was not prepared for that, they don’t have the infrastructure, they don’t have the people, they don’t have the systems to actually do that. It’s enforced this thing. And so everybody’s has been kind of watching with bated breath. W what are they going to do? And they got it. They have to, they have to put it into effect that the vote is the vote.

They can’t just ignore it. And [00:03:00] so the mayor’s office, the city council, they’ve been like scratching their noodles for the past six months being like, oh boy, oh boy, what are we going to do? What are we going to do? And I don’t envy them, but here’s the solution that they tentatively have in place. Dan, what do we have to look forward to?

I guess

[00:03:20] Dan: it’s ridiculous, uh, self, uh, certification of, uh, being exempt and for whatever reason. Um, so basically what they’re saying is, uh, for those of you who aren’t aware, the rent control measure that was passed was a, was the most draconian thing that has been passed in the U S which is just flat 3%.

On all rents, uh, regardless of somebody moves out, which is a huge vacancy control, a huge issue, uh, because without that component, this is perfectly fine with us. Um, but if somebody moves out, it doesn’t matter. If you put a new tenant in the max, you can raise the rent, regardless of who the tenant is, is 3% in a year.

And it also included a new [00:04:00] construction, which is extremely weird. Um, so those two things make it so that it’s so ridiculously strict, that it really shouldn’t be, uh, left in place. And. People are becoming very aware of this and trying to backpedal. So, so basically what they’ve come up with now is they’re saying that you can self-certify, uh, that you are exempt from the increase for whatever reason, maybe your taxes went up 7% and that’s your justification to be raising rents more than 3%, or you did unit improvements or your operating expenses went up due to inflation.

They have provided really no guidance on what your justification could be. So it’s basically just give us something, give us anything, give us something that says, here’s why you should be able to do this. And apparently that’s what they’re going to run with as of now. And this is one of those things where, uh, the mayor’s office and city, uh, city council, they don’t even know what the solution’s going to be.

So this little, uh, self exemption thing is the only, uh, You know, [00:05:00] information that we’ve gotten since this past. I mean, it’s been baseball, we’ll figure it out. Yeah. And they’re not

[00:05:04] Anthony: figuring it out. And I, I, and you guys can see obviously, the issues with a self elected exemption system, where on one hand, everybody’s going to be filing for it and saying I’m exempt because of course inflation being what it is.

Everybody’s expenses are going up more than 3% because that on its own, it’s a ridiculously low number. Uh, so everybody’s going to be filing for it, which is going to lead almost all residents to then go, Hey, wait a minute. How can you do that? So that’s going to take everything to court and it’s going to get messy.

It’s going to get, it’s going to get sick. Ugly. Yeah, real quick. It’s

[00:05:39] Dan: not, and it’s not going to be a quick fix either. This is something where I’d be, uh, uh, really excited if this all got resolved and in a more moderate version of rent controls put in place in two years, I don’t see them just getting rid of rent control.

I see them taking it back to something a little bit more reasonable that we see across the country where it’s going to be CPI plus something. Usually that’s out to like [00:06:00] six, 7% or something. Totally reasonable. And if somebody moves out the basis reset, so any regular rent control would work perfectly for our model.

So, you know, on the long end, I’d say three years on the short end, maybe two years, um, you know, we’ll see something. Come kind of revert to the mean. Now here’s

[00:06:18] Anthony: the interesting thing though. We were at a, uh, a lunch earlier this week. I won’t say his name. We’re the guy who’s been doing business in the twin cities for so long.

He’s a big developer here. He was on the city council for awhile and, uh, we’re having a good conversation with him and he’s like right now is the time to be. In St. Paul, he’s like, there’s so much opportunity because there’s so many people who are just scared and getting out of Dodge and he’s like, and this is going to correct itself within 36 months.

And he was like, and that you’re going to be very happy that you, you acquire these assets. All you have to do is extend out your time horizon. So instead of looking and say, I’m going to exit in three or five, Push that out to seven and 10. And you’re gonna be very glad that you did, which is something that we talk about all the time, which is if you extend your time horizon, it [00:07:00] de-risks the investment.

And it goes with something else that we believe, which is when everybody’s going left and fleeing a market, we look at it like, well, maybe, maybe now’s the time to go shopping. Maybe there’s some pretty good opportunities there, which is one of the reasons that we dove so hard into Minneapolis in the last two years is, you know, there’s some social unrest there.

A lot of question marks about is rent control going to come over there. And man, we just couldn’t get our hands on enough assets. And so. Can’t

[00:07:26] Dan: complain. Yeah, I think this is the one there’s a couple silver linings. This one is that it’s so extreme that it’s like the perfect, what not to do example from any of the characters really kind of scared Minneapolis, uh, to not want to go anywhere near that because they’re seeing what a mess it is.

And it’s so extreme that we saw such a big backlash from the developers where there were hundreds, if not a thousand units that were queued up, ready to be delivered, that gap just turned. Overnight as soon as this past. And I think that’s a big black eye for

[00:07:56] Anthony: number was like 3000, right? Well,

[00:07:58] Dan: thousand site was I think [00:08:00] three or 400.

That was the big one that I think was kind of the nail in the coffin. And then pretty much everybody else who was in the middle of putting something together, I think backed out. And I don’t know what that

[00:08:09] Anthony: number is. Here’s something, the other thing with the rent control measures that they never even really defined.

What, what ma what rent is like is that fees do those counts. And until they could clarify that, I think there’s just so much, um, still all these months after there’s still so much confusion and lack of clarity, but here’s an idea that somebody proposed to me the other day and gave me a good shot is he said, you know what?

I’m just gonna, I’m just gonna write it into all my leases. That rent is $10,000. And that I’m going to give discounts down to my appropriate. Yeah, I was

[00:08:41] Dan: talking about, and, um, I was talking about that same concept with somebody the other day. Well, actually about a couple of weeks ago. And, uh, we were actually going to try not to talk about it publicly because, you know, if you disclose what you’re kind of looking at, as, you know, Not that I’m giving [00:09:00] the city that much credit that they’re going to be listening this stuff and no act, Melvin Carter turn it off.

Right. But yeah, that’s what, that’s, that’s a good strategy because you set your basis way up here and then you give credits so that you’re effective runs down here. And that enables you to, to, you know, reduce the credits or you can do a lot of things.

[00:09:16] Anthony: You should have told me that we weren’t going to talk about.

[00:09:18] Dan: Oh, yeah. I didn’t know. We were

[00:09:20] Anthony: going to bring it up. I got to the same place you guys got to that. I mean, it’s silly things, but the thing is it’s really silly, but like, it could have been viable right now. It’s probably not viable unless we enacted it right away. Yeah, it’s got to be in probably because it’s so close to the May 1st deadline.

Anyway, like there had been some issues

[00:09:40] Dan: there’s like six different ways that as an owner, you can, you can navigate this. So basically the way we see it as there’s going to be a period of time where this is getting worked out and, um, we’re effectively, we, we kind of push pause on St. Paul, but with that said, we’re still looking for.

We know that our investors are probably going to be a little skiddish of St. Paul until [00:10:00] this, this shakes out. So we’re not syndicating deals there, but getting personal opportunity, we’re going to gobble it up because there’s a lot of people who are reacting emotionally and, and selling and fleeing thinking that this is going to be just the new normal for.

[00:10:13] Anthony: Yes, I guess, I guess one thing there is, if you’re listening to this and you’re like, I want to invest with you guys still. And like, let’s go into St. Paul, let’s get in there. We’ll bring in. Yeah, we’ll figure it out, but that’s going to do it for us guys. That is the rent control update. Not it’s been eight months, but not much update.

Maybe not even six months got one bullet point. That’s all that the city has managed. So good luck and Godspeed to them. Uh, if you enjoyed the episode, go leave a review. Go. Um, Let us know what you think about when controls and we’ll see them. The next episode.[00:11:00] .

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