#297 Rent Control and ADUs

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Rent control can have a negative impact on the people it’s suppose to help. Simply put, investors don’t want to build new housing stock in places that are less profitable.

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Show Transcription:

Eric Worral: (00:00)
Hey everybody. Welcome back to another episode of RentPrep for landlords. This is episode #297 and I am your host Eric Worral. And today we are going to be talking about investing in real estate after rent control. So as you know from listening to previous podcasts and also just stand up on the news, rent control is starting to be the new thing, right? It’s a statewide in Oregon, California, in New York state, which those are some pretty large States and it’s starting to grow out in other cities as well with their own specific regulation. So we’re going to be taking a deep dive into what investing looks like with these changes in rent control. We’re going to get to that right after this.

Voice Over: (00:42)
Welcome to the RentPrep for Landlords podcast and now your host, Eric Worral.

Eric Worral: (00:47)
So today’s podcast is mostly focused on an article written by a friend of RentPrep, Joseph Edgar, who is the CEO of Tenant Cloud, which is also a partner of RentPrep’s where we handle a lot of their tenant screening for their clients on their platform. And he wrote this article on Forbes.com titled, Investing in Real Estate After Rent Control. So I just wanted to read some of the article for you and then kind of talk about some of the thoughts of it and where things might be headed and what might be missing from the article if there is anything at all. But just a few paragraphs at a time. Saying that rent control has become a popular topic and is making its way across the country. Oregon, California in New York have all have statewide rent control policies in place while other States are considering rent regulating legislation.

Eric Worral: (01:32)
Now he believes Joe says that controlling rent prices will do nothing to help the actual problem, which is that there aren’t enough rental properties on the market to support those looking. Makes sense, right? A supply and demand. There’s a way more supply than demand. And he lists some stats here to support his argument. And an interesting thing about this article is I started reading it cause I’ll read these different articles and I’m like, well, I’m not going to share something that’s pretty obvious or that I’ve already heard about before. But I’ve never heard the term I believe it’s 80 use as in Apple, D as in dog, U as in university. So we’re gonna get to that in the podcast on what that is. But in the meantime, we’re just gonna break down rent control a little bit further.

Eric Worral: (02:18)
Where Joe wrote here that in 2016, home drop to a low, not seen since 1965. That is a long time. That’s 51 years. If my math is correct. So report from Turner center at UC Berkeley States that there were nearly 600,000 fewer owner-occupied units in 2015 than in 2006, pointing at the foreclosure crisis as a catalyst for the shift in suburban homeownership, which again, makes sense. I mean, you have a, a real estate crash, people are going to lose your houses automatically. But then there’s also a fear that people may have that it could happen again. People who grew up in the great depression tend to not spend as much money. You know, your past events and things that happened to you shape and mold your future behavior basically. So instead of buying more people are renting than ever before in a large share of the growth in rental housing has been in single-family structures as the number of renters rise.

Eric Worral: (03:12)
However, it will be harder to keep up with the demand. So many States that passed rank control are coming to discover the air and logic and have become part of a growing base looking to combat the underlying cause of higher rent increases. The underlying cause of course is the supply of rentals on the market. The more rentals there are in the market, the lower rent prices will go. The inverse with fewer rentals on the market is also true that there are few rentals available. And the ability for rent to increase is limited by ranking control and it will limit rental property investors from wanting to build more rentals and therefore limit supply even more, putting more pressure on prices to increase, you know, makes sense. Because basically what he’s saying is when you put these rent control measures in place, that you’re kind of limiting the upside for investors who build new properties, who are going to say, why am I going to build new properties when you’re capping my potential returns on these rents?

Eric Worral: (04:07)
It’s not worth it for me. So you’re further reducing the supply of rentals that people can choose ramen. Like he said making it so that the prices are higher. So he says that that’s where accessory dwelling units or ADU use come in. And this is new to me. So this is really what I wanted to cover this. I said the single-family rental market that was one synonymous with standalone homes is now transitioning into duplexes to deal with the issue of limited housing supply. We can see an increased popularity of accessory dwelling units or ADU is in which a single-family home can be converted into more than one rental 80 user focused on leveraging current supply to increase the number of units in a market at a faster rate and therefore increasing overall supply in an effort to flood the market with Reynolds and thus lower the price of rent, divide the one single-family rental into multiple rentals, help solve the crisis surrounding limited housing.

Eric Worral: (05:00)
But the problem has been that many States had laws in place to prevent this kind of renovation. So I’ve heard of this concept before, obviously. I mean it’s nothing new as far as splitting up a rental and you know, trying to turn it into a two-unit, which was the one unit or two and two or three. You know, the, some people do this too with like a, they’ll have a unit above a garage cause their space there or something like that. But I’ve never heard it referred to as an ADU or an accessory dwelling unit. So maybe you learn something new on that as well. So he says that’s beginning to change though. As far as the state’s laws, he said that many States are telling their laws to support the transition of single-family homes into 80 years. So like Oregon, for example, it was one of the first States to implement rent control and now it’s setting a new trend by allowing 80 use in more locations statewide.

Eric Worral: (05:45)
The city of Austin, Texas also has created policies support 80 use in an effort to increase the supply of affordable housing across the community. So with changing ADU laws comes new opportunities for real estate investors when looking for an investment property, step back and look at the whole picture. Can you turn one home into three separate rental units? So he gives a couple of ways that you can do this here. And I do want to kind of circle back though as far as you were saying, new opportunities. Because anytime there’s any kind of legislation change that has to do with a market that you’re in, you know, you gotta kind of take a moment and sit and look at it and see if there might be an opportunity that, you know, you could be an early investor in. So I think that’s what he’s getting at with this is that if you, you know, are looking at a city who has a, a bunch of rentals and all of a sudden they changed the laws on 80 use.

Eric Worral: (06:32)
Well there might be a bunch of properties in there that would match up well for that strategy. And you can go in and buy, you know, for single-family homes and turn them into eight property or eight units. And obviously you can get a pretty good return on your dollar while also increasing the rental supply, which will help people who are having trouble finding a place to live. So the first strategy he talks about the great divide, probably the one that most people would think of if you’re trying to split up a unit is you actually turn a single-family home and into a ADU by putting a wall up in the house that would allow full separation. The units, this is often done by finding a bathroom. You can divide into two to create a second bathroom for the other unit. ADU is are typically 500 to a thousand square feet.

Eric Worral: (07:14)
So an even divide is not the goal. Instead, think about places where you can carve off a small portion while still making the main house attractive to a family. Not all houses have the floor plan to make this work, but many do. So the second way he describes her as the townhouse method, which is taking a two-story home and dividing it horizontally with one upper unit and one lower unit, it could be easy a way of converting a home into a duplex. From there, you can move the staircase to the outside and install an entry door at the top. This can provide additional square footage where the interior staircase once was inside and the plumbing issue is usually already solved. Since most two-story homes have their plumbing systems upstairs, you will need to check into updating the HVAC system. But I have found that cost of renovations combined usually ends up being less than you will gain from renting out multiple units.

Eric Worral: (08:03)
So yeah, if you ended up having to drop 10 grand into renovating a to make it into the townhouse, into a two-story you know, split you’re probably gonna get that back in a year or two and then you’ll be making even more profit. So the third method he mentions here is the backyard. And I talked about the fact that a backyard rental allows great cost savings. The landscaping is mostly done and adding a 600 square foot home can be very affordable given the additional rent the property can provide. So to limit the impact on yard space, investors often choose to make the new unit two-story structure. And sewer hookup is usually the most important thing to consider in a backyard. ADU since it may require a trenching from the front yard to the back in order to get into the new unit connected.

Eric Worral: (08:47)
So state laws in many areas prohibit building a secondary dwelling on your property. So make sure to check with local code before you go this route. But again, if are looking at investing in a place and the real estate itself is very valuable the in they open up, the law is on AWS and suddenly you’re able to build on that land you might have an additional opportunity there. So real estate investors have been faced with ever-increasing crises across the country and I’ve seen very little innovation in the industry. The cost of investment properties can deter, would be investors from getting started. 80 use provide a new way to look at real estate and a more affordable way to get started. They’re also an effective way to add much-needed housing inventory to the market in high-density areas. Yeah, I really, really enjoyed this article from Andro Savegre.

Eric Worral: (09:35)
And I think it brings up some really great points. Some of them have heard before as far as, you know, the issues of rent control and how [inaudible] just an exasperating the problem that people are facing. But I haven’t heard it put it in this way of you know, if you’re going to do that, maybe do you gotta instead of doing that, try things like splitting up and long people that split up single-family homes into multiple units. Don’t be so strict on those laws and be able to you know, take the opportunity as an investor to see that and be ahead of the curve and figure that out for yourself. I thought this was a great article. Really enjoyed it and hopefully, you guys learned something too. Always a nice learning, something new about the industry. So yeah, that’s all I got for this week, guys. But yeah, I hope to catch up with you next week and hope you have a great week. Take care.