What You Need to Know About the Rent Control Ballot ResultsNovember 5, 2021 by Paul Begich
One of the major issues in the recent elections was a vote for or against rent control in the cities of St. Paul and Minneapolis. I’m going to break down what you need to know about rent control in each city, how it could affect the rental real estate market, and opportunities for investors given the outcomes.
First, it’s important to note that TWO votes occurred—one for the city of St. Paul and one for the city of Minneapolis. The outcomes of each are similar in that the rent control vote “passed,” but the results that we’ll see are probably very different.
St. Paul Votes in Favor of Rent Control
The St. Paul rent control ballot question was APPROVED on November 2.
The basic premise of the rent control policy in St. Paul was that landlords will be limited to a 3% increase in rent, year-over-year, regardless of a change in tenant occupancy. Meaning, if a unit is renting for $1,000/month and that tenant signs on to another 12-month term, the maximum allowable rent becomes $1,030 (a 3% increase). Likewise, if that same apartment goes vacant, and a new tenant elects to occupy the property, the maximum allowable rent is still only $1,030/month (a 3% increase from the last occupant).
This cap on the increase in allowable rent regardless of a change in occupancy makes St. Paul’s rent control policy one of the strictest, if not THE strictest, in the nation. Pair that with the lack of exemptions on new builds (typically apartments built after 1980 do not have the same rent control rules in other parts of the country), and you’ve basically ensured that the city of St. Paul receives ZERO new development for many years to come.
This new rent control policy, to my knowledge, does not go into effect until May 1, 2022.
Short-Term Implications in St. Paul
The first thing I did on Tuesday morning was call a handful of apartment owners in St. Paul and asked them one question, “How are you going to move forward from here?” The resounding answer was, “We have a tough decision to make.” Because the policy doesn’t go into effect until May 1, these apartment owners are now in a predicament. Do they bring the units that are on a month-to-month lease up to market value OR do they keep them as is and run the risk of NEVER being able to bring their units up to market value, regardless of a sale or not?
Although the news and media outlets may cast a different light, many of these mom-and-pop apartment owners are great people. They’ve owned their brick brownstone on Grand or Summit Ave. for decades, and they have tenants who have been with them for 5, 10 or even 20 years. These residents become a part of their family. They know where they work, the names of their kids (or grandkids), and their favorite local restaurants. These same apartment owners will often elect to keep rents low for these residents, citing a reduced vacancy rate as being better than increasing rents and potentially having a great long-term resident move out.
But now, these owners have a tough decision to make. Do they increase rent to $2,000/month, up from $1,000/month because they’re thinking, “If I don’t do it now, I’ll never be able to bring rents back up to market value”? This puts tenants AND apartment owners in a challenging position. I’m of the belief that long-term residents of St. Paul—the same residents we’re trying to protect with rent control—are those who are going to be the MOST affected over the next 6 months.
Opportunities in St. Paul
I’m not for or against rent control; I move with the market. Whatever the market does, I pivot and capitalize regardless. I’m seeing rent control being passed in St. Paul as an IMMENSE opportunity for apartment buyers.
Over the next 6 to 12 months (and beyond) there are going to be a lot of long-time apartment owners saying, “You know what, I’m done with this. I don’t want to deal with this anymore.” And that’s when and where my buyer clients are going to capitalize.
Can YOU learn to navigate this new rent-controlled market of St. Paul?
Can YOU see the silver lining here and still run an effective business?
Can YOU still provide residents with a great living experience?
One thing I know to be true is that the successful people in my life are persistent, resilient and determined, regardless of what’s going on around them. This is a time in St. Paul where the bold and determined are going to see an amazing opportunity to build wealth. And it will also be a time for owners of rundown and outdated apartments to step away from their properties.
In closing, I’m VERY excited about the opportunities to BUY property in St. Paul over the coming months and years.
Minneapolis Gives Power to City Council on Rent Control
The Minneapolis rent control ballot question was also APPROVED on November 2, BUT the results are different than what’s happening in St. Paul.
The vote in Minneapolis, to my knowledge, has now given the power to Mayor Jacob Frey and the City Council to enact their own version of rent control. Does this mean that Minneapolis will see its own rent control policy? It’s tough to say. Especially since Mayor Frey has come out against rent control.
Short-Term Implications & Opportunities in Minneapolis
I’ve come to learn that real estate can be a very reactionary business. If a news outlet reports that the city of Minneapolis is unsafe and no longer fit for residency, people will go running for the hills. Which is exactly what happened last year during the city’s social unrest. (By the way, this has long since changed.) And now, we’ve got a vote for POTENTIALLY instituting rent control in the city, and you know what? I bet people are going to run for the hills.
Just like St. Paul, I see the short-term effects of this vote being an opportunity for buyers looking to purchase apartment buildings. Many of these brick brownstones, early 1900s construction, Class C apartments are owned by people in their 50s, 60s and 70s. These are owners who watch the nightly news. These owners are immensely concerned about the safety of the city. And these are owners who are now going to be freaked out by the talks of instituting rent control.
This may be a contrarian belief, but I just don’t see rent control—EVEN IF IT GETS INSTITUTED—as being a bad thing. The University of Minnesota responded to the city of Minneapolis’s request for more information on the matter by highlighting the effects of such a policy. That can be viewed here. The webinar doesn’t go into detail about the long-term effects of instituting a rent stabilization program, which I believe will have a negative effect on the supply and affordability of the housing market. It does accurately show the immediate impact to both apartment owners and residents and determined that even the strictest policies would NOT affect an overwhelming majority of owners.
With this information in mind, and the negative sentiment long-time apartment owners are currently feeling, I’m of the belief that over the next 6 to 12 months we’re going to see a potential buying spree in the city of Minneapolis. If you want to get in the game, now is the time!
I’ll leave you with this…
If you’re persistent, determined, and can see the forest for the trees, then NOW is the time to consider multi-family investing. If you’re scared, skittish and reactionary to the market, then now is the time to get out (and sell your apartment building to Emily and me!). The opportunities that are going to be presented over the next year are simply too good not to get in the game—or level up if you’re already in the game.
Oh, and we didn’t even talk about inflation and why now it’s probably more important than ever to be investing your capital as opposed to leaving it in the bank where it’s losing value. Maybe we’ll touch on that in another post.