exposing the dark side of rent control...

What's up you guys! It's Graham here. So I'm gonna go on a limb and make this video, and I realize that it's a bit of a risky topic for me to be discussing: rent control, just given the complexities of the situation. But let's give it a shot! I'm also gonna try to make this video as fair-sighted and even balanced as I can, given that I am a landlord who rents to both rent control tenants and non-rent control tenants. I truly believe that rent control is a flawed system and approach.

I also speak about this with personal experience, coming from someone who's seen a lot of real estate over the last decade, and also from someone who grew up in a lot of these areas that ended up gentrifying like crazy, namely Venice Beach. For everyone out there who's pro-rent control, I really believe that this video could possibly change your perspective and maybe even offer a greater solution where everyone is happy. And if this doesn't change your perspective and you don't agree with what I have to say, that's fair—we're all entitled to our own opinions, and that's what makes the world go round. As long as you make sure, though—still smash that like button!

Let's get into the video. So let's first start at the very beginning, and that is by defining what rent control is. This is pretty much just a government-enacted regulation that limits the amount that a landlord can increase the rent on the tenant annually. The reasoning behind this is pretty straightforward, and it's really just to balance the inequality between landlords and tenants to create a minimum set of rights to make the market fair. It's really to prevent long-term tenants from being priced out of the areas, as they generally just improve and get more expensive over time.

Now, as of right now in Los Angeles, any units built after 1978 are exempt from rent control. This means that the landlord can increase the rent to whatever they want for whatever reason, or they can evict the tenant with 30 to 60 days notice, again for any reason. However, units built prior to 1978 are covered under rent control. This limits the amount that a landlord can increase the rent every single year, and is usually limited to somewhere between 2 and 3 percent annually.

This also means that the landlord cannot evict a tenant unless the tenant specifically breaks their lease or the owner wants to move in as a primary residence. However, as of right now, when a current rent control tenant leaves, the landlord could then go fix up the unit, charge market rents, and then whatever the baseline is of what rent control starts at is now reset at newer, higher levels.

So now let's get some of the facts and figures out of the way, and I will be the first to admit, even as a landlord, that rents in California are way too high. Studies have shown that 58 percent of tenants are paying more than one-third of their income on rent. In fact, a 2015 Harvard study even concluded that one-third of tenants are paying more than 50 percent of their income on rent. Now we can all agree that is absolutely ridiculous.

So how can we solve this mass epidemic and evictions from lower-income tenants? Now, previously the solution was enacted for rent control—basically just put a cap on the amount that the landlord can increase a tenant's rent, and then a tenant won't have to worry about the soaring costs of housing. Now, in theory, this seems like a reasonable solution, and we can say: problem solved, right? Well, not really, because this is more like putting a band-aid on a wound that should have really been operated on and stitched up.

Let me explain. Now, there are very few things that economists agree on—both liberal and conservative—and I don't get into politics whatsoever on this channel. But what I found interesting was the mutual consensus that rent control does not help with housing affordability. A 1992 poll of the American Economic Association found that 93 of its members agreed that a ceiling on rents reduces the quality and quantity of housing.

A Stanford study has argued that rent control actually has an adverse effect on prices for renters and actually works against making housing more affordable. The study looked at two groups of housing: one built after 1980 and one built prior to 1980. The former was not rent-controlled; the latter was rent-controlled. Now, here's what they found: 20% of tenants were more likely to stay in their unit because it was rent-controlled, while others were more likely to move and live somewhere else if they didn't have the incentive of having the rent capped where they currently live.

Now, in the most expensive areas, they actually found that had the highest turnover as landlords actively tried to get their tenants out of their leases to try to get market rent. It was also found that landlords of rent-controlled buildings were more likely to convert their units into something that didn't fall under rent control, thereby reducing the housing supply an additional 15%. And at the end of the day, it was found that the loss of more available housing ended up driving up the price of rent.

It was discovered that a six percent decrease in housing ended up leading to a seven percent increase in rent. The end result is that, based on these studies, rent control ends up restricting the amount of new housing coming on the market. Now, while some tenants out there might get a total bargain and win the lease agreement lottery, most people never get access to low rent-controlled prices, and if they do, they're incentivized to never move out because it's so cheap—further lowering supply. This ends up removing a huge chunk of otherwise available housing, where all of a sudden, the demand stays the same, housing supply restricts as people don't want to move, and prices just end up continuing to skyrocket.

You might just be asking to yourself now: what about just building more housing? Well, in some states, property developers are disincentivized to create multi-family housing because they realize there's no money in it if they can't raise rents as the market demand increases due to rent control. So instead, they just end up building high-end luxury units. This way, developers end up making the most money, and the people who have the money to spend on it, who never needed rent control to begin with, end up getting the best supply of housing.

In San Francisco, it has been found that many older rent-controlled apartments were then converted to condominiums to sell to wealthier residents, thereby continuing to worsen the supply of housing. Now, in terms of city revenue, it was also found that rent control decreases the amount of revenue that a landlord pays in taxes because the landlord is receiving a smaller amount in rent. It's also found that lower rents also meant lower property values, which meant lower property taxes and less revenue for the city. And this type of tax revenue is vital for a city to maintain its parks, roads, streets, sidewalks, lights, and communities.

Now before I get into my proposed solution to all of this, which by the way—Graham for President!—I’m gonna share my purely anecdotal stories and experiences: both for and against rent control from what I've seen firsthand. So my mom and I used to live in Venice Beach before GQ named it the coolest block in America in 2012.

So my mom and I lived here from 1995 to 2007. This was before Google moved in, before Snapchat, before all the tech companies, and before it was even called Silicon Beach. It was just referred to as Venice. Now, this is the type of area that, when I was in middle school and high school, I was embarrassed to bring friends back because of how bad of an area it was. You would go to my place and all of a sudden there would be a homeless person out front just shooting up drugs. There would be prostitutes walking up and down the street, there would be trash everywhere, and believe it or not, there was a lot of gang activity.

So you drive down any alley in Venice, and you'd usually see a whole bunch of tagging, and usually some really scary-looking people hanging out at like 2 a.m. These residents weren't rich by any means, and Venice was not an area that many people wanted to live in. But once the tech companies began moving in—mostly because it used to be a quiet beach town—they brought with them a lot of wealthy employees.

These employees began buying up housing, and because supply was so limited, prices began to skyrocket. As prices increased, other investors wanted in and began buying up even more housing, and eventually, the price of a 773 square-foot house sells for 4 million dollars. In the process, I have seen Venice go from a dilapidated, drug-infested artistic sanctuary into a tech millionaire's playground.

But I have also seen Venice lose its authentic, free-spirited hippie vibe that made people want to move there in the first place. Many longtime residents who moved there because it was a beach sanctuary ended up needing to move because prices simply got too high. All of a sudden, the rent control tenants—lucky enough not to have their rent increased—could no longer afford to do the things they once used to.

They can't go down to Lucky's grocery store and spend $20 on groceries when now it's an era where it's $80 for avocados, a kale salad, and organic fruit. They can't go down to Joe's coffee shop and spend a dollar on coffee when all of a sudden now it's Blue Bottle coffee and that same coffee is now six dollars and fifty cents. Even though rent may have only gone up three percent, everything else has skyrocketed in price around them to reflect the newer, wealthier demographic.

But here's what actually ends up happening—no studies, no economic predictions, just what I've witnessed firsthand. Now, the first thing is that landlords of rent-controlled properties have no incentive to fix up their units whatsoever. If they have a tenant that's paying below market rent, the reality is that the landlord just wants that tenant gone. Because of that, they will do the bare minimum to keep the unit habitable and nothing else, hoping that eventually the tenant will get fed up and leave, allowing the landlord to rent the unit for market prices.

Well, this means that generally, rent-controlled units are simply falling apart. Now, I have seen this also firsthand, where one block is rent-controlled and one block is not. The difference between both blocks is staggering. On one side, you have the non-rent-controlled units and they're all manicured lawns, well taken care of, freshly painted—paint isn't peeling, it looks nice.

Literally one block away, the difference of rent control is that all of these units are falling apart. There's trash everywhere, lawns have gone to dish, it looks terrible, and that is the difference between one block—one being rent-controlled, one being not. Secondly, when it comes to owning real estate, ultimately at its core, it's a business, and a business is driven by profit and money.

Landlords will really end up spending whatever it takes to end up improving their property if that means that they can get a decent return on their investment. But when that incentive is taken away, landlords have no reason to go and fix up their property or make it nicer than they should, knowing that whatever money they spend is not going to lead to any productive ROI. So therefore, they usually just end up not doing anything.

Now, third, my own personal experience is that oftentimes rent control doesn't necessarily benefit the person who's most in need; it benefits the person who is lucky enough to get a lease agreement signed at a time in low rent, and have the entire area surge up in price—regardless of how much money that tenant makes. Now, another anecdotal story here was that in 2011, I wanted to buy a 2-bedroom top-floor condo in Santa Monica that overlooked the beach. The owner was trying to sell this unit for four hundred and fifty thousand dollars, which, when I saw this, I thought: what's up with this? Because every other unit in this building is selling between six hundred and fifty thousand to eight hundred thousand dollars.

Why is this top-floor unit only selling for four hundred and fifty thousand dollars? The reason why was because there was a rent-controlled tenant living in that unit that cannot be evicted under any circumstance. Even worse than that was that her ex-husband was also on the lease and he couldn't be found. So even if you got rid of that tenant, or she moved out, her ex-husband can always come back at a later date and claim a rental ownership of that property.

But the problem here with this rent control tenant is that she was only paying six hundred and fifty dollars a month in rent. So then you have to look at it from the perspective of how much would it actually cost me if I wanted to go and buy that unit at four hundred and fifty thousand dollars? Well, your mortgage alone would be $1,600 per month. Your property taxes would be an additional four hundred and fifty dollars per month, and the HOA cost for the building was an additional three hundred and fifty dollars a month.

You also have an additional fifty dollars a month for insurance, which brings the total cost of owning this unit to twenty-four hundred and fifty dollars every single month. And then you have a tenant that's living there paying six hundred and fifty dollars every single month. This means that for anybody who is going to buy this unit, they're gonna be at a loss every single month for $1,800.

I guess what's surprisingly— or not surprisingly—no one wanted to buy it. The owner even offered the tenant two hundred thousand dollars from the proceeds of selling the unit if she were to agree to leave, and guess what? The tenant said no. Eventually, the owner literally ended up letting this unit go into foreclosure because he couldn't afford to continue making the payments and couldn't afford to take the loss every single month.

Now in return from this, from the tenant's perspective, she has lived in a unit that has not been updated since 1970. The landlord has not fixed a single thing in hopes that the tenant would just get fed up and leave, but the tenant ended up making so much money that she would just fix up the unit herself. This is a tenant who made in the low six figures annually, who could easily afford to pay $3,000 or more in rent, but simply chose to stay because where she was at right now was cheap.

This also allowed her to save a lot of money in the process at the landlord's expense. Now, I totally understand that that was a very extreme example, and I'm sure if we looked, we can find examples of people on the totally opposite side of the spectrum that really needed rent control. But the reality is that rent control is often very widely used by people who don't necessarily need it, who simply view it as a way for them to lock in their rent and save money at the landlord's expense.

I've also seen many other extreme cases where landlords have chosen to keep their properties empty and vacant because they eventually want to sell and don't want to be limited by having a rent control tenant. And again, this further restricts the supply of housing, where I've seen many other landlords choose to Airbnb their property instead of renting it to long-term rent control tenants, which again further just restricts supply.

Now, this is a very complex situation, and there is definitely not a one-size-fits-all approach that will solve all of this in a way that everyone is happy. But these are a few of my thoughts and ideas. See, anytime you have an issue, the first thing you need to do is find out what's causing the problem so you can address it head-on rather than by addressing the symptoms of it.

So what's causing this? And here in California, the real reason is that we have a lack of supply—there's simply not enough housing to go around. So you have more people competing for fewer units, and thereby the prices are simply driven up. Now, rent control protects certain tenants from being priced out, but at the expense of landlords who then become disincentivized from owning or improving their units, restricting supply, causing the root of the problem in the first place. So it becomes this vicious never-ending cycle.

So what do I think is a very reasonable solution to this complex situation? And again, let me say that this is not a one-size-fits-all approach. With any solution, someone is bound to be unhappy by it or not approve of it, but this is what I think we desperately need: more housing inventory and looser building regulations.

Here in Los Angeles, at least, zoning prevents us from building more dense housing because we are really focused on the single-family residence. Most of these areas here in Los Angeles do not allow for anything other than a single-family home on a lot.

Now, I totally get and respect that. I understand that we don't want to become a New York, where all of a sudden you have a bunch of skyscrapers coming out of residential areas. I get that. But I do think that we should allow for more loose zoning regulations around freeways, Expo lines, train stations, things like this, that would allow for us to build maybe three to six stories around populated areas.

And I feel like this would be a win-win for everybody involved. First, they would allow for more units to be built that help alleviate some of the housing shortage. Second, investors would love this because now they can build a multi-family building on something that would previously only be a single-family residence that wouldn't produce enough income.

And third, for people who live in these areas, their property values would simply skyrocket because all of a sudden, their land becomes more valuable to developers. To me, this at least seems like the perfect scenario, and I would love if this were to happen to one of my properties, and all of a sudden I can build six units. I would love that!

When you have such a shortage of inventory and so many people wanting to move in, one of two things happens: either government enacts rent control and caps the limit and what you can charge a tenant, or number two, you simply build more units.

Now, simply telling people that if you can't afford it, you should leave—if you can't afford Gucci, don't buy Gucci. No one is forcing you to live here—that isn't really the right approach to this either. We can't just force people out of their homes because prices went up without having an ill impact on our entire community. We're all people, and we all deserve the chance to be treated fairly.

But at the same time, putting a cap on rents and controlling what a landlord can charge isn't the answer either. Creating more housing and loosening zoning regulations to help alleviate the housing shortage is, in my opinion, the right solution. I could be totally wrong. Let me know in the comment section below, but this is what I think.

Now in order for this solution to work, we need to put our focus on changing zoning regulations to allow for more housing, not putting restrictions on what a landlord can charge a tenant. So for all of you in California, let's make sure to vote no on Prop 10, and let's devote our time, resources, and energy into addressing the real root of the problem, which is simply just a shortage of inventory.

So let's allow for more housing, let's change zoning, let's allow for more multifamily buildings, and let's incentivize landlords to actually create housing that they feel they can get a fair return from while also treating tenants fairly. So with that said, you guys, thank you so much for watching. I really appreciate it! This is a long video—just gonna say, like, subscribe, add me on Snapchat, Instagram, and until next time!