Rent Control Rehab for the Well-Heeled

For those who don't need it, rent control can become an addiction, resulting from too many years of a sweet deal. It can leave the real estate muscles paralyzed and the investment portfolio sick. "Penny wise" might have a "pound foolish" problem.

Don't get me wrong. I'm not talking about those who live in rent-controlled apartments because they cannot afford to move; I'm referring to the thousands of well-heeled ones. The affluent --with greater job stability—move less frequently than the needy, thus retain the treasured units. Those who can least afford it must re-rent at higher rates.

I stumbled upon this "housing disorder" as a Los Angeles Realtor, when encountering dozens of well-to-do Westsiders tucked away in dilapidated rent-controlled apartments, determined to stay for the appealing price tags. Landlords have no incentive to make improvements when they collect rents below market-rate.

It didn't matter that these tenants had higher incomes than their landlords, qualified three times over for a loan, or possessed the down payment to purchase rentals of their own. It didn't even matter that they were losing thousands of dollars in tax write-offs and hundreds of thousands in equity. They were proud bingo winners, and under no circumstances would they sacrifice that for a bigger pot.

Three years ago, I almost convinced Anne to buy. She was living in a $509 per month rental in West L.A., having assumed a new identity in order to dupe the building's owner. He still thought Gwendolyn--who lived there prior to James, Henry, Erica and now Anne —was the tenant. Most L.A. landlords cannot raise the rent more than three percent a year until the unit becomes vacant; and some tenants succeed in pretending they are someone else just to keep the price low.

Anne refused to buy the $280,000 townhouse in Burbank we had selected for her purchase. First, it was in the Valley, and many Westsiders have convulsions about investing "over the hill." Secondly, she planned to put tenants in her new place, but worried that they couldn't be trusted.

"Now why would you think that, Gwendolyn? Sorry, I mean Anne."

That townhouse is now worth $550,000, a loss of $270,000 in equity, and her apartment—where she remains a psychological prisoner--has saved her a grand total of $18,000.

To date, Lindy is the only "rent control client" who has closed an escrow with me. In 1993, she agreed to abandon her unit in Santa Monica in order to buy a six bedroom, tennis court estate for $600,000. To afford the mortgage, she rented rooms, transforming the property into a virtual dormitory. The income sustained her unemployed status until 2004 when she sold the property for $1.8 million.

Property values have risen an average of 425% in California since 1980 and 115% in Los Angeles since 2000. If you have the means, escape the "perpetual tenant syndrome" and enter the rent control rehab program before it's too late.

Got property?