- November 1, 2019: Vol. 31, Number 10

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Investing in rent-controlled apartments

by Randall Zisler

Is it possible to invest successfully in rent-controlled apartments? Not all rent controls are alike, and profiting from rent control depends on the details as well as the timing. Consider an example: Rent control operates in the presence of asymmetric information. How can landlords exploit this market imperfection? Landlords prefer to rent to tenants who stay in an apartment for only a short time because the landlord has the option to adjust the rent upward if the tenant leaves. Tenants, however, have little incentive to reveal their tenancy preference.

Some investors have acquired rent-controlled apartments in jurisdictions that permit the re-establishment of market rents when the tenant defaults or vacates. This control is limited to the duration of the tenancy. These investors realize a higher return if more tenants vacate. Hence, landlords may prefer short-staying tenants. The problem is tenants may have no incentive to reveal their preference for the length of tenancy.

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