Rent Control

Rent control means laws capping the rent a landlord may charge or how quickly it can go up, often with limits on eviction as well. For a cap rate buyer it caps the growth of NOI, which changes both the cap rate buyers will accept and the upside of any below-market leases.

Cap rates partly reflect expected growth: investors accept a lower yield today when they expect NOI to climb. Where increases are capped at a fixed percentage or tied to inflation, that growth is limited and buyers may ask for a higher cap rate, which means a lower price for the same NOI.

Rules differ by state and city, and many exempt newer buildings or single-family homes. Before counting on raising a below-market rent to rental value, confirm what the local ordinance allows. A rent increase that cannot legally happen should not be in the pro forma.