Rent Control and Rent Caps: What Apartment Investors Check

Rent control and rent caps limit how much a landlord can raise rent for a sitting tenant, so they can cap the rent growth an apartment business plan depends on. Oregon, California and Washington each have a statewide annual cap with an exemption for newer buildings, some cities add stricter local rules, and some states, such as Florida, bar local governments from adopting rent control at all. Before you invest, confirm which rules apply to the specific building and check that the pro forma's rent increases fit inside them.

What is the difference between rent control and a rent cap?

The terms are often used loosely. In this article, rent control means a local ordinance that sets how much rent can rise, often with its own board, registration and exemptions. A rent cap (sometimes called anti-gouging or rent stabilization) means a statewide ceiling on annual increases for existing tenants, usually with exemptions and a formula tied to inflation.

The distinction matters because a building can be covered by both. California's Attorney General notes that units covered by a local rent control ordinance that is more protective are outside the statewide Tenant Protection Act, and that local laws may further restrict increases (California Attorney General). Your due diligence has to start with the building's address, not the state.

Which states have statewide rent caps?

Three West Coast states have statewide caps in their landlord-tenant statutes. The summary below comes from the statutes and the state's own guidance; read the current text, because the formulas and exemptions are amended from time to time.

State	Law	Annual limit	Main exemption for newer buildings
Oregon	ORS 90.323 and 90.324	Lesser of 10% or 7% plus CPI (West Region), published each year by the state	First certificate of occupancy issued less than 15 years before the notice of increase
California	Civil Code 1947.12 (the Tenant Protection Act, AB 1482)	Lesser of 10% or 5% plus the change in the cost of living, over 12 months	Certificate of occupancy within the past 15 years, on a rolling basis
Washington	RCW 59.18.700 and 59.18.710	Lesser of 10% or 7% plus CPI (Seattle area), published each year by the state	First certificate of occupancy issued 12 or fewer years before the notice

Other rules sit next to the cap. In Oregon, a landlord generally may not raise rent in the first year of a tenancy, must give 90 days' written notice, and may raise it only once in any 12 months; a landlord that exceeds the cap is liable for three months' rent plus actual damages. Washington bars increases in the first 12 months of a tenancy, and its section is set to expire on July 1, 2040. California's Attorney General explains that a landlord may set the initial rent when new tenants move in.

Each law also has exemptions beyond building age, such as certain regulated affordable housing. A building that is mostly exempt today may not stay exempt: the California exemption is rolling, so units come under the cap once the building passes 15 years.

Can a city add stricter rules, or block them?

Yes, both happen. In California, local ordinances that are more protective than the state law continue to apply, according to the Attorney General's guidance. In Oregon and Washington, read the city's code as well as the state law.

Other states go the other way. Florida's statute says a municipality, county or other local government "may not adopt or maintain in effect any law, ordinance, rule, or other measure that would have the effect of imposing controls on rents" (Fla. Stat. 125.0103). Several other states have similar preemption laws. Preemption can change with a new session of the legislature, so check the current statute for the state where the building sits.

How does a rent cap change the underwriting?

A cap mostly affects renewals. If a sponsor plans to raise rents on existing tenants faster than the cap allows, the plan has a gap. That matters most for a value-add business plan that counts on bringing below-market rents up quickly, and less for a stabilized building where rents already track the market.

A made-up example. A 40-unit building in a capped state has an average rent of $1,400 a month, or $672,000 a year. The sponsor's plan assumes renewals rise 12% next year. Assume, for illustration only, that the cap for that year works out to 8%.

Assumption	Annual rent	Increase
Current rents	$672,000
Plan: 12% on renewals	$752,640	$80,640
Cap: 8% on renewals	$725,760	$53,760
Gap		$26,880 a year

If the market valued the building at a 6% cap rate, $26,880 of income would be worth $26,880 / 0.06 = $448,000 of value. The numbers are illustrative and ignore turnover, which can reset rents on units that change hands in California and Washington. They show why a few percentage points of rent growth matter. See rent growth assumptions for how to test the rest of the pro forma.

Ask these before you commit:

Which rent laws apply to this address, state and city, and is the building exempt? If it is exempt by age, when does the exemption end?
Does the pro forma's renewal increase fit inside the cap for each year of the hold, using the published cap and not a guess?
How much of the rent growth comes from turnover rather than renewals, and what turnover rate does the plan assume?
What happens at exit? A buyer will underwrite the same caps, so the exit cap rate and price should reflect them. See what is a good cap rate.
Is there pending legislation in the state or city that could change the rules during the hold?

A sponsor who can answer these with citations has done the work. Also read the rent roll and T-12 to see how far current rents sit below market, because that gap is what a cap slows down.

How DoorRaise fits in

DoorRaise helps sponsors raise equity for apartment buildings with 5 or more units under Rule 506(b) or 506(c). It prepares the standard offering documents, files Form D and state notices, and holds investor funds in escrow at Enterprise Bank & Trust, an FDIC-insured bank. DoorRaise does not underwrite deals or check local rent laws; the rent assumptions on a deal page are the sponsor's statements, and investors should test them.

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FAQ

Does a rent cap apply to new tenants?

Generally the caps limit increases during a tenancy. California's Attorney General says a landlord may set the initial rent for new tenants, and Washington's statute allows any adjustment after a tenant vacates. Oregon limits the next rent only when a landlord ended a tenancy without cause in its first year. Check local rules too.

Are new apartment buildings exempt from rent caps?

Under the three statewide laws, yes for a time: 15 years from the first certificate of occupancy in Oregon and California, and 12 years in Washington. Local ordinances can differ.

Which states ban rent control?

Some states preempt local rent control by statute. Florida is one example (Fla. Stat. 125.0103). The list changes, so check the current law in the state where the building sits.

Does rent control lower a building's value?

It can limit income growth, and value follows income. How much depends on how far rents are below market, turnover and the buyer's view at exit. Ask the sponsor to show the math.

Next step: read how to vet a real estate syndication for the full list of checks before you invest.

Sources

This article is general information, not legal, tax or investment advice. Talk to your own attorney about the rent laws for a specific property before you invest. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.