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What Is Rent Stabilization? Here's What Landlords and Tenants Need to Know

Rent stabilization can provide much-needed stability for tenants, but there are drawbacks as well.

[Updated: Feb 04, 2021 ] Apr 28, 2020 by Matt Frankel, CFP
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In particularly expensive or fast-growing rental markets, housing affordability can be a serious concern. For example, average rent in recently resurgent Newark, New Jersey, increased by a staggering 30% last year. In towns like Stockton, California, Anchorage, Alaska, and North Las Vegas, Nevada, rent increased by double-digit percentages as well.

That's where the idea of rent stabilization comes in. While it isn't practiced in most parts of the United States, rent stabilization can be an effective way to prevent housing costs from rising rapidly and can provide much-needed housing stability to tenants. Here's a rundown of what rent stabilization is, how it differs from rent control, and the pros and cons of rent regulations on real estate markets.

What is rent stabilization?

Rent stabilization limits the frequency and magnitude of rent increases on apartments, restricting any rent increase to a certain percentage at specified intervals, usually once annually. The most well-known version of rent stabilization exists in New York City, but there are a few other states where rent stabilization exists as well. Specifically, there's some type of rent control or stabilization in California, New Jersey, Maryland, and Washington, D.C. In addition, Oregon has statewide rent control that prohibits annual rent increases in excess of 7%.

Rent stabilization is intended to keep housing affordable, even in the most expensive and in-demand rental markets in the United States, and also to protect tenants from having to move because of sharp and sudden rent increases.

In New York City, rent stabilization typically applies to buildings with six or more rental units that were constructed prior to 1974; however, newer buildings can opt in to rent stabilization as well in exchange for tax advantages. Annual allowable rent increases are set each year by the Rent Guidelines Board, and for leases renewing from October 2019 through September 2020, the allowable rent increases for rent-stabilized apartments in the city are 1.5% and 2.5% for one- and two-year leases, respectively.

In addition to regulating increases in rent, rent-stabilization laws also provide tenants with the right to receive certain required services from their landlords. They also set a maximum allowable rent and make it difficult for landlords to evict tenants.

Rent-stabilized apartments have historically become deregulated for a few reasons -- specifically if the monthly allowable rent reaches a certain threshold (set by local regulators each year) or if the tenant's income exceeds a certain amount, typically $200,000 per year. Once an apartment is deregulated, the landlord can raise rent as they see fit, which is known as a market rate apartment. However, recent legislation has removed both the rent and income caps from New York City's rent-stabilized apartments.

Rent stabilization vs. rent control

There are two main types of rent-regulated apartments -- rent-stabilized and rent-controlled. And despite the terms sometimes being used interchangeably, they have very different meanings.

We've already discussed the basics of rent stabilization. Essentially, in a rent-stabilized apartment, the magnitude and frequency of rent increases are limited by regulatory bodies, which prevents rental prices from rising too rapidly and making the units unaffordable to the tenants occupying them.

On the other hand, rent control severely limits the ability of a landlord to raise rent. In fact, in many cases, rent control is essentially a rent freeze. Like rent stabilization, the most well-known example of rent control is in New York City, where it was enacted after the end of World War II to prevent housing costs from skyrocketing out of control.

Think of rent stabilization as the more modern version of rent control. In New York City, rent control only applies to a relatively small number of units today because of the criteria that must be met. Specifically, the building must have been constructed before 1947, and (here's the most limiting factor) the apartment must have been occupied by the same family since before 1971. Rent-controlled apartments can only be passed down to members of the same family.

When rent control was a new concept, it applied to millions of apartments but has naturally phased out over the years. Only about 21,800 (approximately 1% of the NYC housing supply) apartments in New York City were rent controlled as of 2017. Generally speaking, when an apartment is removed from rent control due to the conditions not being met, it is placed into rent stabilization instead.

Because it's a newer program with far fewer restrictions, rent-stabilized apartments are quite common in New York City today. As of 2017, there were almost 967,000 rent-stabilized apartments in the city, roughly 43% of the entire supply of rental units.

Pros and cons of a rent-stabilized apartment

There are pros and cons to rent stabilization for both tenants and landlords.

For tenants, the obvious perk is that it keeps rent prices from increasing rapidly. By limiting the rise in rent to a low percentage each year, it not only helps increase the supply of affordable housing in expensive areas but it provides ongoing security to tenants who won't have to move frequently because their rent rises too fast. Plus, rent stabilization guarantees that renters will have the right to renew their leases unless they breach their agreements, so a landlord can't simply decide to find new tenants at the end of a lease term.

A concern is that landlords are less likely to invest more money than absolutely necessary into a rent-stabilized apartment unit or building. While rent-stabilization laws require landlords to do enough to keep their properties up to code, routine but unnecessary maintenance issues are often overlooked and landlords may be less willing to make capital improvements to the property. This certainly makes sense -- after all, what motivation would a landlord have to spend more money than necessary on a property when it will have no effect on their profit potential?

Obviously, from a landlord's perspective, rent-stabilized apartments can be less desirable than market-rate units. This is especially true in particularly hot real estate markets. For similar reasons, a high presence of rent-stabilized apartments in an area can turn off developers when it comes to new construction, as market-rate apartments can have a difficult time competing with the relatively low rents offered by rent-stabilized units.

In fact, many state governments clearly believe that the cons of rent stabilization outweigh the benefits for tenants -- 37 states have laws that prohibit local governments from implementing rent control or rent-stabilization laws.

How to find a rent-stabilized apartment

Rent-stabilized apartments can be difficult to find. After all, the main purpose of moving into a rent-stabilized apartment is locking in a moderate rise in housing costs for years to come. So because they receive preferential rent, tenants tend to vacate rent-stabilized apartments less frequently than market-rate units.

However, it's not impossible to find a rent-stabilized apartment, especially in New York City, where they make up nearly half of the housing supply. Aside from using obvious strategies, such as typing in "rent stabilized" on sites like Craigslist and Zillow (NASDAQ: Z) (NASDAQ: ZG), you can specifically target apartment buildings that were constructed prior to 1974. Or, if you want to see whether a specific building has rent-stabilized units, you can use the search function on New York's Division of Housing and Community Renewal's website.

The Millionacres bottom line

Rent stabilization can help provide housing security to tenants and can provide a more affordable way to live in high-cost housing markets, but it isn't without its drawbacks. Weigh the pros and cons before deciding whether moving into a rent-stabilized unit, or investing in one, is the best move for you.

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Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zillow Group (A shares) and Zillow Group (C shares). The Motley Fool has a disclosure policy.