Reverse Rents offer a simple win-win solution to rent control, benefitting both tenants and homeowners. Reverse rents curtail the harms of rent control without weakening existing tenant protections.
The Simple Solution: Reverse Rents
Reverse rents are when homeowners pay a monthly “rent” for a period of time to tenants to move out, ie to not live in the unit. This monthly fee is either a fixed base amount or a percentage of the rental income of the next tenant, whichever is higher for that month.
An example
The numbers here are illustrative.
Alice owns a rent controlled property. Bob is the current tenant and pays far below market-rate at $1000/month. Alice believes the market rate is closer to $3000/month. Alice offers Bob a reverse rent of the higher of either $1200/month or 50% of what the next tenant is paying for 3 years if Bob moves out. If Alice’s next tenant pays $3000/month, Bob gets 50% or $1500. If Alice’s next tenant pays only $2000/month, Bob gets $1200, since 50% is only $1000.
Bob agrees and moves out.
At a minimum, Bob will collect $43,200 from Alice in reverse rent payments the next 3 years.
If Alice quickly finds a tenant for market rate, then Bob gets an additional $10,800, or $54,000 in total. Alice makes an additional $36,000 over the same time because of this arrangement. After 3 years, Alice makes significantly more indefinitely.
Truly win-win.
What is rent control?
There are different types of rent control, but the main tenet of rent control, or rent regulation, is to restrict how much homeowners can increase prices over time.
Reverse rent addresses the type of rent control where homeowners are only restricted from increasing prices for the current tenants, but are free to set any price for the next tenants. This form of rent control is called vacancy decontrol or soft rent control.
Much of the aggravation from homeowners and economists are when existing tenants pay significantly less than the market rate, ie what new tenants will likely be paying.
Why rent control?
Rent control is one of the most contentious elements of modern cities. Ending the policy would displace a significant number of families, while keeping the policy decreases overall housing affordability, reduces tenant mobility, and damages real estate value.
Reverse rent allows tenants to capture some of the market value by “selling” their rent control rights to homeowners. Reverse rents do not weaken existing tenant protections from rent control, while enabling homeowners and tenants to both benefit from these mutually beneficial arrangements. This will not solve all the problems of rent control, but will help address the worst rent control situations: when current tenants pay significantly less than the market rate.
How Reverse Rent differs from Buyouts
A buyout is when a homeowner offers a one-time lump sum to move out, instead of a recurring dynamic amount based on what the market rate. Reverse rent solves many of the problems in the existing buyout process.
Compared to buyouts, reverse rents are less predatory for tenants. Homeowners are incentivized to withhold information to gain leverage and lowball the buyout. When what tenants get is tied to market rates, tenants are protected against asymmetric or imperfect information, making the value tenants receive fairer.
Compared to buyouts, reverse rents are cheaper for homeowners because the cost is spread out over time and homeowners can back the payouts with revenue from the next tenants. Much fewer reverse rents will require a bank loan and the accompanying interest because all of the money is upfront. Homeowners might even be able to write off reverse rents as an investment expense on their taxes. Because reverse rents are cheaper for homeowners, more homeowners will be able to afford reverse rents, which means reverse rents will do a better job of assuaging the market distortions rent control causes.
Compared to buyouts, reverse rents net tenants more money because reverse rents are cheaper for homeowners, and tenants are better protected from getting cheated out of market rate. Tenants will receive more money because homeowners can now offer more money because that money is cheaper to homeowners (spread out over time, payments are less risky, do not require loans), and more tenants will be offered reverse rents because of the relative affordability. Tenants take on some risk in case of market downturns, but are overall protected by the minimum base payout.
How does this affect Tenants?
Reverse rents offer tenants new and potentially significant revenue sources they can use to benefit their lives, eg pay down debts, cover major expenses like surgery, or otherwise invest in their livelihoods. The reverse rents would also help cover the burden and cost of moving.
Unfortunately, tenant coercion, harassment, and abuse are all too ubiquitous and well-publicized. Reverse rents offer a much more amicable outcome to those existing situations where homeowners are aggressively trying to claw back the housing value.
Beyond violent landlords, some tenants simply do not want to stay in those units, but find themselves financially trapped from finding better situations. Many units have not been updated or renovated in decades, and many units’ locations do not or no longer make sense for the tenants and their lives.
It’s important to emphasize that tenants can choose to reject homeowners’ reverse rent offers, so tenants are strictly better off for having this option available. All the existing protections for tenants would still exist and remain unaffected by reverse rents.
Financially, tenants are protected from homeowners defaulting on their reverse rents, since homeowners own considerable assets in the form of property to back up these financial commitments. Overall, reverse rents should facilitate significant wealth transfers to existing tenants.
How does this affect Homeowners?
Reverse rents offer homeowners modest increases in rents short term and significant increases in rents long term. Homeowners could take this opportunity to invest in the unit in the form of renovations and improvements.
Homeowners are exposed to risk in reverse rents; even if homeowners misappraise market value, if the housing market takes a downturn, or if homeowners struggles to find new tenants, homeowners are still responsible for the regular reverse rent payments. Risk averse homeowners might suggest lower minimum base amount in exchange for a higher percentage cut when the next tenants are found.
Homeowners are incentivized to fill their units quickly to help pay for the reverse rents. Currently, cities have many empty units, some more units than there are homeless people in part because homeowners would rather leave units empty than to fill them with sub-market rents they cannot raise. With reverse rents, homeowners have another tool at their disposal if the market rates skyrocket.
This format can also work if homeowners decide to take the unit off the market; the reverse rent contract should offer a separate rate for this scenario to prevent homeowners from deceiving tenants.
It’s important to emphasize that homeowners are never forced to offer reverse rents, so homeowners are strictly better off for simply having this option available.
How does this impact the city?
This increases the supply of available rental units in the city, which could lower rent and improve overall affordability. Housing prices are extremely complex and so movements are difficult to predict from still theoretical mechanisms like reverse rent.
Homeowners will now be freed to invest in their property, improving the overall livability and property values of the city, one home at a time.
This might impact the local demographics and culture, but those effects are far less certain and predictable.
Can we do this now?
Current homeowners and tenants can create a reverse rent contract right now.
However, since this would be a new form of legal contract, it will not be easy to draw up from scratch that would be resilient to anything going awry. Having a standardized contract, similar to how many housing contracts are standardized, can help reduce uncertainty and error, as well as reduce potential exploitation on the part of homeowners.
Reverse rents would benefit from institutional/governmental support to ensure that the reverse rent contracts are carried through successfully. For example, homeowners need to be able to prove how much their new tenants are paying to calculate the reverse rent rates, and it is not clear what a legal solution would look like.
If homeowners and tenants can maintain good faith, then reverse rents should be fairly simple to implement and execute.
Missing details
This article presents a high level overview of reverse rents, but there are a lot of devils in the details taking something from concept to reality. Some missing details include:
- How do homeowners approach tenants regarding the reverse rent situation in a way that best ensures fair and equitable outcome?
- When homeowners with reverse rents sells their homes, what happens to the reverse rent contracts?
- How does renovations affect reverse rents, especially when the number of rooms in the unit changes/with multiple tenants?
- How does renovations affect reverse rents, especially when renovations affect the number of rooms?
- Which legal avenues are the best to resolve disputes surrounding reverse rents?
- How does reverse rents change the demographic makeup of a city and what role would it play in gentrification?
In addition to these open questions, there are city-specific questions that are not easy to comprehensively address. However, none of these are insurmountable barriers, just questions worth answering on execution.
Despite these missing details, at a high level, reverse rents are a simple monthly payment between two consenting parties.
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