You might have heard that there are a few obstacles in the California real estate market. Well, it just got a little more complicated. This blog is going to explain the new California rent control law that went into effect January 1st, 2020, and offer some tips on how to deal with it as a real estate investor and landlord.
What Is the New Law in the California Real Estate Market 2020?
The new California rent control law will limit rent increases to only 5% increases a year, plus local inflation in the California housing market. However, the total rental rate will not exceed a 10% increase including inflation. Inflation rates will be calculated from the Consumer Price Index of each area. The Los Angeles real estate market, for example, has averaged a 2.5% rate of inflation since 2001.
The new California rent control law also adds a “just cause” requirement. This demands that rental property landlords have reason for evicting tenants. Previously, under landlord-tenant laws, landlords could evict tenants without reason. It is important to note that this new law is only being applied to the state of California. Landlords in any other state across the US housing market can still evict without needing to prove a reason. Examples of “just cause” would be violating the lease or committing a crime on the rental property.
The California statewide rental control law will expire in 2030 unless legislation votes to extend it. The law also may vary slightly in cities that already have rent control laws.
When Was It Decided? Why?
The California governor signed Assembly Bill 1482 (AB 1482) in October 2019. The idea is that the law will address rent control in California along with its housing crisis. Millions of tenants in the state suffer from unbelievably high rental prices and are one rent increase away from being homeless. California’s homelessness is growing; it holds around 30% of the nation’s homeless population at about 171,000 people.
Who Is Affected by the New 2020 Law?
California rent control laws will apply to apartments and multifamily homes, and some single-family homes. Buildings owned by corporations or real estate investment trusts will be exempt, as well as condos and most single-family homes. It will also exempt buildings established within the last 15 years on a rolling basis.
In case landlords were anticipating the new rent control law in California, the law will apply retroactively to any increases made since March 15, 2019. So, whatever rental price you were charging at the time will be the base of future rent increases starting in the year 2020.
Communities with Rent Control Laws Already in Place
Now we will look at what cities in California have rent control already. As stated earlier, the following communities with rent control laws already in place will be affected slightly differently:
- Santa Monica
- West Hollywood
- Beverly Hills
- Glendale
- Culver City
- Inglewood
- Los Angeles
- Unincorporated neighborhoods of Los Angeles County
The AB 1492 will not take precedence over the existing rent control laws in those communities. However, it will be applicable where the existing laws are not. For example, Los Angeles’ rent control law has a 4% max on rent increase for buildings opened before 1978. So, the new California rent control law will apply to all the other buildings in the Los Angeles real estate market built between 1978 and 2005. This means that California landlords of those buildings will not be able to charge more than a 5% increase, plus inflation to their tenants. The new law will apply to several hundred thousand units in Los Angeles alone.
Some Tips for Investing in Rent Control Areas in California
California rental property owners will have a few questions now.
First: How do you take the initiative as a real estate investor with rental control laws?
One thing you can do is calculate your return on investment. If you have an annual net rate of return that is less than 7%, then you can apply for hardship increases. It is a sign of a good real estate investor if he/she knows all of the resources available.
Second: How do I generate positive cash flow with California rent control?
Landlords want to know how they can still maintain and increase their rental income. The main way to do that is to make capital improvements. If you are constantly improving your rental property by adding amenities and making repairs, then you can justify your rent increase. By doing so, you increase your asset value and make your investment property more desirable to tenants.
Related: Investing in Rental Property: Renovating for Smooth Rent Increase
While it may seem discouraging, California rent control does not have to be a bad thing for real estate owners. It might take some more work and effort, but the California housing market can still be profitable.
To find profitable rental properties for sale in California, click here to start searching for and analyzing properties in your city and neighborhood of choice!
Related: How to Invest in Areas with Rent Control
An Alternative Option
But, if the California housing market is no longer attractive to you, you are not alone. Many real estate investors are leaving the state for a few legit reasons:
- California rent control laws. We discussed this in detail in this blog. While it is not impossible to achieve success with California real estate, there are a lot of new rules and regulations you must be aware of as a landlord or property manager.
- Increasing property prices. Not only is California rent control unappealing, but California is one of the most expensive states in the United States. The property prices match the high cost of living.
- Very scarce housing availability. Simply put: the housing supply is not meeting the demand.
Reasonably, a lot of people are taking their business elsewhere. There are always other housing markets to look into. Some of the most popular areas right now are the Denver housing market and the Austin real estate market because of their lower real estate costs and fewer rent control regulations compared to California rent control.
Related: People Are Leaving the California Real Estate Market for 2 Cities
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