Rent control

10 Replies

I'd like to buy rental property in california (los angeles county to be exact)

but a lot of what I find is under rent control .

I have been told not to buy rent controlled properties because as an owner I will be limited on what I can do with rent increases and if I want to evict a tenant it is more difficult to do so.

What are the pros and cons about buying rent controlled and no rent controlled property?

Should I even think in buying rent controlled properties?

Thanks in advance for your feedback.

Mario

Newbie.

Hi @Mario Lara  Welcome to BP. 

I'd advise trying hard to find a property that is non rent controlled so that you have more control over how much you want to charge for rent, among other things.

Take a look at the following:

From: http://www.lafla.org/pdf/hou_rentcontrol_eng.pdf

What are the primary benefits of being under rent control? 

1. The landlord can only raise your rent a certain percentage per year (3% in 1999). The landlord has to give you a 30-day notice of the intended rent increase. In addition, you can only be evicted for causes listed in the ordinance. 

2. The landlord can only evict the tenant for the causes listed in the statute. 

3. The eviction notice has to be very specific, giving, in the case of a nuisance, dates, times, places and witnesses to the nuisance. 

4. If the landlord is trying to evict tenant for nonpayment of rent, s/he cannot bring the eviction if, at the time the 3-day notice to pay or quit was given, the property was not registered with rent control. 

5. The landlord can

Thanks a lot Joshua.

I now have a better understanding on this.

Regards

Mario

Not so fast.

Rent control can be a wonderful thing for landlords as long as you understand how it works.

The key is to make sure that you pay a fair price for the building based on the existing rents (not "pro forma", or what they could be if the tenant moved out). 

If you can live with the returns as-is, with the existing rents, then things get interesting. Here's why:

1.  Rent control tenants paying below market rents very rarely move out. This means no turn-over and no vacancy.

2. In LA, you can raise the rent for a rent controlled unit by 3% / yr. Since your mortgage is presumably fixed and your property taxes can only increase by 2% / yr (Prop 13), your operating margin should improve over time.

3. When a rent control tenant does move out, you throw a party and bump the rent to market, which is often a substantial increase.

I wrote a post covering the basics of LA rent control - read it here: http://kagansblog.com/2012/02/explanation-of-los-angeles-rent-control/

HI Moses,

So if I break even the first year , I should be able to get some cash flow the next, correct?

@Mario Lara  

Assuming all your costs stay fixed (highly unlikely) then yes you should make some money the next year. This is because you can raise all your rents by some pre-determined amount usually around 2-3%. 

The bigger question is: why would you want to buy an investment property just to break even? Are you betting on appreciation? If so that's dangerous.

If the market you are looking at doesn't allow a return on your investment, I suggest looking at another market or waiting for a better deal.

Phil

@Mario Lara  

This is how a couple of investor's I know see your situation about rent control. 

In addition to what @Moses Kagan   says, the biggest thing that I see (after doing a bit of homework) is that walking into a situation with pre existing tenants in a rent control building (who handle their rental obligations in a timely manner) is a positive one from the viewpoint that you walk into a situation with pre existing income to service your (debt) mortgage right out of the gate.

So let's say those tenants are under "rent control" stipulations which means you can't go and raise their rents over 3% of what existing rents are. No harm no foul so long as they fulfill their contractual obligations (ten, utilities etc) and stay in good standing.

Moving forward (say after 6 months to a year.. or whenever is right for you), you are going to want to re sign these tenants to long term leases (1 year at least) using YOUR OWN lease.

And since you're interested in making sure that existing tenants (and future tenants) don't downgrade your investment by making it less hospitable for their neighbors (RE: your other tenants in good standing) you will include some of these stipulations in your lease (and pre screening conditions - for new tenants).

- All Units will become NON SMOKING units. (Cleaning cigarette stench from an apartment isn't easy and doesn't come cheap. We won't discuss the health aspects).

- ALL tenants over 18 - 21 years of age ( your call) who occupy any unit must show proof of income - meaning they must show proof of a W2 job. No exceptions.

- All tenants over 18 - 21 years of age will have to sign separate leases EVEN IF their parents live in the same apartment. (This goes a long way in saving you major headaches - IE: Friends entering and exiting the apartment at all times, drinking on the premises, disorderly behaviors of the horror story kind, etc.

- NO parties on building premises after 8PM on weekdays and NO parties/noise on premises after 10PM on weekends.

This list goes on… but you get the point. 

Some existing tenants are going to respectfully disagree with you and opt not to sign your new lease and vacate the premises at a mutually agreed upon time. 

So for example: Unit #1 that lists for $1000 is vacated. You now have the choice of going in and rehabbing it, paint, new floors, whatever needs to be done to spruce it up and make it competitive to existing units in your area.  All of a sudden www.rentometer.com says you can rent out at $1100 and expect reasonable offers to rent it.

Or you go further and offer this newly refurbished apartment as "partially furnished" (Fridge, Stove) or fully furnished (Appliances, Bed and mattress). Now you're on the upper range of potential rent - $1200+.

Yes, you would not have been able to increase rent on the former tenant in the $1000 unit to $1200 plus. However, by starting off the newly refurbed unit out at $1150 - $1200, you have a trade off which you can live with.  Instead of adding a yearly (up to 3%) rent stabilized rate to the $1000 apartment, you're now starting off at your new rates with tenants who most likely will stay more than 1 or 2 years at your new rates (plus 0 - 3% depending on what your increases are).

Finally, there are rent ceilings in non rent control areas also (RE: what #s the market will bear) and so rent control area or not - it all evens out at some point - when you come in as a new owner of a rent control building.

Good luck!

Originally posted by @Phil Hong :

@Mario Lara 

Assuming all your costs stay fixed (highly unlikely) then yes you should make some money the next year. This is because you can raise all your rents by some pre-determined amount usually around 2-3%. 

The bigger question is: why would you want to buy an investment property just to break even? Are you betting on appreciation? If so that's dangerous.

If the market you are looking at doesn't allow a return on your investment, I suggest looking at another market or waiting for a better deal.

Phil

=======

Thanks Phil.

It is taking me a while to find a good deal because every time I do the proforma , I come short.

I guess I just have to be patient and wait until I find something that is producing instead of just breaking even which is a no no from the investing point of view.

Mario 

Francis, 

So this means that even on rent controlled areas I can raise the rent to whatever the market rates are when a new tenant moves in?

Mario

@Mario Lara  You're in Torrance. There's no rent control there and neighboring cities. 

Rent control is not necessarily bad from investment stand point. In good areas of LA you'll be lucky to break even the first year. Sometimes it makes sense to be $200-$300 out of pocket the first year. One way or the other, if you don't have experienced agent working with you, I'd advise you looking for properties without rent control. I can help you' if you're looking into North East LA areas. I'm not a fan of South LA. Although I hear Inglewood is up and coming now :P

Ewa Reza, Real Estate Agent in CA (#01874963)

Hi Ewa,

Torrance is not rent control but there are no units (2 - 4 units) for sale here in my price range. (300 to 600K)

I have been looking in San Pedro and Long beach but most of what I have seen and that I'd like , has been rent controlled. 

I have no idea how the north east LA area is since I have always lived in the south bay area , is it possible for you to tell me what cities in north east LA you are  talking about and may be send me some example units? 

Thanks

Mario

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