Investing in rent controlled areas - smart or bad move?
Hi Everyone - long time lurker here on BP but really am hoping to get y'alls perspectives on potentially investing in rent controlled cities like Oakland or Berkeley, CA. My gf and I are 1st time home buyers in the Bay Area and are looking for a 2-4 unit property (owner occupied) to jumpstart our RE investing journey.
If you're familiar with the Bay Area RE market, you'll know that rent control is a popular thing in the area. I'm not totally against buying something in these rent controlled areas but we've been giving advice that we should avoid at all costs. However, the supply in the Bay is limited and a lot of MF properties in the Bay come from Berkeley/Oakland.
Any advice, input, perspective would be greatly appreciated as we continue on in our search. Has anyone found success with investing in rent controlled areas over the long term? What creative solutions did you use to become successful? What about any failures?
Hoping this sparks a conversation and I'm sure other RE investors in the Bay Area are considering the pros/cons here as well.
Thank you!
Thanks in large part to rent board regulations, market rents in Berkeley have risen higher than in any other similarly sized city over the last 20 years. While rent board regulations successfully moderate rents in continually occupied units, the substantually increased risks to landlords caused by those regulations have substantially increased market rents, too. Thus, in relative and absolute terms, your rents have increased more in Berkeley than anywhere else in America thanks in large part to the rent board (their budgets increase when rents increase). Wink, nod.
The reward has definitely been there for landlords that have persevered. Past performance is no guaranty of what will happen in the future.
There are a lot of risks already for small landlords and more on the horizon. Some landlords lost 50‐100% of their rental income for an extended period of time because tenants were allowed/ encouraged to stop paying rent during the pandemic. Some landlords were forced out of business.
During a recession, your property value may decline and this makes the rent board's anti-landlord regulations even more risky. For example, Berkeley appears ready to adopt TOPA, which would incentive tenants and tenant attorneys to target you, so even as you face a potential loss on your investment (due to being forced to sell during a recession), the TOPists may force even lower sales prices. Gates says we will have more pandemics.
Consider gaining some experience as a landlord in a saner location before deciding to go down the rabbit hole in Berkeley. And before taking the plunge, find and consult with a good attorney. Consider joining BPOA before starting your business.
The rules may have changed behind closed doors over the past few years, but voters approved an exemption for certain parcels as a condition for the creation of the rent board. If you have an existing or new second unit and occupy a unit in the eligible property, you are completely exempt from rent board regulation. This exemption was historically called a golden duplex exemption. You have to go to the rent board to determine which parcels are eligible (most are). There is no guaranty that this exemption will be retained because rent board staff spend hundreds or thousands of hours every year to try to circumvent the will of the voters. But this exemption had been in place for almost 40 years just prior to the pandemic.
If this exemption has not been deceptively eliminated, then acquiring a golden lot may allow you to rent in Berkeley at substantially less risk. Of course, talk to your attorney before making any decisions. And have fun.
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Put a Section 8 or Abode Program tenant in that "rent controlled area" and you won't have to be as nearly concerned with rent control. I've been doing that for YEARS in the East Bay....particularly in Oakland and even during the pandemic I was able to request (and get approved) higher rents. Tenant doesn't care either because with the way I have done it the tenant doesn't even pay anymore out of pocket....the city, county or Abode does.
Simple
@Greg San Martin thank you for the detailed response and perspective on Berkeley RE. I'll definitely spend more time looking into TOPA, joining BPOA and finding a good RE attorney. I think you're right that it makes more sense to find a more "saner" or stable city to invest in the bay area before entering Berkeley. The whole TOPA thing is worrying as an investor, sounds like a very strange way to go about business for landlords. What's the further incentive if you're fighting off lawsuit after lawsuit in Berkeley (which I anticipate would happen given the demographics of the city).
@Brian Garlington thank you for the response! I'm not familiar with how Section 8 or Adobe programs work other than their rents are paid for. My follow up questions to you would be:
- Is there a limit to section 8 / adobe rent? How much are these programs willing to pay?
- What extra precautions / legal compliance do you have to take to have these types of tenants in your property?
- Curious as to what you were able to get approved for higher rents? Oakland's CPI from 2021 - 2022 is 1.9% - were you able to beat that?
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You would be happy.....excuse me......very happy with the answers to all of these questions Brandon.
Before we go to far in the weeds have you and/or your girlfriend taken the most basic step of being pre-approved with a lender yet? Not pre-qualed (everyone has one of those offers) but an actual pre-approval? If not, then this is all simply an academic exercise my man.
@Brian Garlington we're pre-approved (fully) for 2-4 units at different price points. And are actively searching for properties right now.
I kind of tried this path years ago, just couldn't get the stars to align with finding a property I'd want to live in as a primary and with in my budget. During that time I also became more and more concerned with the lack protection for a landlord and increased risk/exposure as being a landlord in CA.....so I passed on trying to make it work.
With all that said, not trying to talk you out of it, but at these price points we're facing here have you thought of doing a primary but supplement/offset the rental portion with something out of state? You could very likely get a primary and at least a couple doors out of state that would have a similar effect on reducing your CA living expense with rental income and having the benefit of separating your primary living investment properties. Then you have way more options on properties and exit plans...
@matt
@Matt K. appreciate your perspective and I'm finding myself thinking like you in regards to the lack of protection / risk of being a landlord in CA. Unfortunately for right now, my partner is receiving a gift from her parents and they are strong advocates against rent control areas. They have multiple buildings in the bay area, some in rent control but most in not and they are really driving us to invest in non-rent control areas. We are limiting our search to these areas for now. But my gf and I plan on investing out of state like you said to give us the cash flow we'd like to have in our portfolio.
So invest in the bay for equity / appreciation and in the future invest out of state for the cashflow.
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1.9% was easily beat my man.
Quote from @Brandon Cristiano:
@matt
@Matt K. appreciate your perspective and I'm finding myself thinking like you in regards to the lack of protection / risk of being a landlord in CA. Unfortunately for right now, my partner is receiving a gift from her parents and they are strong advocates against rent control areas. They have multiple buildings in the bay area, some in rent control but most in not and they are really driving us to invest in non-rent control areas. We are limiting our search to these areas for now. But my gf and I plan on investing out of state like you said to give us the cash flow we'd like to have in our portfolio.
So invest in the bay for equity / appreciation and in the future invest out of state for the cashflow.
Do both like me ? Primary is in CA, this gives me the equity/appreciation but luckily I'm my own tenant in a sense...But, with the way prices are right now... There's some serious consideration to renting vs buying in lots of the Bay Area....but also the gift thing could likely offset that scenario.
Out of state gets me the cash flow to offset my mortgage/reduce my living expenses. Plus primary residence gets more favorable interest rates vs investment properties.
HELOC against primary gets you funds to be competitive out of state and you can recycle the funds over and over by paying it down faster. You can also get HELOC against the investment properties as well...getting you more purchasing power.
Realisticly most people don't stay in a home as long as they think they would on paper... Plus you then have tax free exemption and back up property to potentially move into if you sold the primary. You also have 1031 for the investment properties if you exit them
Went through extremely similar situation as you... Feel free to message if you want more details or talk shop.
Thanks in large part to rent board regulations, market rents in Berkeley have risen higher than in any other similarly sized city over the last 20 years. While rent board regulations successfully moderate rents in continually occupied units, the substantially increased risks to landlords caused by those regulations have substantially increased market rents, too. Thus, in relative and absolute terms, your rents have increased more in Berkeley than anywhere else in America thanks in large part to the rent board (their budgets increase when rents increase). Wink, nod.
The reward has definitely been there for landlords that have persevered. Past performance is no guaranty of what will happen in the future.
There are a lot of risks already for small landlords and more on the horizon. Some landlords lost 50‐100% of their rental income for an extended period of time because tenants were allowed/ encouraged to stop paying rent during the pandemic. Some landlords were forced out of business.
During a recession, your property value may decline and this makes the rent board's anti-landlord regulations even more risky. For example, Berkeley appears ready to adopt TOPA, which would incentive tenants and tenant attorneys to target you, so even as you face a potential loss on your investment (due to being forced to sell during a recession), the TOPists may force even lower sales prices. Gates says we will have more pandemics.
Consider gaining some experience as a landlord in a saner location before deciding to go down the rabbit hole in Berkeley. And before taking the plunge, find and consult with a good attorney. Consider joining BPOA before starting your business.
The rules may have changed behind closed doors over the past few years, but voters approved an exemption for certain parcels as a condition for the creation of the rent board. If you have an existing or new second unit and occupy a unit in the eligible property, you are completely exempt from rent board regulation. This exemption was historically called a golden duplex exemption. You have to go to the rent board to determine which parcels are eligible (most are). There is no guaranty that this exemption will be retained because rent board staff spend hundreds or thousands of hours every year to try to circumvent the will of the voters. But this exemption had been in place for almost 40 years just prior to the pandemic.
If this exemption has not been deceptively eliminated, then acquiring a golden lot may allow you to rent in Berkeley at substantially less risk. Of course, talk to your attorney before making any decisions. And have fun.
July 2022 Edit:
I neglected to mention this because it is so fundamental in a college town, but one of the best ways to minimize the financial risks of rent board regulation is to own student rental housing (UCB students). The rent board's regressive policies lose their teeth when the tenants are virtually guaranteed to move out every few years. ASUC does a great job of promoting the rent board each and every election year even though UC rent board policies have injured UC students more than any other segment of the population. You are far less likely to get a professional tenant in student housing. You would pay a premium for a good student rental property but it may still be the best deal inside the city borders. Difficult call in a difficult market. Good luck.