Does Prop 13 in CA apply to multifamily Investments cap on prop t

Question

Does the property tax rate have a cap on annual increases in multifamilies?

How much is it?

Brian Burke · Answer

Yes it's capped at 2% increase per year even for multifamily.  But be aware that there is a lot of push from some people to create a split tax roll in CA which would separate commercial property (which includes large multifamily) from residential property and strip prop 13 tax methodology from commercial properties.  If that happens, it would be tragic for commercial property owners.  That's one reason I'm not buying anything in CA (but if I'm shopping for excuses to NOT buy property in CA I have a whole menu of excuses to choose from).

Sam Yin · Answer

I have been recently concentrating on the IE. I agree that primary markets have more potential, but I do not have enough capital to break in and make the most of what little capital I do have.  I use to have rentals in LA and San Bernardino County, but I spent 2021 consolidating them closer to each other for ease of management.  Since I self-manage and live in the LA area, Central CA is out of the question.  The IE is as far as I am willing to self-manage. So far, the IE can still consistently yield over 10% CoC.

I overpaid on an 8-plex by $40K back in May, out of pocket over the appraisal. Many told me that it was a big mistake to do so at the time of the buy, especially in the IE. I felt that it was the price for me to pay to get into the commercial world of REI. Looking back, I would do the same thing again. That property yields about 20% CoC, with more room to grow. But more importantly, it got me into the commercial world and opened up so many doors.  I picked up 2 more 10plexes a few month later, all off-market deals. All below market. All with double-digit returns and plenty of upside through forced appreciation. All because I got my foot in the door.

Just like you, I did try some Central CA properties, but I canceled the escrow after bad inspections reports. At the time, I was trying to scale up in unit numbers, but I am glad they did not go through.  I now concentrate on smaller units, so long as they meet my underwriting.  As much as I am trying to break into the 40+ unit complexes, it just works out that I can only afford smaller units due to the frequency of my purchases.  I have not allowed enough time to save up enough capital... but it's a trade-off because I am trying to keep the momentum going.

Sam Yin · Answer

@Tony Kim FWIW, I still invest in Cali. I have been investing here for many years as a hobby. When I took it serious about 2 years ago, I invested in Cali. I totally understand the different sentiments, but I believe deals can still be found and any increase in operational expenses can just be past on to the consumer (tenants).

I am not oppose to out of state either. However, I keep on finding great deals hear locally.

To be fair, I'm still very much in the learning and growing phase. I'm a refugee from Cambodia and found my way to Long Beach with the others that were dropped off here. I was one of the last series to escape here... 1989. I spend years working odd jobs, from sewing in factories, cutting diamonds, baking doughnuts, etc. But the biggest thing is the shift in mindset into understanding REI. Once I got over the traditional thinking process that many of us grew up with and embraced the modern REI mindset of leverage and equity growth, I was able to pursue REI.

I put this out there for fellow BP members that fear CA real estate to know that it can work here as well. You just have to look for it. There is really no difference between OOS investing and investing in CA that is a few counties away from you... but you can find deals I  the same city with good returns as well.

My recent 3 purchases over the summer yield over 10% CoC with plenty of upside in rent and equity. 2 years ago, 2 other triplexes yield over 10% as well and equity has grown about 35%+. Granted the market is hot, but the CoC is still decent. Their is room left over to raise rents and achieve 25% or more CoC.

Deals are everywhere. You just have to look for them. When they hit the market, they are often not as good because too many people passed up on it in private... but there are still to be had and can be made into a good deal through good negotiations.

I think the fears of politics and landlord laws in CA are overrated. Politics swing back and forth. Population shift is normal,  but not detrimental to a place like CA.

Brian Burke · Answer

Aside from constant threats to drastically alter the property tax structure, existing and expanding rent control, anti-landlord regulatory environment, anti-landlord/investor public sentiment, litigious tendencies, liberal judges, tents popping up everywhere, cardboard sign carrying panhandlers at virtually every roadway intersection, trash on roads pretty much everywhere you look, increasing crime, high cost to get pretty much anything done, and not the greatest economics (speaking from an investment point of view such as price-to-rent ratio, etc), probably my biggest reason is that I like to invest in places where people are moving TO, and avoid places where people are moving FROM.  And lately, people are leaving CA (no wonder why considering the above)--which leaves me with better investment options elsewhere.

Melissa Oberti · Answer

@DongHui Patel listen to @Brian Burke and stay away from CA.  Too many other great states to invest in without all the issues we have in CA.

Sam Yin · Answer

Nothing extra ordinary. My 2021 deals were all off market. This helped to weed out competition and gave me time to negotiate the sales price down.

The first one that closed in May, 2021 was an unusual deal because I had to pay over the appraisal. However,  since it was a government contract, it had a built in 10% increase year over year for each tenant. Once I acquired it, I renegotiated with the government to raise everyone to the highest renter. Then, I evicted one tenant, upped the rent on the new government tenant over the rest,  and set the new standard rent rate for the remainder. I kept the 10% per year clause. Best part of the contract is that the government pays for the rehab and repairs.

The other 2 were mismanaged by older owners that just wanted to cash out since they were in their 80s. They have owned them over 20 years and ran out of depreciation. These were value add deals. The rents only penciled out to 7% - 9% during negotiations. I forced it up further with 20%+ rent raises upon closing. This also forces up the value of the property.  Remeber...  that's 20% of the total rent, which translates to a larger increase to CoC because operating costs and Debt Service is pretty well fixed.

Hope the helps. Deals are out there. Just gotta look off market. But my 2020 deals were from Zillow and they too have double digit returns. Best of luck to your journey as well.

DongHui Patel · Answer

@Sam Yin All the deals I proforma'd in the IE didnt yield 20% CoC, is there some extraordinary deals that you found with a huge upside that I am missing?

Tony Kim · Answer

Hi Sam, yeah don't get me wrong. I'm still a strong believer in California as well. Despite their best attempts to make it difficult to invest here, I still focus only in or near LA. I also agree that the tenant unfriendly laws are way overblown. Yes, they're unfriendly, but if you know what you're doing, it should have minimal effect. Living in LA with both a blessing and a curse. The entry points are extremely high, but the potential to build wealth is also extremely high.

BTW, where are you finding deals with those kind of numbers? Central California? I've looked long and hard at cities in Central areas but ultimately decided to pass on them. I even went into escrow on a few properties, but the deals fell through for various reasons. I still feel the best way to grow wealth is through the primary markets.

Tony Kim · Answer

If you guys are all in Cali, I guess I'm not the only one with insomnia. Thanks for posting Brian.

It almost seems like this bill, while devastating to the true commercial players or wealthy folks with properties well in excess of 5 million, it will benefit regular mom and pop ppl like me who don't own 8 figure-like properties....and also do not really need any additional handouts. Sounds like just another stupid and misguided attempt to redistribute wealth. Just look at the agency that submitted the proposal, uggh!

Brian Burke · Answer

Hmmm…not sure why the link didn’t work, it’s working for me. I’ll try a different way.

Click here for article.

Does Prop 13 in CA apply to multifamily Investments cap on prop t

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