inherit tenant in rental control area

20 Replies

I am buying a rental property at Bay Area has a tenant who is paying 20%-25% below the market. Due to the rental control law, I am planing continue with the term's the selling landlord. This is my first time to get a property with tenant, need some help on What are the steps I need to take to make the transition smoothly? What pit holes should I watch out?

In California you have to uphold the existing lease the current landlord has in place until the end of the lease then you can change them if allowed by law. If it's rent controlled then you should become very familiar with the rules before you buy and decide if you want to abide by them. If you don't then move on to another property.

Make yourself aware of the rent increase laws in that county. How often can you increase the rent? How much can you increase the rent? Also, find out if their are any fees associated with rent control such as the Rent Stabilization Ordinance (RSO) fee, which you may be able pass on to your tenants to pay each year.

Joe,

You'll have to honor the existing lease. I suggest you get an estoppel for each unit so there's no arguments later on. Talk to each tenant, if possible, to learn what is wrong with the building. Do they have any complaints? 

Is this property in San Jose? 3 units or more, which were built before September 7, 1979, are subject to rent control. Duplexes or less are exempt. 

20-25% below market is not bad. Hope you got a decent price for it. Given rents have plateaued in the last couple of years, You can catch up with the rent in the next few years with the allowable annual 5% rent increase. If you want to speed up the annual rent increase to 8%, study up on the capital improvement pass through. 

The CSJ recently passed Just Caused Eviction. I suggest you read up on their 12 Just Cause Evictions to familiarize yourself

Best of luck.

Originally posted by @Joe Xie :

Tia Jones very good suggestion. Where should I get such information?

If you are in San Jose check out this webpage http://www.sanjoseca.gov/index.aspx?NID=1355

Hello Joe Xie. I wonder if you can share some info about that apartment. How many unit & how much did you get it for?

I have just missed out on a 7 unit near lake Merit, at 640K (auction), so kinda want to know how much those apartment normally go for.

@Albert Ng This is a unit at a 4-plex and I already got one with $480K without tenant. This with tenant unit rent 20-25% below market, listed at $390K and I am in contact with a price slightly higher than the list.

If you could get 7 units at $640K, it will be a steal. See this 4plex, a little farther away from lake, 2 with market tenants (~$2600), 2 units with half of that (~$1400), listed at $1.5M, I think it will sell above or close to the list.

https://www.redfin.com/CA/Oakland/4121-Greenwood-A...

I am always amazed by how things work in Ca. I want to live in a rent controlled apt. I don't want to own one!

$6,461 rent a month for a 1.5m quad.  Run Forest Run.  I am not sure that you could break even on that property.  The rent multiplier is .5 

@Lesley Resnick Not all CA has rental control, San Francisco and Oakland are two cities have the strictest controls. I just saw documentary called Real Estate Wars: Inside the class and culture battle that's tearing San Francisco apart. There a story that a 37 year tenant paying $470 rent in SF on a place market is more than $6000, while refused $80k cash for key pay out offer from new owner who bought the place and want to move, the tenant says he has the rights stay there. Craze, right? See yourself https://m.youtube.com/watch?v=LVVO8b4vvis

However, even without rental control, the cap rate is not good here. All my rental's cap rate are below .6 if against the current market property value. In CA, we have to look at appropriation. I have properties increased value 4 times than I bought. so I am ok with .6 cap.

@Joe Xie  Thanks for sharing the youtube video. As you have pointed out, San Francisco and Oakland have amongst the strictest tenants laws in the county.  I'd be happy to make an introduction to a great landlord attorney if you like?! (I am a RE investor and Realtor here in SF and the Bay Area)

Originally posted by @Joe Xie :

Lesley Resnick Not all CA has rental control, San Francisco and Oakland are two cities have the strictest controls. I just saw documentary called Real Estate Wars: Inside the class and culture battle that's tearing San Francisco apart. There a story that a 37 year tenant paying $470 rent in SF on a place market is more than $6000, while refused $80k cash for key pay out offer from new owner who bought the place and want to move, the tenant says he has the rights stay there. Craze, right? See yourself https://m.youtube.com/watch?v=LVVO8b4vvis

However, even without rental control, the cap rate is not good here. All my rental's cap rate are below .6 if against the current market property value. In CA, we have to look at appropriation. I have properties increased value 4 times than I bought. so I am ok with .6 cap.

I have heard appreciation is the only play in SF.  I work with a number of investors who are from SF, since the cap rates are so low and finding flips is almost impossible.  At.6 does it cost you money every month? 

@Joe Xie Oakland definitely has some strict regulations to follow in regards to rent control and tenant/landlord relations. 

Rent Control for Oakland:

Starting July 1st, 2017: You can raise your rent 2.3%. This has been increased 0.3% from the previous year. Great news for landlords. 

- Frequency: This can only be done ONCE every 12 months. Even if you don't use the entire 2.3% (i.e. you raise the rent 1.0% to start out) it still freezes your ability to raise the rent for the next 12 months after that. 

- Rent raises do rollover ! However, only up to 3x the current CPI amount. For example, if you haven't raised the rent in 37 years - like the real life example above (although that took place in SF, not Oakland) - you can only raise the rent a total of 6.9% if you do this after July 1st of 2017. 

- Important: Also, make sure to give your tenants at least a 30 day written notice of any rental increase!

You can read more up on the specifics of the regulations here!

Also, check out this link for some information on Fees!

@Lesley Resnick I put down big down payments, so all are cask flow positive. 

@Alex Capozzolo Thanks a lot for the information, this helps a lot. One question, the seller had an increase this Jan, so that mean I can not do any increase till next Feb, right? The tenant is on one year lease, so how my contract should looks like? A lease till end of next Feb? 

@Joe Xie No problem! I would assume that even if title transfers, that 12 month hold would still be valid. However, you should confirm this with either an attorney or someone who has done a good amount of investing in Oakland to find a definitive answer!

@Alex Capozzolo just learned that the current landlord did not register and pay Rent Stabilization Ordinance fee. What is this mean for me? Could I be forced to back pay the fee since the tenant in the unit (2012)? How people can get away not paying it (mean what would be the consequences not paying it)?

@Joe Xie I'm not 100% positive on this situation, but I did just give the Oakland Rent Board a call and am waiting to hear back from them. I'll keep you posted once I do hear back, and if you'd like to give them a call their phone number can be found here 

@Joe Xie Just spoke with the Rent Board. It sounds like the current owner is doing some shady stuff if he's not up to date with these payments that he's legally required to pay. If that's the case, then he should disclose that to anyone who is thinking about buying it (which it sounds like he did disclose this information to you). If he doesn't take care of these payments, you would be required to pay them up to date. If you're seriously considering this property, the you could negotiate that the overdue amount owed in late fee be taken off the agreed upon purchase price, that way you can use that portion of the funds to cover all the previous year that he/she hasn't been paying. Let me know how things go !