MOST important to consider before investing in California

20 Replies

To those of you currently investing in California, what are the most important factors to consider when analyzing properties? I'm looking for things that are specific to CA that I may not already know: specific laws, tax codes, maintenance issues specific to the region, etc. I have been a buy & hold small multi-family real estate investor on the east coast and I am now looking for my first CA property. I would love to learn some state specific issues I am unaware of that are specific to CA...to minimize surprises down the road!!

Originally posted by @Lauren Bellis :

To those of you currently investing in California, what are the most important factors to consider when analyzing properties? I'm looking for things that are specific to CA that I may not already know: specific laws, tax codes, maintenance issues specific to the region, etc. I have been a buy & hold small multi-family real estate investor on the east coast and I am now looking for my first CA property. I would love to learn some state specific issues I am unaware of that are specific to CA...to minimize surprises down the road!!

Wow, that's a huge question.

By population, CA is about the size of WA, OR, NV, ID, UT, AZ, MT, WY, CO, and NM combined. We have 58 county governments and 482 municipal governments.

So first question: where in CA are you looking to invest?

Best,

Jon 

Look up AB1482. It applies to all of California. It has two components: rent control and just cause eviction.

AB1482 prevents you from buying an under-performing multi-family, evict the current tenants, upgrade, then rent at market. Unfortunately, small multifamilies aren't priced with that into account. Buyers and appraisers still use comps for 2-4 unit multifamily, when the price should be based on income instead, similar to commercial. I regularly see listings that advertise "XX% rent upside potential" when it's not possible to just raise the rent XX% due to AB1482.

Another CA-specific cost is Earthquake insurance. It's optional. Lenders do not require it and many homeowners don't carry it. The policy has high deductibles and the premiums aren't cheap. But I buy it anyway because I really can't afford to lose a building to an earthquake. But everyone's risk profile is different.

Hi Lauren, we buy and upgrade multifamily properties in Los Angeles, but a few of the things I'll say below apply anywhere in CA:

1. Rent control laws. We have state rent control. Cities like LA, SF, Berkeley, West Hollywood also have their own laws. Make sure you know which laws apply where you're buying. 

2. Zoning obviously. Realtors will sell a development dream of a property, make sure you verify.

3. In urban areas, areas can go from bad to OK quickly, within just 1/3 of a mile distance. In parts of LA where we invest, some investors could get stuck buying on a bad block and have a terrible experience, but those who know will purchase 10 blocks to the north, and will be fine. 

4. Rehabs are pricy here and workers are in short supply, like everywhere I suspect. 

5. Try to buy in an area that is supply constrained, i.e. there's demand but it's tough to build more. This is why Los Angeles and San Francisco have done so well in terms of appreciation, but a Bakersfield or Fresno, while still good, is not quite as strong for long term growth. 

6. Taxes of course. Proposition 13 is your friend. Big time. 

Originally posted by @David Lu :

Another CA-specific cost is Earthquake insurance. It's optional. Lenders do not require it and many homeowners don't carry it. The policy has high deductibles and the premiums aren't cheap. But I buy it anyway because I really can't afford to lose a building to an earthquake. But everyone's risk profile is different.

About the earthquake insurance: that is a good point, but is also region specific. There are a LOT of major fault lines in the LA area and in the bay area and some fault lines on the eastern side of the mountains, but if you are looking in the Central Valley (Sacramento down to Bakersfield) there is very low risk in earthquake damage

Rent control is the big one. It is important to understand AB1482, which has already been mentioned in this thread. Cities will also sometimes have their own rent control laws which overlay state rent control laws. 

On the topic of earthquakes... You will find that properties built pre 1930 are often not bolted to the foundation. Some insurance companies will have issues with this. Also, some cities have seismic retrofit requirements. In LA city there are seismic retrofit requirements for 4+ unit buildings built pre 1978 with tuck under parking. 

Originally posted by @Christine Smith :

Rent control. Also, depending on your strategy, STR regulations.

Good one! I'm familiar with rent control in NYC but will have to research further in CA. We are definitely considering STR as an option as well. It is regulated by municipality here in MA & will definitely research more as we narrow down our target market. I use Airdna as a starting point to research market trends which is a great tool.

Originally posted by @Jon Schwartz :
Originally posted by @Lauren Bellis:

To those of you currently investing in California, what are the most important factors to consider when analyzing properties? I'm looking for things that are specific to CA that I may not already know: specific laws, tax codes, maintenance issues specific to the region, etc. I have been a buy & hold small multi-family real estate investor on the east coast and I am now looking for my first CA property. I would love to learn some state specific issues I am unaware of that are specific to CA...to minimize surprises down the road!!

Wow, that's a huge question.

By population, CA is about the size of WA, OR, NV, ID, UT, AZ, MT, WY, CO, and NM combined. We have 58 county governments and 482 municipal governments.

So first question: where in CA are you looking to invest?

Best,

Jon 

 You got me there, definitely casting a wide net with this question! We are focused on southern CA but have not identified our target market yet. Considering San Bernardino/Riverside cities, Palm Desert, Lake Elsinore, and surrounding areas. But who knows, maybe we will settle on a different area based on the answers I get here! 

Originally posted by @David Lu :

Look up AB1482. It applies to all of California. It has two components: rent control and just cause eviction.

AB1482 prevents you from buying an under-performing multi-family, evict the current tenants, upgrade, then rent at market. Unfortunately, small multifamilies aren't priced with that into account. Buyers and appraisers still use comps for 2-4 unit multifamily, when the price should be based on income instead, similar to commercial. I regularly see listings that advertise "XX% rent upside potential" when it's not possible to just raise the rent XX% due to AB1482.

Another CA-specific cost is Earthquake insurance. It's optional. Lenders do not require it and many homeowners don't carry it. The policy has high deductibles and the premiums aren't cheap. But I buy it anyway because I really can't afford to lose a building to an earthquake. But everyone's risk profile is different.

 This is excellent thanks so much David, I have heard of issues with raising rent but haven't heard of AB1482, will definitely research. And earthquake insurance is on my radar will do a pro/con analysis based on the property we end up going with. It's so interesting how issues like these vary state to state, we definitely don't think about earthquake insurance out here!

Originally posted by @Seth Borman :

You need to understand how Prop 13 property taxes work.

 This is a great one Seth, and the first piece of advice I received when researching investing in CA. Definitely top of the list!

Originally posted by @Shiva Bhaskar :

Hi Lauren, we buy and upgrade multifamily properties in Los Angeles, but a few of the things I'll say below apply anywhere in CA:

1. Rent control laws. We have state rent control. Cities like LA, SF, Berkeley, West Hollywood also have their own laws. Make sure you know which laws apply where you're buying. 

2. Zoning obviously. Realtors will sell a development dream of a property, make sure you verify.

3. In urban areas, areas can go from bad to OK quickly, within just 1/3 of a mile distance. In parts of LA where we invest, some investors could get stuck buying on a bad block and have a terrible experience, but those who know will purchase 10 blocks to the north, and will be fine. 

4. Rehabs are pricy here and workers are in short supply, like everywhere I suspect. 

5. Try to buy in an area that is supply constrained, i.e. there's demand but it's tough to build more. This is why Los Angeles and San Francisco have done so well in terms of appreciation, but a Bakersfield or Fresno, while still good, is not quite as strong for long term growth. 

6. Taxes of course. Proposition 13 is your friend. Big time. 

Thank you Shiva, your response is extremely insightful! I especially appreciate your advice regarding regions experiencing supply constraint, I will be sure to dig deeper into this topic when narrowing down micro-markets. We experience the quick transition from nice to bad neighborhoods in Boston as well, but many of the "bad" neighborhoods are now turning for the better. It's difficult to gauge where and when...and even more so without boots on the ground to experience some of the first signs of improvement.

@Lauren Bellis , If you haven’t established residency yet, I would look at all legal structures to protect all your non-California assets/income from being captured by the California tax code. This doesn’t exactly answer your question, but it’s something to think about depending on your financial situation and future investment plans.

There are many successful, wealthy investors in CA, but if I had a time machine, I wish I knew about the clawback provisions California has in their tax laws for if you ever decide to move real estate assets out of California through 1031. 

Originally posted by @Karim E. :

@Lauren Bellis could anyone explain Prop 13 property tax and its benefit and how it help an RE owner? Sorry, I am new and not familiar with tax laws.

Hi Karim, I am just myself learning about this topic & am by no means an expert. But based on my research:

CA Proposition 13 limits the tax rate for real estate to no more than one percent of the full cash value of the property.The proposition decreased property taxes by assessing values at their 1976 value and restricted annual increases of assessed value to an inflation factor, not to exceed 2% per year. It prohibits reassessment of a new base year value except in cases of (a) change in ownership, or (b) completion of new construction. These rules apply equally to all real estate, residential and commercial—whether owned by individuals or corporations.

This is great for property owners & investors because it limits the rate at which RE is taxed. It is not necessarily the best thing for municipalities because it limits tax revenue for schools, roads, etc.

Here's an interesting video on the history and impact of Prop 13: https://youtu.be/pF4xnxk0Oas

For now California is all a about  supply and demand . Pick a stable area where there is job growth that sustainable for the working class here. I would focus on Sacramento and the Central Valley . Try and find a value add type multi family. Check on the crime stats and the historic rents . To get a true picture I would focus on what rents did from 2008 thru 2012. Happy to network and assist .

Originally posted by @Robert C. :

@Lauren Bellis, If you haven’t established residency yet, I would look at all legal structures to protect all your non-California assets/income from being captured by the California tax code. This doesn’t exactly answer your question, but it’s something to think about depending on your financial situation and future investment plans.

There are many successful, wealthy investors in CA, but if I had a time machine, I wish I knew about the clawback provisions California has in their tax laws for if you ever decide to move real estate assets out of California through 1031. 

Excellent feedback thank you Robert. I have been looping in my accountant/lawyer with my plans & will now keep clawback provisions on my radar. Have not established CA residency yet so I have some time to explore my options.

Originally posted by @Jo-Ann Lapin :

For now California is all a about  supply and demand . Pick a stable area where there is job growth that sustainable for the working class here. I would focus on Sacramento and the Central Valley . Try and find a value add type multi family. Check on the crime stats and the historic rents . To get a true picture I would focus on what rents did from 2008 thru 2012. Happy to network and assist .

Thank you Jo-Ann, analyzing trends for rent, crime, etc is definitely part of my initial analysis...i love the idea to focus on rent trends from 08-12, will help get a sense of true growth & pinpoint transitioning markets. Value add multi fam is definitely the goal, Would love to connect I appreciate the support!

If you are sane, one would avoid Cali, Washington, Colorado and New York. We are the enemies in these states.