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Wes Blackwell
  • Real Estate Agent
  • Phoenix, AZ
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Sacramento Rent Control 101 - Everything You Need to Know

Wes Blackwell
  • Real Estate Agent
  • Phoenix, AZ
Posted Jul 2 2018, 14:57

Sacramento Rent Control 101 – Everything You Need To Know

I work with a lot of investors from California’s Bay Area who are looking to escape the sky high prices and find more affordable markets where the numbers actually makes sense. And usually the first stop on the search is Sacramento, just a mere two hours away near the top of the state’s Central Valley.

But besides the astronomical housing prices, there’s one other thing that Bay Area investors are looking to escape in looking for greener pastures… rent control.

If you’ve been asleep at the wheel, you might have missed the news that the state of California will have a measure on November’s ballot to repeal the Costa Hawkins law passed in 1995 the prohibits local communities from enacting rent control policies.

COSTA HAWKINS LAW QUICK OVERVIEW

  • No Rent Control on Single Family Homes
  • No Rent Control On Properties Built After February 1st, 1995
  • Allows Landlords To Raise Rents With New Tenants

http://www.kcra.com/article/ca-ballot-measure-aims-to-help-cities-like-sacramento-with-rent-control/21756945

*** One tenant in the video says she’s living in an 813 sq ft dump off Fruitridge and paying $1,400/mo in rent. Wowza!

Should the initiative pass in November, cities and counties would be allowed to change existing laws, or adopt new ordinances without any restrictions.

Repeal would allow cities and counties seeking to adopt new rent control to apply limits on rent increases to any housing of their choice. It would also allow jurisdictions to change or strengthen existing local rent control laws.

SACRAMENTO RENT CONTROL OUTLOOK

So, let’s say the initiative passes (investors and landlords, you better get out and VOTE!!!)… what happens in Sacramento where so many people from the Bay Area are moving, and so many of you BiggerPockets investors are looking?

First and foremost, you should know that Sacramento Mayor Darrel Steinberg STRONGLY opposes rent control, and wants to keep it off the ballot:

https://www.sacbee.com/news/local/news-columns-blogs/city-beat/article212766719.html

Second, the Sacramento Association of Realtors also strongly opposes rent control. Just look at the cover of the most recent issue of our trade journal:

The California Apartment Association and about a dozen other big lobbying entities also oppose rent control too. And trust me, they’re making their voices heard.

But, so are the tenants. Just take a look at all the people huddled up outside the California Capitol building in protest:

Watch the video at the link below:

https://www.sacbee.com/news/local/news-columns-blogs/city-beat/article212688589.html

WHAT THOSE WHO SUPPORT RENT CONTROL DON’T UNDERSTAND

Here’s something I’ve seen time and time again when it comes to rent control… those in support don’t seem to understand that you can’t live in a really cool area (like California) and not pay extra to live there.

I made this connection when I say flyers in Midtown Sacramento posted all over walls, lamp posts, and coffee shop windows saying “Keep Midtown Affordable” <-- LOLZ

Midtown is undoubtedly the hottest, coolest, hippest area in all of Sacramento. It has all the cool shops, nightclubs and amazing places to eat and drink. And it offers you all of the big city feel without the big city price.

Sooooo… it kinda goes without saying that you’re going to pay more to live there because it’s in such high demand.

I remember back in my college days when my classmates where paying several hundred dollars extra to live in some hundred year old building in Midtown just so they could be close to all the action… meanwhile I’m paying way less and living in a gated community with a pool. Silly millennials, whenever will they learn? :-p

That small microcosm of Midtown vs. the rest of Sacramento is representative of California vs. the rest of the nation. We got a lot of cool stuff, like beaches, nice weather, high paying jobs, etc. So I understand why people want to live here.

But there’s only so much housing… and so many people that want it. And therefore, housing expenses go up – whether it’s rent or purchase price.

It’s simple supply and demand.

If you’ve read some of my other posts here about millennial migration and the trends affecting the Sacramento and Stockton housing market, you’ll understand why there has been a sudden increase in demand for Central Valley housing as of late:

https://www.biggerpockets.com/forums/621/topics/396725-millennial-migration-to-sacramento-2017---here-comes-the-rush

https://www.biggerpockets.com/forums/627/topics/528157-stockton-the-last-bastion-of-housing-affordability-in-california

This trend isn’t stopping either… more and more millennials are turning 30 every year (over 4 million) and the average age a woman has her first child is 28. Living in downtown San Francisco with 5 roommates is cool when you’re single… it’s not cool when you’re pregnant.

So they’re coming to Sacramento and Stockton to look for more affordable housing and finally buy a house. And when the rents are dirt cheap compared to the Bay Area, they’ll gladly pay them. It’s the incumbent residents that suffer the most from rent hikes.

BUT – they need to understand where they live. It’s California. We’ve got cool stuff. It’s a great place to live (for most). And so therefore… it’s expensive.

WHAT HAPPENS IF RENT CONTROL PASSES IN SACRAMENTO?

Here are a few things to consider if rent control passes in Sacramento (probably wouldn’t be until 2019-2020 as it has to pass the California ballot in November this year first).

Landlords and Potential Sacramento Investors Shouldn’t Freak Out Just Yet

Ultimately it’s going to depend on exactly what laws are passed. Maybe it only affects certain areas of the city (like Midtown)… maybe you’re allowed to increase rent to market rate with new tenants. In those cases it won’t be so bad and you might not even be affected. Just set your tenants on 6 month leases and update the rents twice a year if it worries you that much.

But if there are more restrictions, like a city-wide proposal that only allows you to increase the rents 3% per year, be on the watch for a MAJOR retaliation from landlords city wide.

Here’s the thing about business-minded people… you can’t tax them. They will always move the cost to the consumer. ALWAYS. Increase business taxes = cost of products and services goes up. So the only person who loses is the consumer.

And in the case of imposing rent increase limits, I wouldn’t be surprised for the city’s landlords to make a HUGE jump in rent prices immediately before the measure goes into effect. Why? Because that initial base price sets the amount of the future increases to follow.

New Construction On Housing Units May Come To A Halt

California is already an extremely expensive place to build… there’s all kinds of fees, inspections, nature protection, red tape, etc. By limiting returns on new projects, builders will look elsewhere to make their profits.

Just take a look at this chart below showing what happened to the construction of new rental units in Ontario after 1975 when rent control was implemented:

The same thing would happen here in Sacramento (and the rest of California). And that just further complicates the problem. More demand + less housing units = higher rent. What we need is MORE housing, not less!

The Stockton Housing Market May Boom Like Crazy

If Sacramento passes rent control and Stockton doesn’t, the Stockton Housing Market may experience a big boom over the next few years.

Why?

Like I said in a previous point, Sacramento landlords may hike up rents prior to the law taking effect, which would make Stockton a much cheaper alternative to Sacramento for renters.

Second, Investors will also flock to Stockton since there won’t be any rent control, and compete with owner-occupants for housing… competition for housing = higher sales prices.

BUT – that may put Stockton on the same path in a few years’ time once prices and rents catch up with Sacramento. So keep that in mind too. This initiative affects EVERY market in California… not just Sacramento.

DOES RENT CONTROL EVEN WORK?

One thing supporters of rent control here in Sacrament don’t seem to take into consideration is that rent control might not even work…

https://www.mercurynews.com/2017/11/01/bad-news-for-tenants-bay-area-rents-are-still-rising-in-dozens-of-cites-across-the-region/

https://sf.curbed.com/2017/11/3/16603900/rent-control-san-francisco-stanford-study-gentrification

Quote of the day: ““We find that six percent decrease in housing supply led to seven percent increase in rental prices.” <-- See the Ontario graph above to see how this will impact Sacramento and every other city who implements it.

HOW RENT CONTROL IN CALIFORNIA MIGHT AFFECT OTHER STATES

Lastly, one impact that rent control might have is a housing market surge in nearby states like Nevada and Arizona.

First, many California investors will make the move to states that don’t have rent control policies. Here’s a map for you below (lolz to ensue):

Second, when rents go up in Sacramento regardless (for all the reasons I stated above), many people will consider moving to those states with more affordable housing. Especially if they’re younger (millennials).

The 70 year old woman who’s been going to the same church in Oakland for the past 40 years isn’t going to be the person moving out of state. Her whole life is here, and all her family and friends too.

But for the young millennial? Bye Felicia.

https://www.cnbc.com/video/2018/06/20/costar-group-more-millennials-moving-out.html

And when you take a look at the nearby alternatives to California, the pricing really matters:

CONCLUSION:

Don’t freak out just yet. First the initiative has to pass for the state of California. Then it has to pass the local legislature too. And a whole army of lobbying entities are against it, and so is the city’s leadership. So it may not even come to pass.

If it does, there’s lots of ways around it (I foresee all kinds of advice posts for Bay Area investors on converting units to Tenancy In Common or Condo Conversions).

Also, keep an eye on the migration to Las Vegas / Henderson, Nevada and the Phoenix Arizona Metro Area over the next few years should it pass…

Las Vegas was already named the #1 hottest market for 2018 by Realtor.com (probably because everyone in California over the age of 21 has already been there):

http://www.fox5vegas.com/story/37301190/las-vegas-named-hottest-real-estate-market-for-2018

And the Arizona Sun Corridor (Prescott to Nogales, running right through Phoenix) is set to double in population by 2050 (up to a whopping 12 million!)

http://www.america2050.org/arizona_sun_corridor.html

Rent control in California and it’s long term effects may just make these happen sooner than normal.

  • Real Estate Agent CA (#01991457) and AZ (#SA674470000)

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