Using 2020 Rent Control To Your Advantage

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You need to learn how to stay in control with the new 2020 Statewide California Rent Control

  1. Stay on top of rents – 5% + COL increase each year up to market maximum
  2. Negotiate hard for cost reductions when buying buildings with rents far below market – you can take years to get to market rents
  3. Solid contract with tenants identifying all the reasons for violation of the contract
  4. Consider the initial rental contract to be 11 months so it is easier to evict before they are renting for a year

We are very fortunate that the real estate organizations in California were able to negotiate a reasonable rent control law. However, Rent Control is just a way to guarantee that housing will not be maintained to the best condition. Many (but not all) landlords will stop making major improvements if they are forced to keep their rents below market and their returns are small. It is the unintended consequence of a bad idea.

Fortunately, the statewide rent control, in my opinion, is workable for investors. The big elements are

  1. Rent increases are limited to 5% plus cost of living
  2. Eviction can only be made for cause
  3. Cost to evict

#1 is the item which evokes a really negative knee-jerk reaction amongst investors. However, considering the Cost of Living (COL) in Orange County, CA was 3%, the total rent increase allowed is 8%.

Well, who can argue with #2? Evicting bad tenants is still allowed and it prevents capricious evictions at the whim of a landlord. If you have ever rented and been told to move with no justification, it is a huge hassle and as long as you are abiding by the rules, this is reasonable. The problem with the law as written is that it harms the small mom and pop investors- the nice people who like to keep their good tenants and don’t raise the rents in order to keep these good tenants. It is better than tenants who damage the property, are slow in paying (or worse – don’t pay and have to be evicted) and irritate other tenants causing turnover, vacancy and lost revenue.

Unfortunately, the years of low rents means that when a landlord goes to sell the property, the buyer has to put up with several years of below market rent. Any prospective buyer will have to raise rents- losing tenants as they prep for new tenants as well as vacancy. This results in the property having a lower value and the good landlords who take care of their tenants and don’t raise rents to the market end up selling for less money. So the law effectively punishes these nice people. Perhaps there needs to be a provision in the law for a one time rent increase to market on the sale of a property or a rent acceleration clause that allows rent catchup for the owner so they are not punished.

Of course, we can take advantage of this and make lower offers to buy these properties which are guaranteed to have a higher value in the near future if you can tolerate the lower income until rents are increased.

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