Rent control has seen an increase in popularity in many communities in California and across the country over the past few decades. Whenever there's a rent increase, tenants are priced out of their homes and neighborhoods. It’s easy to see why renters would be in favor of new rent control law.
But how does a new rent control law affect landlords in San Diego?
Rent control laws dictate what landlords can charge for rent on their properties. This is done in one of two ways: either by an annual increase percentage, or a flat rate based on the size of the home.
Rent control may seem scary, but keep in mind that in California, the new rent control laws only impact corporate-owned properties and buildings that are more than 15 years old. An individual with one new single family property would not be affected, for example.
As a landlord in California, it helps to stay informed of any new rental law so that you can make the best decisions regarding your property and its rent. If you're someone who rents their home, you should also be familiar with when landlords can raise rents. Let’s review the pros and cons of rent control.
A rent control law typically puts a cap on the amount that a rental rate can increase each year, which is beneficial for one who rents. As a result, tenants will be much more likely to rent your property long term.
As a landlord in San Diego, this new California rent control law should cause fewer vacancies every year, as it'll increase the chance that your current tenants will renew their lease.
Vacancies are costly and can cause a number of budgeting problems. You'll eliminate missed rent payments by having your tenants renew their leases.
Tenant Financial Stability
Tenants find an opportunity to increase their financial stability when a new rent control law is enacted. Because the point of any rent control law is to put a legal cap on any rent increase, a new rent control law in California means tenants can save more money and prepare for the future, without needing to rely on a significant increase in income or a career change.
Having more financial stability can help boost the economy, as tenants in San Diego and across California may increase the money they have to spend on things other than rent, like amenities for their daily lives, or even education for themselves or their children. Rent in San Diego and in other areas in California is considerably more expensive than most other places in the country, which is why renters new relief in law form.
Tenant quality of life in California will likely increase due to controlled rent. As rent control law helps tenants gain financial stability, you can expect them to stay for the long term.
In San Diego and other parts of California where there is a shortage of housing to rent, a new rent control law might increase the efficiency of housing space.
Rent control law can mitigate housing shortage issues in California by also incentivizing landlords to fill their properties, instead of leaving rentals vacant and attempting to sell the property, which leads to higher prices on the market.
This new law will help increase the supply of affordable housing in San Diego, which in turn helps lower the amount of homelessness in municipalities.
The rent control law doesn't apply to all California rental properties. In fact, there are quite a few exemptions. The new legislation does not apply to every housing situation in a one size fits all style. Some notable exemptions to rent control law include:
New properties for rent (less than 15 years old)
Single-family homes and condos for rent that are not owned by corporations
Units for rent in a duplex where the owner occupies the other unit
Mobile homes for rent
If you're a landlord in California, you may also raise the rental rate of a unit as much as they please once a tenant leaves, before a new tenant moves into the rental unit. As a result, the new law also features tenant protections, such as requiring a “just cause” for any tenant that has lived in a rental unit for at least one year.
No Incentive to Upgrade
As a landlord, you might consider upgrading the appliances and features of a rental property every few years to keep tenants or to attract new ones. With these upgrades, you can reasonably increase the rent price, as your rental property will stand out in the San Diego rental market.
However, with rent control law, you might feel your incentive to upgrade the space is decreased. If you pour resources into upgrading one of your properties, you are still limited by the law as to what you can charge by the yearly increase rate.
You may not feel inclined to replace appliances or amenities until they break down, and then you might consider replacing them with a similar model instead of a newer one.
However, to offset this, tenants that are more likely to renew their leases under these new laws will likely take better care of their space, knowing they will be occupying it for a longer duration.
Prices Below Market Rate
Due to rent control laws, some apartments and houses may fall below the market rate. The longer a unit is rent-controlled, the further it will fall behind. This means that landlords may not see as much income for their properties as they could potentially get.
The new law might make it harder to reach financial goals, and you might not have enough resources to cover maintenance on the property, which might lead you to put it off. This can lead to the deterioration of properties over time, which then contributes to the lack of affordable housing.
Legal and Administration Fees
Because of rent control laws, landlords may incur more legal fees as they attempt to find loopholes, or simply ignore, regulations. This may result in costly legal disputes between landlords and tenants.
Additionally, monitoring rent control schemes can result in more bureaucratic work and controls to be put into place.
This can lead to high administrative costs, which are covered by higher taxes, and that can seriously hurt the local economy by lowering tax income, which could be used for infrastructure projects for the municipality.
Financial Issues for Property Owners
Rent control regulations can have serious financial implications for property owners and real estate investors. Rent control may discourage builders and investors from creating new housing, contributing to the high demand and homelessness problems.
It might also become harder to sell your property because buyers will consider the caps in rent increases in their purchase decision. If you took out a loan with a bank to cover your investment, rent control may limit your income so that it is harder to pay that loan off. Many property owners will likely turn to property management companies to help them navigate the new legislation.
The 2019 Tenant Relief Act
A range of new tenant-landlord laws came into effect this year, known as the Tenant Relief Act of 2019.
It’s important to be aware of how any new law affects real estate investors.
Rent Caps: The new Rent Cap mandates that rent increases can't be by more than 5 percent in addition to the percentage change in the consumer price index in a year.
Just Cause: When a tenant has lived in a unit for more than a year, their tenancy can’t be ended without “just cause.” If just cause isn’t provided, the landlord may even be responsible for paying the tenant the amount of a month of rent to help with relocation costs.
Tenant Relief Act Exceptions: The Tenant Relief Act (also known as AB 1482) does not apply to single family residents, condos, or townhouses as long as the owner isn’t an investment trust, corporation, or an LLC with corporate members.
Tenants who live in units not protected by the Tenant Relief Act were informed in the summer of 2020 and future leases in California must stipulate whether the cap on rent increases at 5 percent applies to them by law.
Some landlords who manage small, single family homes are exempt from the new Rent Cap and Just Cause regulations, but it’s important to be crystal clear on whether these terms apply to you and your property.
If you’re unclear, you may want to contact a property management company or another expert on California rental law.
When a new rent control law caps rent increases it has a serious impact on both tenants and landlords. The new rent control law will bring a number of advantages and disadvantages for those who own a rental property or other real estate investment in California.
Implementation of rental regulations makes sense under specific conditions, such as large cities with high demand for affordable housing. However, a law that removes the ability to raise the rent on a rental property can create problems down the road that need to be avoided.
California's new rent control laws have a sunset in 2030, meaning they will not be around forever. This may create enough incentive to build enough housing space to meet demand and lower the rate of homelessness in the area, rather than keeping California rental prices stagnant by law.
If you have questions about what impact the rent control laws might have on you and your rental property in the San Diego area, reach out to us at North County Property Group today! We have extensive experience in property management of single family homes, multi-family units, vacation rentals, real estate, and more.