What are some challenges with being a landlord in California?

Question

I've seen some comments on recent posts along the lines of "...but I won't be investing in California because the laws and regulations are very unfriendly to owners/landlords." On paper I recognize California is a high tax/high regulation state (lived here for over a decade and wouldn't refute that) but I'm curious if anyone has specific regulations or laws in mind that they can share that make ownership/landlording more difficult than other areas of the country. Even better if you know of local Bay Area laws to point to or in consideration under legislature in the area. For example, I know Palm Springs has a limit on how many STR licenses a business entity can have and Napa/Sonoma are either in the process of limiting or have already limited the number of STR licenses in the county Links, resources etc. would be great.

Nathan Gesner · Answer

Where to start? It is the most regulated, litigated state in the Country. When NOLO wrote a book about how to manage rental properties in America, they wrote one book that covered 49 states, then they wrote a completely separate book for California. That was over 20 years ago and it's only gotten worse.

I just shared a video a couple weeks ago. Professional property managers were unable to collect rent or inspect a home for three years because of COVID. Yet the Tenant is able to work, his kids go to school, he drives nice cars, etc.

California has limited reasons why a Landlord can terminate a lease. Last year an attorney negotiated a $500,000 payment to get a RENTER out of a house so the owner could renovate and sell.

The ability to gain appreciation is incredible, but it comes with a lot of risk. I know many investors that bought in California in the 70s, 80s, 90s, and 2000s, but now they've sold all their property and moved their money to other states because they're tired of what's happening.

Greg M. · Answer

You mention STR, forget about those. The people hate STR so much that these will likely be restricted on a state level.

What's bad depends on the area, but you may run into: Mandatory renewals. No starting evictions until 30 days past due. Rent control that may restrict your increases to way less than actual inflation. Requirements to pay tenants to leave and these payments can be very large. Frequent suspending/changing of laws that allow you to remove tenants for lease violations, like having pets, unauthorized people living in the unit, etc. Forcing you to allow "relatives" to move in. Free legal for tenants to fight landlords. Activist judges that want to give the tenant one more chance on your dime. Inability to ever remove your rental from the rental marketplace. Near impossibility to get tenants out to do major reno and if you do, you have to allow them back to their original unit at the old rent rate. Inability to mark-to-market upon vacancy. And worst of all is our government that knowingly does things that are bad for the market, but it buys them votes.

Add to all the above the fact that very few properties cash flow positive and it takes a special kind of investor to take the risk.

CA is regulating itself out of the mom and pop rental market. M&P are fleeing the market at a rate DOUBLE what it historically was. Give it time and only mega corporations will own rentals here. Just too much risk for most people.

Sam Yin · Answer

@Raj Ajrawat

The responses are very well intentioned and very educational.  I would like to bring a slightly different perspective, for what its worth...

I have only conducted business in CA. I am open to out of state and would like to if the right opportunity presents itself. Thus far, all my opportunities are here in CA.

Where I'm getting at is that I have only experienced CA. Thus, my business model is for CA. I wish I experienced other states... perhaps I might have grown faster or more profitable.

Rent control is real. Some may feel it stifles rent increases, but I also think it helps with the increases. Because of the rent control, it motivates LL to raise rents, and often to the max allowed. Thus, it reduces the inventory for tenants. The law covers you, as long as you work within it. There will be those that argue about super low rents that will take too lo g to be profitable.  But that seems counterintuitive.  If that was the case, why would you purchase that property? If that was your property, either you are already profitable,  it's all paid off, or you are just running bad business and this is not the right business venture to pursue.

Evictions... I evicted plenty of people before, during,  and now post covid. It is not impossible and it is not difficult. It is tedious,  but not to the degree that people make it out to be. For those that argue about the city rent controlled areas and such, why would you invest there after your due diligence. CA is huge and there are many areas that are not rent controlled beyond State wide rent control. For the current owner of such property, you are either already profitable or it's time to move on from it. For prospective investors, invest in other areas.

For context,  I'm as mom and pop as they come. No partners, nothing special. I'm able to slowly but surely create systems to be able to manage over 60 rentals about 5 hours a month. Not passive, but passive enough for me. It is really FIRE. It took only a couple of years of intentional investing.

I'm very new and I'm still learning. So far doing 3 deals a year, which is my goal, that includes sales/purchases. Realistically just adding one apartment year. Got into multifamily June of 2021. Had a few SFRs prior that was barely breaking even, but it was strategical. It not difficult.  It just takes due diligence and an open mind.

Profits are decent. Cash flow probably less than OOS, but I do not know. I was doing it to build legacy wealth,  not get rich. The last $5M of equity was built in the last couple years. Gross approaching $1M/yr at 35% margins and growing. Still learning and open to new ideas. Goal is $50M in 10years or less then just chillax.

Forget the nay sayers. Do what fits YOU. If that's CA, then do CA. If that's OOS, then go OOS. BUT dont bash CA till you try it. Giving up after a few hurdles is NOT trying it. Local investing has its benefits because it allow better control. Give it a few years and a few properties. Evict a few people and transact a few properties.  Then decide. I'm solo with a goal of $5M assets under management growth per year, while maintaining LTVs under 65%. I'm barely meeting it, but that's why I set the bar there. Some years over and some year under, but averaging $5M/year growth as long I keep wanting to.

Point is, if it was that bad, there would not be LLs here. May be there is a big exodus of mom and pop, but I do not see it. The inventory is slim because mom and pop LLs are fighting ruthlessly here to snatch them up. I'm witnessing it.

Hope that brings a fresh perspective without too much controversy.

Dan H. · Answer

You have posts on both sides and they happen to both largely be correct.

Many of the laws cited are local laws and not statewide.

There is statewide rent control on multi family but it is 5% + CPI capped at 10%. Last year 10% was the cap and 10% will be the cap next year.  10% increase at market rent in my market is a significant increase (one of my tenants got $600/month increase).

The statewide 15% STR tax proposal was pulled by its author and will not get assembly vote this year (and would have lost if it had).

Local rules can be more strict than the statewide rules.  Most of the most stringent of rules cited by posts were local and not state rules.

Do you know which state has the highest percentage investor owned residential?  CA.  Do you know which 3 cities according to Case Shiller had highest total return for this century in the US?  San Fran, LA, San Diego. My market is San Diego?  Do you know where it ranks for evictions and late/missed payments?  Both are near lowest in the country. Do you know where neighborhoodscout ranks coastal CA cities for appreciation this century?  Virtually all coastal cities are 10/10 in the nation (look up your city).

The reality is low vacancy rates give LL a lot of power and helps ensure quality tenants even with the tenant protections.

Ca has many tenant friendly policies and has the highest RE ROI of any state (at least if you use this century as the time frame).

I have been burned recently by a local ordinance (Mission Beach STR quota that forced me to shutdown an STR that we have legally operated (paid our ftransit occupancy tax) since 1999) that I am not thrilled about.  However, I have also made a lot of money off of CA RE (generational wealth).  This demonstrates both views not only are correct but both views can impact the same investor.

good luck

Corby Goade · Answer

I work with an endless list of clients who are moving their investments out of California- not because they can get better returns, but because they've completely lost control of ownership. The cities and states have full control of their properties, not them as owners.

If you just take a peek to the east a bit, you'll find a few states that are very landlord friendly, offer similar, often better returns and are easily accesible to you, $100 flights, less than an hour, ect.

Not sure what your strategy or goals are, but having rights and control of your properties is vital in this business. I'd certainly take that in to consideration.

Best of luck!

Bjorn Ahlblad · Answer

Insane for sure, and they did. Berkeley looking to do the same, and I am sure the will.

How can a LL assure the safety of their tenants? They cannot!

Adah N. · Answer

@Sam Yin

Thanks for sharing.

John Morgan · Answer

I’d stay far away from tenant friendly blue states like CA. I’ve heard horror stories after horror stories.

Bjorn Ahlblad · Answer

@Raj Ajrawat Let me start: City of Oakland does not allow LL to conduct criminal background checks. Next!

Brad S. · Answer

A couple state concerns below and then there are local issues, like local rent control, etc, depending on the city.

*  CA Assembly Bill 1482 - CA rent cap law with other provisions, effective January 1, 2020

*  Proposed Senate Bill 584 - 15% tax on short term rentals

And there are and have been a slew of other bills that have been and continue to be proposed, and for some, it is just a matter of time before they get passed.

Search the above bills for more detailed info

What are some challenges with being a landlord in California?

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