Rent Control Strategies

[Osazee Edebiri]

Hi BP,

Wondering if anyone has suggestions for rent control units? Rent control  Particularly in Oakland, California.  I have a unit at an excellent rate, and like to get my other units that are at low rents to at least market rate.

[DG A.]

can you owner occupy? How many units in your buildings? 

[Thomas S.]

It depends on how your rent controls work.

One part of my business is not only controlled with yearly increases but also increase limits during turn over. To get around the turn over restrictions I gave notice to all tenants raising rent to market and then grandfathered in a rent discount to there present rent. In theory this allows me to raise new tenants directly to market rent at turn over.

As for annual rent increases the only way to go above annual restrictions is through cap expenditures. Regrettably rent controls kill the business. Long term tenants are extremely undesirable and spending money to maintain the property is a waste of money.

[Osazee Edebiri]

Originally posted by @DG A.:

can you owner occupy? How many units in your buildings? 

 I could have owner occupied,  but I didn't want to have the commute from Oakland to San Jose.

3 units

[Osazee Edebiri]

Originally posted by @Thomas S.:

It depends on how your rent controls work.

One part of my business is not only controlled with yearly increases but also increase limits during turn over. To get around the turn over restrictions I gave notice to all tenants raising rent to market and then grandfathered in a rent discount to there present rent. In theory this allows me to raise new tenants directly to market rent at turn over.

As for annual rent increases the only way to go above annual restrictions is through cap expenditures. Regrettably rent controls kill the business. Long term tenants are extremely undesirable and spending money to maintain the property is a waste of money.

 Yes, our rent control works similar. Luckily the rents had never been increased, so I was able to do the CPI increase, but that doesn't come close to market. 

The property cash flows, but if the tenants were to move. The cash flow would be much higher.

[Robert Marston]

How many years did you NOT raise the rents? I am almost certain you can "bank" years that you do not increase rents however you cannot do a yearly increase more than 3 times the CPI for the year (2% till June 30th, so a 6% total increase) and no matter the CPI you cannot adjust rents >10% in any one year.

You could earthquake retrofit the building and that would increase your value plus allow you to adjust rental rates based on that so long as you don't use any public monies or Insurance to pad your costs. This could be a good tool to protect your investment and get the rental increase to offset the costs. Not gonna get you to market rates I'm sure but it is the idea that popped into my head! =)

[Osazee Edebiri]

Originally posted by @Robert Marston:

How many years did you NOT raise the rents? I am almost certain you can "bank" years that you do not increase rents however you cannot do a yearly increase more than 3 times the CPI for the year (2% till June 30th, so a 6% total increase) and no matter the CPI you cannot adjust rents >10% in any one year.

You could earthquake retrofit the building and that would increase your value plus allow you to adjust rental rates based on that so long as you don't use any public monies or Insurance to pad your costs. This could be a good tool to protect your investment and get the rental increase to offset the costs. Not gonna get you to market rates I'm sure but it is the idea that popped into my head! =)

 Thanks Robert, the rents had never been increased, so I increased rents and banked upon purchase.

I will look into your Earthquake retrofit idea.

[Ryan Landis]

@Osazee Edebiri how much will the value of the property go up if you are able to bump rents? I had someone just last week talk to me about a 4 unit they have out in Oakland where buyouts probably make a ton of sense.

[Thomas S.]

Depending on the tenant I have in some cases been forced to make their lives so miserable that they choose to move. It is the only way to keep rents current.

It's unfortunate that it is necessary to operate business this way but the government regulations sometime make it necessary due to the unacceptable financial environment they created.

In my jurisdiction long term tenants are simply not cost effective to keep. Ideally we need a turn over every 3 years to maintain market rent.

[Osazee Edebiri]

Originally posted by @Ryan Landis:

@Osazee Edebiri how much will the value of the property go up if you are able to bump rents? I had someone just last week talk to me about a 4 unit they have out in Oakland where buyouts probably make a ton of sense.

 Hi, Ryan that's some of what I am trying to figure out. I tried to do research on buyouts, all I have found so far it seems they are arbitrary. I could potentially go that route, but two things. I want to makesure I don't risk getting sued later and that it is the best financial decision.

A few things I need to learn. How do you calculate the value a property goes up based on rent increases? How do you evaluate wether to buy out a tenate and the best strategy to do so, (like offering 5k vs 20k?

[Osazee Edebiri]

Originally posted by @Thomas S.:

Depending on the tenant I have in some cases been forced to make their lives so miserable that they choose to move. It is the only way to keep rents current.

It's unfortunate that it is necessary to operate business this way but the government regulations sometime make it necessary due to the unacceptable financial environment they created.

In my jurisdiction long term tenants are simply not cost effective to keep. Ideally we need a turn over every 3 years to maintain market rent.

 Good to know, please elaborate on the operation of your business, are you talking deferred maintenance, what else?

[Thomas S.]

You need to be more creative than that, what I do can not/should not be posed on a open forum that is likely being monitored by welfare pimps and government agencies.

I will say that what you need to do is get them upset enough with their treatment that they either leave or stop paying rent. As soon as they stop paying rent they are on a downward spiral that you then escalate. They usually shoot themselves in the foot if you have protected yourself. 

One word of caution you need to be well informed of tenant rights to bend and skirt the law (not to be attempted by newbie or hobby landlords).

[Osazee Edebiri]

Originally posted by @Thomas S.:

You need to be more creative than that, what I do can not/should not be posed on a open forum that is likely being monitored by welfare pimps and government agencies.

I will say that what you need to do is get them upset enough with their treatment that they either leave or stop paying rent. As soon as they stop paying rent they are on a downward spiral that you then escalate. They usually shoot themselves in the foot if you have protected yourself. 

One word of caution you need to be well informed of tenant rights to bend and skirt the law (not to be attempted by newbie or hobby landlords).

 I figured that is what you were getting at. Thanks

[Ryan Landis]

@Osazee Edebiri I would highly recommend talking to an attorney that is familiar with the process. Others might say you can do it more economically on your own, but the way I view it is a lawyer is just part of doing business. One arbitrary way to think about it is how much more valuable would the place be to you if you were getting an extra $1,000 a month? $2,000 a month? Etc. The real way to do it is to look at comps :)

[Osazee Edebiri]

Originally posted by @Ryan Landis:

@Osazee Edebiri I would highly recommend talking to an attorney that is familiar with the process. Others might say you can do it more economically on your own, but the way I view it is a lawyer is just part of doing business. One arbitrary way to think about it is how much more valuable would the place be to you if you were getting an extra $1,000 a month? $2,000 a month? Etc. The real way to do it is to look at comps :)

 Thanks Ryan, I talked to a friend who successful did it in Oakland and talking to attorney sounds like the right way. He even showed me what the attorney wrote up and what he paid would definitely be worth it. I am going to try that route. I will wait to see how they handle the rent increases first, obviously no need to pay if they help me get rif of themselves.  

Maybe I will try Greg's way whenI become more experienced. Lol

[Susan O.]

Originally posted by @Osazee Edebiri:

Originally posted by @Ryan Landis:

@Osazee Edebiri I would highly recommend talking to an attorney that is familiar with the process. Others might say you can do it more economically on your own, but the way I view it is a lawyer is just part of doing business. One arbitrary way to think about it is how much more valuable would the place be to you if you were getting an extra $1,000 a month? $2,000 a month? Etc. The real way to do it is to look at comps :)

 Thanks Ryan, I talked to a friend who successful did it in Oakland and talking to attorney sounds like the right way. He even showed me what the attorney wrote up and what he paid would definitely be worth it. I am going to try that route. I will wait to see how they handle the rent increases first, obviously no need to pay if they help me get rif of themselves.  

Maybe I will try Greg's way whenI become more experienced. Lol

http://ohmyapt.apartmentratings.com/the-argument-against-rent-control.html

Looks like they are expanding rent controls

http://www.tenantstogether.org/ This group is heavily funded pushing for bureaucracy in each city in California.

https://www.sftu.org/ Tenant organizations rising up all over California with big agendas backed by a lot of $$$ from socialist organizations.

http://www.housinglb.org/ Long beach rent control pushers.  They have agenda for creating new bureaucracies, new taxes in Long Beach and spreading to Orange County

This is getting crazy: http://www.laweekly.com/news/legislation-to-expand...

[DG A.]

The funny thing is, at the end of the day... rent control combined with NIMBY's against real estate development wind up reducing housing supply, and increasing market rate rents. 

That means when someone finally dies or moves in a rent controlled real estate market, the demand for housing by high income people drives up the market rate rent of a newly available unit. The people rent control is meant to make housing affordable for are priced out in that scenario. At least in California with the current Costa Hawkins laws. If rent control gets even more restrictive... like there's no market rate reset when someone moves out, then it will be REALLY hard for investors to ever be able to buy or sell their real estate. Who wants to buy a $700,000 property with a total $2,500 in rents, and no ability to raise rents to cover the mortgage?

[Susan O.]

Originally posted by @DG A.:

The funny thing is, at the end of the day... rent control combined with NIMBY's against real estate development wind up reducing housing supply, and increasing market rate rents. 

That means when someone finally dies or moves in a rent controlled real estate market, the demand for housing by high income people drives up the market rate rent of a newly available unit. The people rent control is meant to make housing affordable for are priced out in that scenario. At least in California with the current Costa Hawkins laws. If rent control gets even more restrictive... like there's no market rate reset when someone moves out, then it will be REALLY hard for investors to ever be able to buy or sell their real estate. Who wants to buy a $700,000 property with a total $2,500 in rents, and no ability to raise rents to cover the mortgage?

That's how some buildings in San Francisco and Los Angeles are.  They have these dilapidated buildings that are run down.  People in the neighborhood complain why won't they fix up the apartment. Eye sores.

But then they can't sell the properties because they're 8 units getting $600-900 per unit because tenants pass the rentals from generations.  It's totally a messed up unfair unconstitutional system. Rent control destroys neighborhoods. Turns them into Ghettos like South Central LA and parts of East LA

[DG A.]

I'm a fan of moderate rent control. 

I think if Oakland and San Francisco were a totally free market, there would be no one earning below ~$125,000/year living here. And that would mean, minorities (due to their income) would often not have the opportunity to live in and work in areas with a lot of job opportunities like the Bay Area. 

 I just made the transition from renter to owner, and if Oakland were a free market my rent would have jumped up by $1100/month in just one year.

As long as there's a time where the rent can reset to market rate, I think rent control actually drives property appreciation faster than it otherwise would.

The trick as an investor is to know the laws, and use the tools at your disposal to get your rents up over time. Tools like:

• Cash for keys
• Capital improvement cost pass thru
• owner-occupying small multifamilies
• buying properties with banked rent increases
• converting 2 small units into one big one
• rent control exemptions 

[Susan O.]

Youre actually not allowed to do cash for keys in cities like LA. Possibly in other cities. 

http://www.laweekly.com/news/la-moves-to-curb-cash...

They cracked down on landlords  even offering as much as $75,000 to tenants to leave! it's like having to bribe someone even though it's YOUR property

Also if you want to be an owner occupier in LA you have to pay up to $22k in relocation fees.

If you try to give cash for keys you can get fined and open a lawsuit in a lot of cities with rent control.  it's illegal under rent control rules.

http://hcidla.lacity.org/Relocation-Assistance up to $23k/ family for relocating older tenants

[Susan O.]

Also it's a misconception that rents would just skyrocket if there were no rent controls.

Most landlords don't bother hiking up rents each year. 

They want to avoid turnover or are simply mom/pop lanldords that are just happy with the rents they get and are pretty passive, like out of state landlords etc.

But when you have a system like rent control that is unbalanced you have new units that are pushed to the max rents and old units that are stuck in rent control.  So when new units come on market the landlord knows they have to push it to the very top of rent the market will bear.

If there was no rent control then landlords often think-- oh i'll just raise the rent later and if it does come on market they don't try to push the rent to the very top because they know that at some point they can raise the rents. 

http://www.economist.com/blogs/economist-explains/...

This explains it somewhat I think

[Chris Mason]

No one has mentioned furnished rentals. 

Target tenants are white collar professionals that 'permanently' live somewhere else, but are here for 1-12 months on temporary work assignment. 

The rent you charge will be well above normal market rent.

Possibilities are...

• They leave in 1-12 months, you rent it to someone else as a furnished rental at the most the market will bear. You win.
• Their assignment becomes permanent. You continue to charge well above normal market rent. You win.

Vacancy and higher turnover are the big downsides here. Automation and systematization are important. As well as how much higher your rent will be using this. In the Bay Area it's not uncommon for traditional market rents to be half or less what furnished rentals go for.

To keep you from getting jammed up when it comes time to get another mortgage & keep things Fannie Mae Friendly (can I trademark that?), I'd suggest doing leases that are 99.99% normal, with the only deviance being that it automatically goes month-to-month after 1 month.

HomeSuite is one of many companies facilitating this (disclaimer: I shook hands with and had a 5 minute conversation with HomeSuite head honcho @David Adams  like 6 months ago). Check out what your units' furnished rental comps go for - your socks might just be knocked off.

[David Eiges]

@Susan O. Correct me if I'm wrong, but that laweekly article talks about adding in additional oversight to the "cash for keys" arrangements in Los Angeles.  Landlords must inform their tenants of their rights in an RSO unit, provide a specified minimum relocation amount ($7.9k-19.7k), provide copies of the buyout agreement to the city, and allow tenants 30 days to back out of any buyout agreement.  Still allowed, just a little more process needed now.

[Matt Mason]

Originally posted by @Susan O.:

Youre actually not allowed to do cash for keys in cities like LA. Possibly in other cities. 

http://www.laweekly.com/news/la-moves-to-curb-cash...

They cracked down on landlords  even offering as much as $75,000 to tenants to leave! it's like having to bribe someone even though it's YOUR property

Also if you want to be an owner occupier in LA you have to pay up to $22k in relocation fees.

If you try to give cash for keys you can get fined and open a lawsuit in a lot of cities with rent control.  it's illegal under rent control rules.

http://hcidla.lacity.org/Relocation-Assistance up to $23k/ family for relocating older tenants

Yes, you can do cash for keys in Los Angeles.  Not sure if you read your article, but it just discusses the fact that the cash for keys transaction has to be recorded with the City. 

[Susan O.]

Originally posted by @Matt Mason:

Originally posted by @Susan O.:

Youre actually not allowed to do cash for keys in cities like LA. Possibly in other cities. 

http://www.laweekly.com/news/la-moves-to-curb-cash...

They cracked down on landlords  even offering as much as $75,000 to tenants to leave! it's like having to bribe someone even though it's YOUR property

Also if you want to be an owner occupier in LA you have to pay up to $22k in relocation fees.

If you try to give cash for keys you can get fined and open a lawsuit in a lot of cities with rent control.  it's illegal under rent control rules.

http://hcidla.lacity.org/Relocation-Assistance up to $23k/ family for relocating older tenants

Yes, you can do cash for keys in Los Angeles.  Not sure if you read your article, but it just discusses the fact that the cash for keys transaction has to be recorded with the City. 

 They actually don't let you raise it to market rents during a pay out or reloacation.  So you can pay them out to use the ellis act and change the use, but you can't raise the rents for the existing units.

I've paid out a tenant $23,000 then I was not able to raise the rents.  I had to keep the rents at the current rate based on the previous tenant.

https://caanet.org/rentcontrol/

http://hcidla.lacity.org/rso-overview

[Matt Mason]

Originally posted by @Susan O.:

Originally posted by @Matt Mason:

Originally posted by @Susan O.:

Youre actually not allowed to do cash for keys in cities like LA. Possibly in other cities. 

http://www.laweekly.com/news/la-moves-to-curb-cash...

They cracked down on landlords  even offering as much as $75,000 to tenants to leave! it's like having to bribe someone even though it's YOUR property

Also if you want to be an owner occupier in LA you have to pay up to $22k in relocation fees.

If you try to give cash for keys you can get fined and open a lawsuit in a lot of cities with rent control.  it's illegal under rent control rules.

http://hcidla.lacity.org/Relocation-Assistance up to $23k/ family for relocating older tenants

Yes, you can do cash for keys in Los Angeles.  Not sure if you read your article, but it just discusses the fact that the cash for keys transaction has to be recorded with the City. 

 They actually don't let you raise it to market rents during a pay out or reloacation.  So you can pay them out to use the ellis act and change the use, but you can't raise the rents for the existing units.

I've paid out a tenant $23,000 then I was not able to raise the rents.  I had to keep the rents at the current rate based on the previous tenant.

https://caanet.org/rentcontrol/

http://hcidla.lacity.org/rso-overview

If the tenant agrees to a payment and agreement to vacate their unit you can charge whatever you want on the re lease.  If you are talking about Ellis Act or moving in as an owner then that would not apply as there are additional rules regarding that.

I know several people that buy out tenants, renovate the units and re lease at market rates in LA.  It is done all the time.