Why Your Property Market is So Important: A Tale of Two Cities.

We have a duplex that we own in Los Angeles. We are very lucky that over the years we have had great tenants that pay their rent on time. If our tenants decided to stop paying rent for whatever reason and we had to evict them, pre-eviction moratorium, it could take us upwards of six months to do that. That’s how long the process can take in Los Angeles.

That means for the six+ months they are not paying rent, we still would have to pay mortgage, taxes, and sometimes utilities for them to be there. That’s in addition to all the eviction costs. Also, while they’re there you cannot rent it out to someone else who will pay. It’s a terrible situation for a landlord to encounter, and this precise scenario has sent more than a few landlords hurtling toward bankruptcy and foreclosure.

Now, that does not necessarily mean that you should never invest in Los Angeles. Some situations may not be so terrible for a landlord, such as when you have many units over which to spread the costs while you are evicting a non-performing tenant. If you are renting out a single-family house or a duplex or triplex, however, losing out on all that rent for half a year or more, could put you in jeopardy of losing your property!

Another way in which Los Angeles is very tenant-friendly (as opposed to landlord-friendly) is through rent control and other housing protections.

With rent control, most tenants are guaranteed the ability to stay in a rent-controlled apartment at the rent-controlled rent pretty much forever. That’s a great idea in theory because it helps tenants remain in their homes. In practice, however, it means that as property taxes and other real estate ownership expenses rise, landlords’ hands are tied in terms of making enough money to handle them.

In Los Angeles, if you buy a multi-unit property and you have tenants that are paying below the market rents you can only require one tenant to leave, and you must pay them a very generous moving fee to do so. The other tenants will be able to stay as long as they want and rents can only be increased about 3 percent per year indefinitely.

Here’s an example of how rent control can end up hurting a landlord and even the tenants as well:

Let’s say you want to buy a four-unit building, a quadplex. Market rents in the area are $1500 per month, but your tenants are on month-to-month leases and paying around $600 per month. You can require the occupants of one unit to vacate (though you have to pay them a $5000/person moving fee). So, let’s say you move out a family of 3. You can require them to move, but you have to pay them a $15,000 moving fee. Now you can charge $1500/month for that apartment, but it will be 10 months before you’ve broken even, and that does not include the carrying costs you may accrue while you are moving the tenant out of that one unit.

As for the other units, month-to-month means they can give you a month’s notice to vacate, but you cannot force them to leave if they are otherwise meeting the terms of the lease. To evict them they would have to either stop paying rent or do something else extreme to violate other provisions of their lease. Even then, it can still take upwards of six months for the eviction.

If those tenants remain, you can raise their rents by only 3 percent each year. That means a year after your purchase, you can raise rent to $618, but that is nowhere near the $1500 + 3% market rent ($1545) the other unit will get. And the disparity will grow over time so you’ll always be far below the market rate on those units.

Unless you’re practically gifted the building in the first place, it’s very hard to make those numbers pan out.

Of course, the above scenario is for non-pandemic times. Currently, there's a national eviction moratorium and Los Angeles has a rent freeze too, so you can neither evict nor raise rents regardless of whether or not your tenants pay.

Now, let’s contrast Los Angeles with Dallas, Texas (in normal non-pandemic times).

In Dallas, you can evict a tenant for non-payment in 3 weeks. So, if your tenant is late on rent once, you can have them out and their place back on the market and ready to be leased within one month. From the very start, if you have a bad situation with a tenant you will be able to “stop the bleeding” nearly six times faster than you would in Los Angeles.

Also, there is no rent control in Dallas. That means if you bought a 4-plex where everyone was month-to-month and paying below the market rents, none of those tenants have a right to stay in your property and pay cripplingly low rents. You can give them 30 days’ notice of a change in rent to market rates and/or give them a 30-day notice to vacate. They’d have to start paying the new rent or be out in 30 days.

As a landlord, can you see how that would be more attractive and why your chosen market is so important?