All Forum Posts by: Greg San Martin

Adam,

In Berkeley, my recollection is that under Measure Q, if a single family homeowner builds an ADU AND occupies one of the two units, then the homeowner will be exempt from rent board regulations. Despite losing an attack on this rule two years ago, the rent board is trying again to regulate everyone that invests their nesteggs to expand the housing supply. So, if their measure fails in November, your ADU investment would probably make a lot more sense.

Recognize that in California, single family homes can add one detached ADU and one attached ADU or junior ADU. In some cases, JADUs can be done for under $50K.

Lastly, recognize that it may be possible for you to condo and sell the ADUs separate from the original unit.  Berkeley is among the first cities to claim that it wants to allow housing developers to use this new provision in state law.  We'll see.

if you live in the main unit while the ADUs are built, then when AND IF the condos are established, you could presumably sell the main unit right away and claim the "2 in 5" tax writeoff. You could then move into one of the ADUs and live there for two years before selling it. If you were careful about who you rented the other ADU to, then you might be able to move into the other ADU and live there for another two years before selling. So, over 4 years, you could conceivably sell three condos. If married, that would be a $1.5 million writeoff against your overall gains.

Lots of big IFS here. Obviously this is not investment advice.  Always seek strategic advice from a professional. 

Maybe best to wait to see whether Berkeley's brain damaged voters pass anti homeowner ballot measures.  State propositions could undermine new real estate investments too.  And the state supreme court just illegally invalidated the will of the voters.  If rates remain higher for longer or go up, then maybe best to wait.  Oversubsidized overbuilt apartment buildings may continue to keep rent levels fixed or declining.  Look at Berkeley rent trends for the past 4 years. Insane shelter in place rules have resulted in an $80 billion state budget deficit.  Entire industries have left the state due to inept state and local regulators.  Good luck finding a reputable entity for home insurance. Berkeley will increasingly be sought after as temperatures rise and inland metros become uninhabitable.  So it is a good long term bet (provided the socialists do not bankrupt you first).

I live in Berkeley.  You said "tenant," singular.  Assuming yours is a 1 BR, $2,750 seems high even in the best neighborhoods.  

The good news is that in cities like Berkeley with aggressive rent control, there is always a shortage of available rental units (the rent board bureacrats constantly find ways to perpetuate the housing shortage upon which their jobs depend).

April is when new UC students begin to aggressively look for August housing.  They stay 3 to 5 years.  Not exactly medium term but something to consider.  

Just remain wary of the potential consequences of operating in an anti-landlord jurisdiction: vacancy taxes, potential vacancy control, inability to remove deadbeat tenants, etc.

Coincidentally, Jesse Vasquez posted "why your MTR isn't renting" on YouTube yesterday.  

JV video on why your MTR isn't renting

I own a triplex and currently occupy one of the units (I may move out). I have a sophisticated W2 from a full time job (not at home). I would like to offer actively managed STRs for a year or two until the end of bonus depreciation or longer. My structure basis was originally $0.6 mil and is currently $1.8 mil. The units have been vacant except for a few short term guests that responded to my ads late last year.

I live in a jurisdiction that effectively bans STRs that are less than 14 days. If I offer certain qualifying services, then guest stays lasting 14 to 30 days appear to remain eligible to qualify as actively managed STRs while also complying with local codes. Two loopholes may be better than one.

I am interested to hear from other owners in a similar work situation that found a way to make actively managed 14-30 day STRs work. 

What does your day look like? 

What services do you offer? 

What services do you actually end up providing? 

What professionals did you use to set up your STR business?

Why is this a good/bad idea?

If you provide STR professional services to home owners in my situation, I would be particularly interested in your thoughts. If this STR business is viable, or if there are better options for shielding W2 and rental income, I am funded and ready to roll.

Who would have guessed that afternoon peaks would be replaced by evening peaks so quickly? With the price of solar continuing to decline, and with energy storage capacity rocketing upwards thanks to wise changes to the NEM rule, it is certainly possible that long term contracts for solar will end up being the most expensive way to procure clean kilowatt hours.   There are many possible future outcomes.  And none of them are certain. So it is wise of you to solicit different perspectives.

The strategy across most of Assembly District 15 is to create a supermajority of tenants, none of whom will ever vote down a city or county parcel tax or an increased tax on housing providers.  If the thousands of units at Bart were condos for sale that enabled greater access to generational wealth opportunities by the younger generations, then I'd support this.  But new ownership opportunities are the last thing you will see in cities that are dominated by electeds who want to end private ownership of rental housing.  That said, I do not think those home values will suffer much, paradoxically because of the housing shortage created by effectively prohibiting the creation of new homes for sale.  If any rentals in those areas lose significant value, the TOPA ghouls flanked by code enforcement and tenant attorneys will be happy to make a lowball offer.  The enema police will be on patrol 24/7 in that hood.

Thanks in large part to rent board regulations, market rents in Berkeley have risen higher than in any other similarly sized city over the last 20 years.  While rent board regulations successfully moderate rents in continually occupied units, the substantially increased risks to landlords caused by those regulations have substantially increased market rents, too. Thus, in relative and absolute terms, your rents have increased more in Berkeley than anywhere else in America thanks in large part to the rent board (their budgets increase when rents increase). Wink, nod.

The reward has definitely been there for landlords that have persevered.  Past performance is no guaranty of what will happen in the future.  

There are a lot of risks already for small landlords and more on the horizon.  Some landlords lost 50‐100% of their rental income for an extended period of time because tenants were allowed/ encouraged to stop paying rent during the pandemic.  Some landlords were forced out of business.  

During a recession, your property value may decline and this makes the rent board's anti-landlord regulations even more risky. For example, Berkeley appears ready to adopt TOPA, which would incentive tenants and tenant attorneys to target you, so even as you face a potential loss on your investment (due to being forced to sell during a recession), the TOPists may force even lower sales prices.  Gates says we will have more pandemics.   

Consider gaining some experience as a landlord in a saner location before deciding to go down the rabbit hole in Berkeley.  And before taking the plunge, find and consult with a good attorney.  Consider joining BPOA before starting your business. 

The rules may have changed behind closed doors over the past few years, but voters approved an exemption for certain parcels as a condition for the creation of the rent board.  If you have an existing or new second unit and occupy a unit in the eligible property, you are completely exempt from rent board regulation.  This exemption was historically called a golden duplex exemption.  You have to go to the rent board to determine which parcels are eligible (most are).  There is no guaranty that this exemption will be retained because rent board staff spend hundreds or thousands of hours every year to try to circumvent the will of the voters.  But this exemption had been in place for almost 40 years just prior to the pandemic.  

If this exemption has not been deceptively eliminated, then acquiring a golden lot may allow you to rent in Berkeley at substantially less risk. Of course, talk to your attorney before making any decisions.  And have fun.

July 2022 Edit:

I neglected to mention this because it is so fundamental in a college town, but one of the best ways to minimize the financial risks of rent board regulation is to own student rental housing (UCB students).  The rent board's regressive policies lose their teeth when the tenants are virtually guaranteed to move out every few years.  ASUC does a great job of promoting the rent board each and every election year even though UC rent board policies have injured UC students more than any other segment of the population.  You are far less likely to get a professional tenant in student housing.  You would pay a premium for a good student rental property but it may still be the best deal inside the city borders.  Difficult call in a difficult market.  Good luck.

No comment on existing "tenant."

Would the home be owner occupied or a rental? Does it have ADU potential? Under Measure Q, rent control would not apply if owner occupied one unit after ADU is built. The exemption extends to eviction controls in most if not all properties.

Rents have been flat for a few years.  And Berkeley remains very anti-small landlord.  Rules often get changed behind closed doors and without notice.  Building would be expensive. Tenants control the ballot box so expect wealth transfer measures to become even more outlandish. If you leave the owners unit vacant, or rent it, you lose the exemptions 

Still, if I were starting out, I'd consider building and living in the ADU and renting the larger house. It is nice to have options.

Berkeley Measure Q

With so much equity, fewer buyers are priced out by higher rates.  So, in addition to the sustained supply shortage, the potential decline in demand seems likely to remain muted compared to prior downturns. 

It will take MORE than mere rate hikes to crash real estate markets.  

Thanks in large part to rent board regulations, market rents in Berkeley have risen higher than in any other similarly sized city over the last 20 years.  While rent board regulations successfully moderate rents in continually occupied units, the substantually increased risks to landlords caused by those regulations have substantially increased market rents, too. Thus, in relative and absolute terms, your rents have increased more in Berkeley than anywhere else in America thanks in large part to the rent board (their budgets increase when rents increase). Wink, nod.

The reward has definitely been there for landlords that have persevered.  Past performance is no guaranty of what will happen in the future.  

There are a lot of risks already for small landlords and more on the horizon.  Some landlords lost 50‐100% of their rental income for an extended period of time because tenants were allowed/ encouraged to stop paying rent during the pandemic.  Some landlords were forced out of business.  

During a recession, your property value may decline and this makes the rent board's anti-landlord regulations even more risky. For example, Berkeley appears ready to adopt TOPA, which would incentive tenants and tenant attorneys to target you, so even as you face a potential loss on your investment (due to being forced to sell during a recession), the TOPists may force even lower sales prices.  Gates says we will have more pandemics.   

Consider gaining some experience as a landlord in a saner location before deciding to go down the rabbit hole in Berkeley.  And before taking the plunge, find and consult with a good attorney.  Consider joining BPOA before starting your business. 

The rules may have changed behind closed doors over the past few years, but voters approved an exemption for certain parcels as a condition for the creation of the rent board.  If you have an existing or new second unit and occupy a unit in the eligible property, you are completely exempt from rent board regulation.  This exemption was historically called a golden duplex exemption.  You have to go to the rent board to determine which parcels are eligible (most are).  There is no guaranty that this exemption will be retained because rent board staff spend hundreds or thousands of hours every year to try to circumvent the will of the voters.  But this exemption had been in place for almost 40 years just prior to the pandemic.  

If this exemption has not been deceptively eliminated, then acquiring a golden lot may allow you to rent in Berkeley at substantially less risk. Of course, talk to your attorney before making any decisions.  And have fun.