All Forum Posts by: Raju Balakrishnan

 I find it’s tough to bring California (the Bay Area) in on the conversation because it’s such a different beast from most markets and people have been conditioned to look down on California from what they’ve heard online. I totally agree that there is no reason to leave rents flat for 18 years, but owners here have been spoiled by:  

1.) Huge historical appreciation. People start disregarding rents when they have massive equity and/or a high-paying W2. 

2.) Supply/Demand imbalance. Beyond adding to the appreciation our housing stock is a majority crappy and old so expectations are lower than other parts of the country in what they expect for their money. You can actually keep a renter for years without having to do much maintenance for them for lack of alternatives.

3.) Prop 13 which freezes property tax basis. One of the great advantages for CA investors also reduces one of the largest expenses over time for lazy landlords. 

I suspect that the time of many landlords keeping rents THAT low around here will steadily disappear now that there is state wide rent control. The “nice” apartment owners that kept decades low rents in place and are selling now have gotten hit much harder on their valuations. For anyone paying attention, the state rent control law has effectively put in a floor on how far behind market rates you can be without losing equity (in multifamily).  

Sorry, totally went on a tangent from the OP topic. But to bring it back, I agree with everyone that said it comes down to your underwriting standards. Instead of “you make your money when you buy” you could also say “you make your CASHFLOW when you buy”. Because so many people think of real estate as an “investment”, all they consider is buy low, sell high. If more folks truly viewed real estate as a “business”, then it’s buy low, sell high AND operate profitably. 

You need to get a GC license in Cali to do this. You can only play Owner/Builder on your own primary residence. So your friends are flirting with trouble. From CSLB:

This section defines what an owner-builder is and the laws surrounding the practice.

• An owner-builder is what the term indicates: a person owns the property and acts as their own general contractor on the job, and either does the work themselves or has employees (or subcontractors) working on the project.
• The work site must be their principal place of residence that they have occupied for 12 months prior to completion of the work.
• The homeowner cannot construct and then sell more than two structures during any three-year period.

Getting a GC license and going Legit is pretty difficult. First you need 4 years of Journeyman level experience and a licensed GC to sign that paper for you. Then the test is a bear in Cali, only 12% pass rate...harder than Bar Exam. Then getting legal requires Liability Insurance, Bond, Workers Comp , Etc.

If you do all this, you will probably lose money the first few years while you learn the ropes....but after that you can expect to make about 20% for Overhead And Profit . Your profit will be a little more than half, so on a $800k new build, you can expect to make $80 - $100k. For a years work.

$250k for non existing space conversion is not expensive for your area.  It will cost more than that if hands off

If the main house is over 15 years old, many jurisdictions have it go rent control as soon as the ADU goes into service.

It is my view, based on the rationale of the 15 year exclusion and based on what senator Weinkowski indicated, that it is an interpretation that does not match the intent of the law makers. The intent of 15 year exclusion is that adding a unit does not get rent controlled for 15 years to encourage adding units. To apply rent control on a SFH that just became MF discourages this addition and the SFH was not MF for 15 years. The issue is battling a jurisdiction on this would be tough and costly. So it is what it is even though logically it should not be.

The worse part of rent control is not usually how much you can raise the rent. This is especially true of the statewide rent control of 5% + CPI capped at 10%.  Unless there is a crazy year of inflation, this is adequate rent increase.  The worst part is the difficulty of getting rid of poor tenants.  Tenants that are rough on property, pay late, are alcoholics or drug users, are rude to neighbors, are a pain in the a$$, etc.  good luck getting rid of these poor tenants.  Best way is repeatedly max rent increase but in some areas that still has the rent below market rent.  

Good luck

Anyone who works remote is probably going to loose their job in the next couple years to an AI. This is low-hanging fruit for AI, because no physical work.

If you think I am talking about something in the future, you have not kept up the last 8 weeks. Watch the presentation of the latest version of ChatGPT4o and if you don't have much time, skip to min 15 where "she" teaches him how to do math. Tell me your kid's teacher is that smooth explaining math! Link.

And if you think it is going to stop there than watch this: Figure1 robot demonstration. Remember these things are getting rapidly better. Google CEO estimates that we will see their capabilities double every 12-18 months.

Which means factory jobs are being next. Since we are talking about paradigm shifts, this will be the biggest of all. And it is happening faster than society can respond. 

Nvidia is now higher valued as Apple at $3 trillion market cap. Yes, you have read that correctly. Ask 10 random people, 8 have never heard the name, that is how fast things are changing.

In my mind the outcome is crystal clear. Literally of the population will be unemployed. Anyone who works remote or online or does low skill manual labor. Which means as a society we will have to shift to a universal basic income system, like it or not, there is no other way. People need to eat and pay rent.