THE RENT CONTROL MYTH: INVESTING CONSIDERATIONS FOR MULTI-UNIT BUILDINGS IN LOS ANGELES COUNTY
As commercial real estate brokers in Los Angeles, one of the most common requests from prospective buyers is to locate building that are not under the Rent Stabilization Ordinance (RSO) aka “rent control.” Approximately 85% of all apartments in Los Angeles are currently rent controlled. This makes the non-rent controlled properties a highly sought after commodity in an already competitive market. But a critical analysis reveals some surprising truths and a savvy buyer should consider a few important facts before discounting rent stabilized investment opportunities.
Fact 1: There is No Rent Control in Los Angeles County
This may surprise quite a few people, but technically speaking, there actually is no rent control in Los Angeles. The term “rent control” is commonly used to refer to all government rent regulations but in cities where there is actual rent control (New York being a prime example) there are strict price ceilings for rent controlled buildings. Rent Stabilization on the other hand, seeks to limit the rent increases from year-to-year and provide certain tenant protections (generally from no cause or arbitrary evictions). It is important to note that there is no ceiling for a rent increase after a tenant moves out. A landlord may raise rents to what the market will bear. This would simply not be possible if the property was truly rent controlled.
Fact 2: Rents are Rising in Los Angeles
This is not surprising to anyone renting a unit in or around Los Angeles, but buyers tend to forget the fact that rents overall have increased tremendously over the years. From 2000 to 2012, rents have risen 25% across the board in Los Angeles County. So what are the actual differences in rental amounts? In 2014, the average rent per unit in an RSO apartment was approximately $1,600 a month. The average rent for non RSO units was $600 dollars higher. This may seem to be a significant amount of money, but an apples to apples comparison is impossible. For example, a building built in 1920 will generally have less square footage per unit than one built in 1980. Newer buildings also tend to be located in higher income areas as well, which plays out in the list price of said newer building. Statistically, tenants in rent controlled buildings move out of their units within 5 years, at which point the unit may be rented out at market rent. This turnover makes most rental units comparable regardless of the Rent Stabilization Ordinance.
Fact 3: An Undeniable Fact: California’s Housing Market = Renters, Renters, Renters
It is sad but true – it is harder now to own a home in California than ever before. There are many reasons for this: increasing amounts of debts in the form of credit cards and student loans, income inequality, the job market, etc., etc. But the biggest reason is also the most obvious. Quite simply, homes prices in California have increased at such a dramatic rate that owning a home has become unaffordable for all but a few. As of 2017, the median homes price in California is more than double the national average. In the city of Los Angeles, it is nearly triple. What does this mean for investors of commercial real estate? It means that investing in multi-family properties in and around the Los Angeles area involves lower risk than properties located elsewhere. It also means that there will be a steady supply of renters for the foreseeable future.
Conclusion: Proper Due Diligence is the Most Important Factor
The savvy investor will not look to one single factor when making their decision when it comes to commercial real estate. Whether a building was built in 1980 or 1920, the fundamentals are always at play. What is the cash flow look like, what is the condition of the building and fixtures, the pipes and electricity, what is the tenant make-up and so on and so forth. To not consider an investment opportunity simply because it is rent stabilized makes little sense when looking at realities of the housing and rental market in Los Angeles County.