Rent control is a statewide mandate in California, thanks to The Tenant Protection Act of 2019, which went into effect in January of 2020.
There was a lot of talk about this law and what it would mean for rents in California. However, we didn’t get to pay too much attention to it right after it was implemented. Property managers were scrambling throughout 2020 to manage the impact that the COVID-19 pandemic was having on the rental market. With eviction moratoriums in place, there were higher priorities.
Most of the pandemic-related programs and restrictions have ended, however, and we can again focus on what rent control means for California rental properties.
Here’s what property managers and rental property owners need to know about rent control in California.
Tenant Protection Act of 2019: A Review
There are a lot of details involved in The Tenant Protection Act, and hopefully you have familiarized yourself with it enough that you know whether your rental property is included or exempt from its rent control stipulations.
Here’s what you generally need to know:
- The law introduced statewide rent control to California, stating that landlords cannot raise the rent more than five percent plus the annual cost of living increase that’s set by the Consumer Price Index (CPI).
- You may be exempt from rent control if you’re an individual landlord who owns and rents out one single-family home, a townhouse, or a condo. The age of your property will also come into play. If your property received a Certificate of Occupancy in the last 15 years, you will also be exempt.
- Just cause evictions are required if you want to remove a tenant. Before this law was passed, you had the option of not renewing your lease with your tenants. You could simply provide the appropriate notice and they would move out and you’d get your property back. The big change in the eviction process is that in order to remove your tenants without penalty, you have to have just cause. This means they are not paying their rent, they’re engaging in criminal activity, or they’re not following the terms of your lease agreement.
- If you want to remove your tenants for another reason but you don’t have just cause, you can still serve them notice, but you’ll have to pay a relocation fee which is the equivalent of one month’s rent.
Another point that needs to be made about statewide rent control is that it does not replace any local rent control measures that predated The Tenant Protection Act of 2019. So in a city like San Francisco, those local rent control measures still take precedence over the statewide law. However, the state law may include properties that were not already covered by local laws.
Consumer Price Index and Rental Increases
The CPI is a measure of inflation which is established and measured by the Bureau of Labor Statistics.
While rates are measured and reported by the BLS throughout the year, the only statistic that matters is the annualized CPI rate reported for April. There are certain metro areas in California that measure for their specific metro area:
- San Francisco-Oakland-Hayward
- Los Angeles-Long Beach-Anaheim
- Riverside-San Bernardino-Ontario
- San Diego-Carlsbad
If your property does not fall into a specific metro area that has its own CPI, you will be measured by the general western part of the U.S.
Rent can be increased in no more than two increments during any 12-month period, and the cumulative total is not to exceed the allowable annual cap.
Raising Rent When You’re Exempt from Rent Control
When you find yourself renting out a single-family home or a multi-family unit that’s new and not bound by rent control restrictions, we recommend still staying in line with rent control caps.
Raising the rent more than 10 percent even if the rent control laws do not cover you is silly. Even in a market like this one, where rents are high.
Updating Your California Lease Agreement
You need to communicate the parameters of this law with your tenants, who will not necessarily understand whether rent control applies to them when they rent your property.
If you’re included in the rent control law, you’ll want to put something in your lease agreement to reflect that. It’s even more important to adjust your lease agreement if you’re exempt from the law. You want to notify your residents that the property they’re living in does not fall under this new law. This will eliminate confusion and disputes.
San Francisco Rent Control
Remember that local laws are still intact when it comes to rent control, especially in San Francisco. If you’re renting out a home within San Francisco, you need to have a keen understanding of both the local and state laws.
The San Francisco Rent Board is in place to protect tenants from excessive rent increases and unjust evictions while assuring landlords fair and adequate rents. Every year, they announce the annual allowable rental increase for San Francisco rental properties.
As a property manager or landlord, you can only raise rent once every 12 months, and by the allowable increase. The annual allowable increase effective March 1, 2022 through February 28, 2023 is 2.3 percent.
Rent control in San Francisco depends on what type of property you have, and when it was built.
Here, the most important date for the local rent control ordinance is June 14, 1979.
Properties that were built and received their original certificate of occupancy after that date are exempt from rent control in all forms. It doesn’t matter if you have a single-family home, a condo, or an apartment building.
If your property was built before that date, your rent control laws will depend on the type of property you have.
- Single-family homes and condos are exempt from the rent control mandate, but are still subject to eviction controls.
- Multi-residential apartment buildings built before that date are subject to both rent control and eviction control.
If you own a multi-family building or you’re renting out units in a building, you’re likely going to need a solid understanding of rent control limits and requirements.
What Does this Mean for Your California Investment Property?
You’re renting out a home that’s subject to rent control laws. What does this mean for your profitability, especially with inflation so high and rental rates climbing? Or, are you thinking about investing in a property in California, but you’re not sure how the rent control laws should factor into your decision?
Here are some things to think about.
Generally these rent control laws mean you won’t be able to raise your rent more than seven or eight percent every year. This law is in effect for 10 years.
The CPI changes annually, so landlords will be required to understand what it’s been set at before they add their own five percent if they’re planning to raise rent by the maximum amount the law allows.
When you have an investment property that’s subject to rent control laws, you have to be strategic about how you price the property, attract tenants, and negotiate lease renewals.
To maximize the return you earn on your rent-controlled investment, we recommend:
- Strategically pricing your vacant property. The rent control laws do not limit what you can set your rent at when the property is vacant. You’ll want to study the market, and remember that you’ll need to compete with those properties that are subject to rent control. Their prices will be lower. But, you will want to avoid underpricing your rental property at the point that you list and market it. Otherwise, you’ll have a difficult time increasing the rent year after year because you’re bound by those rent control limits.
- Screen tenants carefully. You will likely have them in place for longer than a one-year lease. In a market without rent control, tenants feel free to look around at lease renewal time. They may find something cheaper and it’s worth it to them to move. With rent control in place, tenants know their rent is capped. They’re more likely to stay in place longer. Plus, the just cause eviction laws make it difficult to evict a tenant without cause. You’ll want to know you’re placing great residents.
- Always partner with local California property managers before you invest in a property, set a rental value, or raise your rents at renewal time. The tenant protections make the management of your property more challenging. It’s an excellent reason to work with property managers.
Rent control impacts each market and even each property a little differently. How you respond to it depends on where you are and what you need from your property.
It’s not all bad news. Rent control does not have to impair what you earn and it should not dissuade you from investing in a California rental property. It’s simply something to be managed, and with the right property management partner, it’s not too difficult to work around
Contact us at Sharevest Property Management if you need additional advice or you’d like some customized help. We’ll be happy to show you where you stand.
