A major side effect of AB1482 is that it is turning many “nice guy” private landlords into “tough guy”corporate-type landlords.
Here is just one story of a nice guy named Matt who was affected by California Rent Control in a very big way.
Matt is a middle-aged guy who decided to take his money out of the stock market and invest in the
community where he planned to retire… Auburn, CA. In January of 2019 Matt purchased an older 4-plex in average condition. The property had some deferred maintenance and each tenant was paying approximately $300 less than fair market rent value per month. The property was producing approximately $1,200 less than neighboring similar 4-plex properties.
Matt hired RentPros Property Management to manage the property in late January of 2019. Our office did some analysis and immediately recommended that Matt increase rents by at least $200 per month.
This would still be less than fair market value but would yield Matt an additional $800 per month! At that time, February 2019, Matt could have increased the rents by issuing 60-day notices to each tenant.
The tenants would still have a very good deal and Matt would achieve a more market realistic income. But Matt said “no.” You see, during the escrow period Matt had met all of the tenants. He got to know them personally, learned their stories and decided he wanted to help them by not increasing rents until he completely remodeled the units. Matt began a massive remodel of the property in early February of 2019.
During the remodel Matt went completely overboard. He installed all new appliances, including new washers, dryers, stoves, and ovens. He replaced all the windows, fully paint inside each unit and the exterior. He installed all new flooring, all new kitchen and bathroom cabinets, new showers, and baths.
He replaced the heaters and air conditioners… Matt made his contractors work around tenants’
schedules. Matt even paid for a hotel when tenants had difficulty using the kitchen or bathrooms due to the remodel. Matt was a good guy.
As I said, Matt is a just regular guy. He works 50+ hours a week at his job in the Monterey area. Matt saves money where he can but wants everything about his property to be first class. For Matt, his new project was like having another child. It was a labor of love, his retirement, and a source of personal pride. Like 99% of my private landlord clients, Matt cared deeply about his property, his tenants, and his reputation.
Finally, in June of 2019 Matt completed the transformation of his now beautiful 4-plex. He succeeded in creating a First-Class energy efficient home for his tenants. Matt finally approved my request to increase rents; however, he only agreed to increase each unit by $200 per month, not the $300 I was now recommending. Matt said, the additional $200 per month increase would just cover the $800 per month payments on the home improvement loan he used to upgrade the property. For now, Matt just wanted to break even on his investment.
Matt’s tenants were thrilled to sign new one-year leases. They were very happy to pay the increased rent, live in such a wonderful property and still pay $100 per month less than their neighbors who lived in units which have not been remodeled. Matt’s tenants were as happy as I had ever seen, and Matt was happy and proud as he could be.
Then along came AB1482… the California Statewide Rent Control Law.
On January 1, 2020, just five months after the rent increases took place, AB 1482 came into effect and Matt was forced to reduce the rents back to what they were on March 15th, 2019. This represented an immediate decrease in Matt’s income by $135 per unit or $540 per month. You see, the bill only allowed an 8.3% increase above the March 15th rent amount. Instead of Matt getting the modest rent increase of $800 for the 4-plex, AB 1482 forced Matt to roll the rents back to virtually zero overall increase. This meant Matt now had a negative cash flow of $500+ per month!
Never mind that all tenants had signed a new lease agreement at the modest increased rent amount. Never mind that all Matt’s tenants were thrilled with their new home. Never mind that the tenants were thrilled to still pay $100 less than their neighbors who lived in old un-remodeled units. Matt’s tenants now received the benefit of the state mandated rent reduction costing Matt a minimum of $6000 per year, assuming no unexpected maintenance, increases in property taxes or utility increases occurred.
Matt’s attitude changed.
Matt realized he invested his hard-earned money, his time and his sole into the property. He did so
because he believed that over time, he could gradually increase rents, realize a profit and someday have the property contribute to his personal retirement.
After AB 1482, Matt now has negative cash flow of over $500 per month. That’s a guaranteed monthly pay cut for Matt of more than $6,000 per year assuming he has no unexpected maintenance, no increase in taxes or utility bills. The bottom line is Matt now writes a check each month so his tenants can live in his beautifully remodeled property.
Yes… Matt’s attitude has changed.
Due to the dire financial predicament created by AB 1482, Matt recently instructed my office to increase rents by as much as possible and as often as possible. Matt also started investigating how he could somehow increase his rents to achieve a neutral monthly cash flow position once again. Kind and thoughtful landlords like Matt are now being forced to fight for their financial survival. To do this they must spend less on their properties and be stricter with their tenants.
Under the rules of California Rent Control, here are Matt’s only options:
a.) Hope the tenants’ default so he can evict them, then place new tenants at a higher rent.
b.) Sell the property cheap to someone who can afford the negative monthly cash flow
c.) Wait for tenants to vacate voluntarily – then increase rent for the new tenant
d.) Pay the tenants to move and then place new tenants at a higher rent amount.
g.) Increase rents annually by 8.3%. Matt will never achieve market rents by this method
h.) Keep the property knowing the property will never be a profitable investment
California Assembly Bill 1482 and bills like it are creating great financial hardship for literally thousands of California real estate investors like Matt. Tenants suffer too as Landlords try to find ways to survive the incredible economic hardship brought on by such legislation.
As a CA Real Estate investor, I can only watch as legislators continue to write and pass new laws equally destructive to tenants and investors as AB 1482. The only thing I know for sure is these laws are not good for California real estate, not good for California real estate investors, not good for California tenants and not good for California.
