There has been a lot of talk about inflation recently, especially as the economy has recovered from the pandemic. Everything costs more than it did two or three years ago, and towards the end of 2021, housing prices increased at record levels. Rent prices are going up across the country for tenants, thanks to an increase in demand and a dwindling supply when it comes to rental housing. In some markets, rental prices have risen 30 percent.
That’s good news for owners of rental property and investors who have well-maintained homes available to qualified tenants who can afford the rents.
In California, the market is a bit different. Rents are still priced high, especially when it’s a new property that’s coming onto market for the first time. But, during the worst of the pandemic, many cities saw their rents drop, and getting back up to market rent is a challenge, especially with rent control laws and the Consumer Price Index being as high as it is.
If inflation continues to rise and the state of California is thrown into an emergency, you won’t be able to increase your rent by more than 10 percent. In a normal market, that 10 percent increase might be more than enough. But, if your rents are already lower than they should be and you’re managing a property that’s below market, you might be wondering what to do to get it where it should be.
Here’s a look at what we’re working with and what owners can do to ensure they minimize losses.
The Tenant Protection Act and Rent Increases
On January 1, 2020, California implemented statewide rent control which limits the annual rental increases that can be made on a property to five percent plus the increase in the regional Consumer Price Index (CPI). Inflation is driving up the CPI, but that doesn’t mean landlords can expect a large range for rental increases. The law also states that increases cannot be more than 10 percent of the lowest gross rental rate. Even with a rising CPI, you’re going to be capped at 10 percent if you have a property that’s bound by the rent control rules.
This means you can raise your rent more than you might have been able to in other years, when inflation was not as high. BUT, you’re still stopped from raising it more than 10 percent. Tenants will still feel the pinch of a higher rent, but they have that protection in place, unlike in other states where rents are climbing as high as the market will let them.
Does Rent Control Apply to Your California Property?
The first thing you’ll need to establish is whether your rental property is even subject to rent control. There are exceptions to the statewide law.
There are exemptions to rent control for single-family homes, condominiums, and any newer buildings that were constructed in the last 15 years. If you’re renting out a room and not a full unit, or you’re occupying one of the units in your three or four-unit building, you will not have to worry about rent control restrictions.
Maximizing What Your Earn
The problem for many landlords and rental property owners in California is that while rent control is in place to protect tenants from rising costs that come with inflation, there is no regulation on the cost of doing business as a landlord.
Property owners are suffering from increased costs, too. But, you can’t raise your rent to the point that those costs are covered.
For example, you might find yourself paying twice what you did previously for maintenance and materials when you’re repairing a property. Labor can be up to $300 a day in some California cities. When you’re working within the parameters of rent control, you have to account for inflation, but you can’t pay for it with extra rent.
You’re treating your rental property as a business, and unfortunately, the amount you can earn is essentially capped.
Here are a few suggestions for bringing your property closer to market rents.
- Leverage the turnover process. You cannot raise rent on your existing tenants, but once your tenants move out and you’re preparing to look for a new tenant, you can increase the amount of rent you’re asking. Don’t overprice your property because you won’t find good tenants willing to rent it. But, set the rent at a level that meets the market demand. You can also make improvements and updates during the turnover process, to drive up the rental value of your home. Fresh paint, new floors, energy-efficient appliances, and smart home technology can all increase what you earn.
- Allow pets. Pet-friendly properties will earn you more money because you can charge a pet fee or a pet deposit when tenants are moving in.
- Consider additional investment opportunities. When you’re ready to buy a new rental property, look for those units that won’t bind you to rent control. A single-family home or a new construction building might make more sense so you can earn higher rents and not worry about rent control restrictions.
- Choose your tenants carefully. Getting rid of a problematic tenant is more complicated than ever. Retention is also higher in rent control units because tenants have incentive to stay in place. So, when you’re screening for renters, make sure you’re choosing someone you’ll want to work with.
Partnering with a professional property management company can help you get through these expensive times. While your property manager can’t get around the rent control laws, we do have processes, systems, and resources in place to help you maximize what you earn and limit what you spend on your California rental property.
We’d be happy to evaluate where you are and talk about how you can earn a little more and spend a little less. Please contact us at New Bridge Management. We provide leasing and management services in Modesto, Turlock, Merced, Stockton, and the surrounding Stanislaus, Merced, and San Joaquin counties.