Why Rent Control Sucks in California
We have had the experience of coming from a rent control environment in Los Angeles (LA) to a non-rent control one in the Midwest. The vast difference between the two is so apparent. In this blog post, we will dig into why rent control sucks and why we decided enough was enough. There are a couple of benefits to rent control, but the downsides far outweigh them.
What is rent control?
First, we should start with the definition of rent control:
“Rent control is a broad term for legislation that limits rental rates in a city or state. Rent control laws vary by municipality, but they generally put a limit on annual rent increases and protect tenants from eviction without cause.” -Bugalow.com
We agree with the intention of rent control, creating affordable housing, and protecting tenants from unscrupulous landlords. But ultimately the downsides outweigh this, and we believe the free market should be allowed to persist.
Los Angeles rent control
One good thing about LA rent control is that the challenging barrier to enter could be rewarding. Let’s explain why, in LA, if you have a building that has vastly under market rents, you cannot just give tenants a notice to leave or raise rent to market (3% rent increase limits). The tenants need to voluntarily agree to move and be compensated by the owner anywhere around $40,000 plus per unit. We have paid less at times, but we would say that’s an average.
Here is an example of why this makes sense. Let’s say you have a unit currently renting for $1000. You pay the person/family $40,000 to move, put another $30,000 to renovate the unit, and then lease it for $2,000. So, if you divide the extra $12,000 a year by your $70,000 investment, you have a 17.1 % return. Which is great, right?
Well, maybe not after going through a grueling negotiation with the tenant for months and then a heavy rehab with challenging permitting from the city. A lot of times, this process can take a year or more. The good thing about rent control is once you have the market price stabilized asset, its value holds well. Most buyers will pay a premium to buy a building in that condition where they don’t deal with this complexity. For us, this head damage in the LA environment just wasn’t worth it anymore.
Leveraging breach of contract to get someone out of a unit in LA
Leveraging breach of contract usually leads to eviction. This generally means a minimum three to four months in the court system and $5,000 to $10,000 in attorney and court fees, and many more thousands of dollars lost from loss of use. Not to mention, tenants could request a jury trial or file Bankruptcies to delay action. We have had an eviction take as long as a year. We also had a situation renting at the new market price where a tenant breached the contract by moving roommates in without approval.
When we served this person with a notice to comply, the tenant went berserk, came to our office, cussed us out, and posted untrue slanderous things about us on social media tenant advocacy groups. Eventually, the tenant did comply, and we got everything squared away. It was an immense pain in the butt. Honestly, because these tenants know that the law is on their side, they tend to be more aggressive and troublesome because they can get away with it. Though most tenants are acceptable, it’s just a few that cause all the problems. In a non-rent control landlord-friendly place, a lot of this can be avoided.
Using a notice of non-renewal
If we had a less ideal tenant at lease renewal in Oklahoma, we could just issue a notice of nonrenewal for them to move in 30 days after expiration of a lease. We do not want to be in the business of putting people on the street. If you have a tenant causing issues with your staff or other tenants, they leave you little choice. If it has to lead to eviction for some reason, it takes only 30 to 60 days, even during COVID.
Though we have the eviction moratorium currently underway, it’s only valid if the tenant can prove that they have had hardship like losing a job because of COVID. People that do not have a valid reason have been able to evict during COVID. Those evictions were in the best interest of the community. Essentially in Kansas City or Oklahoma City as a landlord, you have more rights and the freedom to exercise those rights.
The tenant owns the unit in a rent control scenario – plain and simple
Essentially what it comes down to in the rent control area is that the tenant owns the unit.
You, as the landlord, need to pay a healthy sum to get that control back. In the non-rent control vicinities, you retain control of the unit. You have more flexibility to get rid of a burdensome tenant without it having to be a breach of contract. You have more control over the life of the investment and the direction in which it’ll go. Ultimately, this means fewer headaches and more ease doing business in general, while also still getting a very healthy risk-adjusted return.