How To Protect Your Multifamily Investment Under California Rent Control
If you own rental units in California, you have likely heard that California has passed statewide rent control, beginning January 2020, but retroactive to March 2019. The rate you were charging California residents on March 15, is the base rate for your increase cap.
The rent control bill stipulates that rent can only increase five percent per year plus the local rate of inflation. There may also be local regulations to consider in addition to the state regulation. For example, Los Angeles has a rent control law, but only for buildings constructed before 1978. Calculating your rent increase will depend on all of these factors.
Meanwhile, you may have seen this headline suggesting triple-digit rent increases in Southern California in 2021. Sensational headline aside, they suggest the average Southern California renter will see an additional $100 per month by 2021 based on competition for housing in the area.
Five percent plus cost of living may seem sufficient to protect your profit margin until you consider what could go wrong.
California is already one of the most regulated states in the country, and this addition of rent control should serve to increase the urgency to do all you can to protect your financial assets.
If you have to evict a resident in California, it’s an expensive proposition. Evictions will require an attorney and will likely result in you having to pay a resident to move out. Under the new law, you must give a resident an explicit reason for the eviction. If they have been a resident at least one year, they have an opportunity to cure the infraction.
Imagine a tenant you need to evict has a lease that specifies “all bills paid” or a prorated share of the utility expenses. The resident decides not to pay rent or utilities, and you can’t turn off the services to mitigate your damages. Now you are out the rental income and the utilities. You allow them to cure, they don’t, and now you have to file a suit. By the time a contested eviction case makes its way through the court system, you are looking at a minimum of three months. Meanwhile, a vindictive resident could be running the hot water all day until it runs out, causing problems for your other residents who may be frustrated and give notice, and dramatically increasing your monthly master bill.
We don’t mean to scare you but knowing the worst-case scenario can help you develop a sound business strategy to protect your investment. The cost of a single eviction will create a significant hit for your NOI.
The best practice is to ensure residents put utilities in their name. For one, it protects you from having to cover the utility cost if the resident doesn’t pay. It also is proven that residents overuse services included in rent, and now you’ll have less ability to raise the rent to cover the cost.
Beginning January 1, 2018, all new multifamily units are required to have submeters. The California state law is still silent on using a ratio utility billing program, but your local regulations may say otherwise. If you are still using “all bills paid”, please consider protecting your investment with a billing program.
Banyan works with owners with 20+ units to install submeters or create ratio utility billing systems. The resident will be responsible for their utilities, reducing your risk of loss and increasing your monthly NOI. Without meters, you can use a ratio utility billing program (RUBS) that creates the same effect of putting the utilities into the resident’s name. Regulations vary by city and county, so work with a billing company that understands regulations and can advise you accordingly is critical.
Changes will be needed in your lease documents if you do not have provisions in for utility billing already documented.
Utility billing programs are complicated due to the varying local regulations, but we figure that out for you. Select a billing partner that has regulatory expertise, knows how much and what you can recover, and can provide customized solutions.