What can we tell you about rent control in California that hasn’t already been said?
The problem for Merced
rental property owners is this: even though so much has been written, spoken, and debated around rent control, there’s still a lot of confusion out there. Does rent control even apply to your property? If it doesn’t now, will it in a year or two from now? What does it mean for raising the rent? Can you even raise the rent?
We’re here to help you understand rent control and what it means for your property. We also want to share some of the small print-to-rent control laws that may have gone unnoticed by you.
Let’s dive right in and try to answer any lingering questions you may have.
It Starts (but not really) with The Tenant Protection Act of 2019
Rent control in California certainly did not start with the Tenant Protection Act of 2019. There had been rent control at the city level for years, most notably in San Francisco. What this law did is to bring rent control statewide across California. While there are still exemptions (most notably for
single-family homes and condos as well as apartments or multi-unit rentals in buildings less than 15 years old), this covers a lot of rental properties in California. What it essentially means is that landlords cannot raise the rent more than 10% total or 5% plus the percentage change in the cost of living – whichever is lower – over a 12-month period.
Here are the key insights we’d share with you about the Tenant Protection Act:
- You need to pay attention to which properties in Merced are covered by this law even if your property is not. This is your competition; if the competing properties can only raise the rent up to 10 percent every year and you try to raise your own rents by 15 percent, which homes do you think tenants will be quicker to rent?
- No one likes being restricted by rent control, but honestly, we would rarely recommend that you raise your rent more than 10 percent during a renewal anyway.
Review this law if you’re not already familiar with it.
Your Lease Agreement Should Have Been Updated
Here’s something a lot of landlords missed when this law was first rolled out: your lease has to reflect the exemption. There’s even specific language that the state wants you to use:
“This property is not subject to the rent limits imposed by Section 1947.12 of the Civil Code and is not subject to the just cause requirements of Section 1946.2 of the Civil Code. This property meets the requirements of Sections 1947.12 (d)(5) and 1946.2 (e)(8) of the Civil Code and the owner is not any of the following: (1) a real estate investment trust, as defined by Section 856 of the Internal Revenue Code; (2) a corporation; or (3) a limited liability company in which at least one member is a corporation.”
If it occurs to you now that you never updated your lease agreement and your property is, in fact, exempt from both the rent control and the just cause provision in this law, let’s get this taken care of right away.
Rent Control and Flood Damage in Merced
There is no rent stabilization on the local level in Merced. We follow the state laws.
However, in 2023, you may remember that a nuanced sort of rent control was put into effect, most notably to address problems that were related to some serious flooding we saw in the region. The Merced City Council approved an emergency ordinance that prohibited landlords from raising the rent on tenants who were impacted by flood damage (up to 16,000 homes suffered). Under that law, once a home was renovated to repair flood damage, landlords could not raise the rent for up to six months.
Why are we talking about this and what are the insights we want to share around this local law from last year?
Rent control can show up at any time and impact what you’re able to charge. Even if you’re exempt from state laws. Even if you think you’ll always be able to charge whatever you want for your property. That’s not necessarily true, and you need to be prepared for the possibility that you’ll have a hard stop at the amount you can charge or increase.
Rent Control Insights for Merced Landlords and Real Estate Investors
Any landlord renting out properties in Merced has to understand the rent control laws and how they apply. Real estate investors considering properties in California also have to understand the implications of rent control. Here are some of our best insights around this:
- Budget for Income Limitations. Rent control caps will limit your ability to
increase rental income, impacting your ROI. As we mentioned, even if your property is exempt from rent control, you’ll still be competing with rent-stabilized properties.
- Maintenance Costs. The inability to raise rents significantly can make it challenging to cover rising maintenance and operational costs.
Here are some strategies we can offer to help you mitigate the challenges posed by rent control:
- Invest in Exempt Properties
Focus on acquiring properties that are exempt from rent control laws, such as single-family homes or new constructions. You can also consider diversifying your investments across multiple property types to balance your risk.
Invest in property improvements that justify higher rents within the allowed increases. This can include
upgrading amenities or offering premium features.
