In September 2019, California's legislators passed AB 1482, known as the Tenant Protection Act of 2019. Once the governor signs the bill into law, effective January 1, 2020, residential rental landlords of certain covered properties must comply with additional lease provisions that limit rent increases and the owners ability to evict.

Learn more about the rent control regulations and how these laws will potentially impact your investment.

Which Properties Are Affected?

If you own a property built at least 15 years ago that is not currently subject to local rent control restrictions, then AB 1482 might apply to you. Exemptions include dormitories, affordable housing, and single-family homes and condos (as long as they're not owned by a corporate entity, such as an LLC, corporation, or REIT), as well as duplexes, if the owner lives in one of the units.

Cap on Rent Increases

Landlords of covered properties will be limited to raising gross rent to the lesser of 10 percent or five percent plus the change in the cost of living (CPI Index), which has ranged from around one to three percent in recent years. So if the inflation rate is two percent, then you can increase your tenant's rent by a maximum of seven percent. Note that the effective date is retroactive to March 15, 2019, meaning that any future rent increase will be based on the rent in place as of that date.

If your unit is vacant, you can raise the rent as much as you wish.

Just Cause for Evictions

The measure also extends just cause eviction protections. For tenants who have lived in their rental unit for at least a 12-month period, you generally cannot order renters to move out if they are following the terms of their lease. If you, the owner plans to move into the unit, demolish the unit, substantially renovate, or no longer rent it at all, then you can evict the tenants; however, you must pay evicted tenants the equivalent of one month's rent for relocation expenses.

What Rent Control Means for Your Investment

AB 1482 expands rent control to hundreds of thousands of units across the state for at least 10 years, since the legislation will be in effect until 2030 unless the legislature extends the law's deadline beyond that. This means your ability to evict tenants and raise rents to account for increased expenses or property improvements will be restricted. The rent caps may also lower the long-term value of your property, since valuation will be based on pro forma calculation of increases based on current tenants' rental rates rather than market rate rents.

With passage of AB 1482, property owners might want to reconsider your investment choices. One option to consider is maximizing the potential gains you have achieved on your property by selling and utilizing the 1031 exchange investment strategy. Direct 1031 Exchange will walk you through the entire exchange process and introduce you to strategies that allow for continued investment in real estate out-of-state without the hassles of property management and deferring any associated capital gains taxes from your property's sale.

Interested in exploring your investment opportunities? Contact Daniel Brown with Direct 1031 Exchange to discuss your options.

Reference:

Tenant Protection Act of 2019: tenancy: rent caps, California Assembly Bill 1482 (2019-2020): https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200AB1482

 

About the Author

Daniel Brown, Managing Director at Direct 1031 Exchange.