The Intricacies of ROI and an Investment Property in a Rent Control Market - Article Banner

Real estate is almost always an excellent investment. When you buy an investment property with the expectation that you’ll rent it out, you’re setting yourself up for short-term gains by collecting rent every month. The long-term returns are even better, especially when your property increases in value while your mortgage debt is paid down. 

Statewide rent control went into effect in California in 2020. In our rental market, we’re also still recovering from the impact of the eviction moratorium, which lasted longer here than it did in other parts of the country. 

So how do you invest wisely and profitably in a rent control market? Can it even be done? 

The answer is yes. Even in a market where owners have to navigate rent control and strict tenant protections, you can earn money on your real estate investments. The trick is to work with professional partners who can help you avoid common and expensive mistakes. 

Choosing a Profitable Investment Property 

You’ll need to establish some investment goals and consistently pursue those goals throughout the investment cycle. Choose your property carefully. The most expensive mistake you can make while investing in Visalia is to buy a property that seems great on paper but then it turns out to be a dud because no one wants to rent it or the repair costs are astronomical.

Two specific things will tell you if you’ve found a profitable investment property: 

  • Location
  • Condition

Think like a tenant when you evaluate the location. Is the property close to schools, shopping, restaurants, and entertainment? If so, you’ve got a place that tenants will want to rent. If it’s remote, difficult to access, or trapped in an industrial or heavily commercial neighborhood, you may have trouble getting the rental price you want or attracting tenants who are interested in living there. 

Property condition is something that you need to seriously evaluate before you invest. A lot of buyers are drawn to the “fixer upper.” They think they’ll be able to work some magic, make some major renovations, and earn a lot of money. 

If that’s your investment strategy and it speaks to your specific investment goals – great. 

If it doesn’t, avoid those investment properties that need a lot of work. The time and money you’ll have to spend will be more than you anticipate. Not only will you have to sink a lot of resources into the renovation and the rehab, you’re not going to be able to rent it out for several months. That’s a huge rip into your cash flow and your ROI. You’re spending money without making money. 

Look for an investment property that’s in generally good condition. Needing a few cosmetic updates is okay. But don’t choose a home that needs everything. You’ll struggle to see any ROI for a long time.

Rent Control and Tenant Protections in California

Rent Control LawWhen investors are deciding whether or not to buy rental real estate in California, one thing that gives them pause is the rent control laws. They’re some of the strictest in the country, and rent control impacts what you can earn on your property, especially when your rental units are subject to the statewide limits on how much you can raise your rent. 

New homes are largely exempt from state rent control laws. If you’re going to invest in Visalia rental property, look for newer buildings and single-family homes. New buildings are exempt from rent control until they are 15 years old. The idea is that with this exemption, developers would be encouraged to build new rental housing without the limits of rent control. It’s also meant to encourage real estate investors to continue buying and renting out those properties.

With the implementation of AB1482, you cannot raise your rent in a 12-month period more than five percent plus whatever the Consumer Price Index (CPI) determines to be the inflation increase. 

Generally, it means you won’t be able to raise your rent more than seven or eight percent every year. This law is in effect for 10 years. 

The CPI changes annually, so landlords will be required to understand what it’s been set at before they add their own five percent if they’re planning to raise rent by the maximum amount the law allows.

When you have an investment property that’s subject to rent control laws, you have to be strategic about how you price the property, attract tenants, and negotiate lease renewals. To maximize your ROI, we recommend:

  • Strategically pricing your vacant property. The rent control laws do not limit what you can set your rent at when the property is vacant. You’ll want to study the market, and you’ll need to compete with those properties that are subject to rent control. Their prices will be lower. But, you will want to avoid underpricing your rental property at the point that you list and market it. Otherwise, you’ll have a difficult time increasing the rent year after year because you’re bound by those rent control limits. 
  • Screen tenants carefully. You will likely have them in place for longer than a one-year lease. In a market without rent control, tenants feel free to look around at lease renewal time. They may find something cheaper and it’s worth it to them to move. With rent control in place, tenants know their rent is capped. They’re more likely to stay in place longer. Plus, the just cause eviction laws make it difficult to evict a tenant without cause. You’ll want to know you’re placing great residents.

The tenant protections make the management of your property more challenging. It’s an excellent reason to work with Visalia property managers. We’ve been working with owners throughout the pandemic, to manage the eviction moratorium and keep rent coming in. It’s been a difficult market to navigate, but we can work together to ensure you earn the ROI you’re expecting. 

If you’d like to talk about how to best position yourself to succeed as an investor in Visalia and throughout Tulare County, please contact us at The Equity Group.