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WHAT IS RENT CONTROL?
Rent control, in short, is a limit on how much landlords can raise rents as well as puts stipulations on evictions.
The current law states that owners can raise rents 5% + Consumer Price Index.
Owners cannot evict a tenant who has resided at the property longer than 1 year without “just cause” (breaking items in the contractual lease), unless:
Owner is to do “substantial renovations” to the building, requiring permits that take longer than 30 days to complete (no cosmetic rehabs)
Owner can give termination of tenancy if they, or a family member, are to occupy the unit themselves.
Properties built less than 15 years ago are not subject to rent control
Owner-occupied properties where the other unit is in the same building and the tenant started tenancy after the owner was already living there, is also not subject to rent control.
WHAT IS THE ALLOWABLE RENT INCREASE IN 2021?
5% + 4.1% CPI as of March 2021 = 9.1% total annual rent increase.
WHAT IS THE NOTICE FOR RENT INCREASE?
The current notice for rent increases is a 30 day notice for rent increases under 10%, or 60 days for increases over 10%.
HOW MUCH DO PROPERTY MANAGERS CHARGE?
In San Diego, property management companies will charge a percentage of the gross monthly rent, typically between 5-7% based on the number of units. For single family houses, this can be as much as 8-10%.
WHAT ARE OPERATING EXPENSES?
Operating expenses are the expenses needed to run the building, including (but not limited to):
Gas / Electricity (often sub-metered and paid by tenants)
Insurance + Property Taxes (often paid through the mortgage)
Repairs + Maintenance
HOW MUCH IS MY BUILDING WORTH?
There are 4 value indicators to determine the value of a 5+ unit apartment building, including:
Price per unit
Price per square foot
If you understand what 3-5 comps in the subject property’s neighborhood are selling for in each of these categories, take the average of the comps and apply these value indicators to your building and the current income performance. You will receive a value for each value indicator, if you average these 4 values, you will have roughly the value of the building.
Note: As a broker, we understand what neighborhoods are selling for and if buyers will be willing to pay more or less for certain income and property conditions, but if you want a rough idea, this is a simplified version of how to keep track of your property value.
For a 2-4 Unit buildings, appraisers do not consider the income of the building, and will be subject simply to the price per unit and price per square foot of the most comparable sales within the closest proximity to the subject property.
For a single family rental, appraisers will also look at comparable sales and neglect any rental income.
Feel free to request from us comparable sales for your property.
MY RENTS ARE LOW, MY TAX BASIS IS LOW AND MY PROPERTY IS PAID OFF, WHY SHOULD I MAKE ANY CHANGES?
It is common for long term owners to keep their rents below what the market can bare, this makes it easy to be a landlord, with minimal vacancies and turnover. Marketing a vacancy when it comes up is a breeze since word of mouth from other tenants brings in good tenants without having to post an ad. This is all well and good, but by not charging tenants market rate (or at least close to market rate), you are giving away that extra income every month and your income is degrading the value of your building. Not to mention, tenants are likely not notifying you of items that need repaired in fear that their rents might be raised, so your building is also suffering.
It is common for owners of 10+ years to have a delta of leading market rents and their rents by 30%. With rent control limiting how much you can raise rents, you will not be able to catch up, and doing a 1031 exchange into a new building (or different asset class, such as NNN or DST) allows you to obtain that extra 30% income you were leaving on the table. You may be happy that your tenants are happy, but how do your heirs feel about their inheritance going to your tenants?
I’VE HEARD YOU SAY RAISING RENTS IS HEALTHY FOR YOUR TENANTS, CAN YOU EXPLAIN?
Raising rents is healthy. Not only for your income and the value of the building, but yes, also for your tenants. Think about your life expenses. Would you rather have small, incremental increases in your life expenses or all of the sudden, all at once, have your expenses double or triple? Which could you handle better?
This is the same for your tenants. If you keep your rents low because you think it's helping your tenants afford to live in San Diego, it's actually doing the opposite. If you raise the rents slowly over time you are preparing your tenants for San Diego prices, so they can keep up with the changing times and not have the rug ripped out from underneath them if something happens to you or the property.
HOW MUCH RENT SHOULD I CHARGE?
How much rent you should charge depends on what the leading market rents are in the neighborhood of your property as well as how your unit compares to those units. As it stands, California law does not have limits on how much you can raise rent after a vacancy (unless in a State of Emergency, then the most you can raise above the previous rent level is 10%). It is best do do an analysis of the going rents in the neighborhood of the property and price the unit accordingly.
If you are going to be preparing the property for sale, it is best to get the most amount possible for the vacant unit. If you are planning to continue to hold long term, it may be advantageous to charge slightly under what the market can bear in order to attract a long term tenant and avoid turnover.
If you are contemplating giving a rent increase, it is also advantageous to understand what else is available for rent. If you are $300 below the next lowest rent rate in your neighborhood, you can still implement a rent increase and have tenants that are happy to stay.
We provide free custom rental surveys upon request, and can help you determine how much rent you should charge for your vacancy. Call 858-876-5701 or email Christina.ACIApartments@gmail.com to request a rent survey for your building.
HOW TO SELL A RENTAL PROPERTY WITHOUT PAYING TAXES:
You can sell real property without paying the capital gains tax by conducting a “1031 tax deferred exchange,” which is rolling the gains from the subject property into another property of equal or greater value.
WHAT IS A 1031 EXCHANGE?
A 1031 exchange is an exception to the tax code under Section 1031 of the IRS which allows the tax on capital gains to be deferred if the relinquished property is sold and exchanged for another like-kind property within certain timelines.
HOW LONG CAN CAPITAL GAINS TAXES BE DEFERRED FOR?
The current tax code allows gains to be deferred until a final sale of a property that was exchanged into, if the sale does not include purchasing another property, or until the death of the owner (or spouse). At that point, there will be a new assessed value of the property and all capital gains will be wiped clear.
CAN YOU 1031 EXCHANGE INTO MULTIPLE PROPERTIES?
Yes, you can 1031 exchange into multiple properties, as long as the total amount of property being exchanged equates to equal or greater value than the original property, and has equal or greater amount of combined debt.
HOW TO SELL MY RENTAL PROPERTY:
Pick the right broker for you
Gather all the data about the property requested from the broker, collaborate with the broker to decide on the best marketing price for the property based on your goals + sign the listing agreement.
Marketing material will be put together, as well as professional photographs of the property, and drone videos when applicable
The broker manages the listing, following up on calls, presenting and organizing offers and negotiating the best candidates to yield you the highest price
Once there is an accepted offer, escrow is opened (your broker will have recommendations for escrow and title officers), your job is to sign disclosures and provide access to the building for the buyer to do their physical due diligence
Your broker will keep you updated on the buyer’s progress and contingencies will be removed according to the negotiated contract until the final close of escrow!
Note: If you are conducting a 1031 exchange, you will also be opening an accommodator account during the escrow period, so that proceeds from the sale can go directly into the accommodator account and held for the next purchase. Your broker will know the best accommodators in town.
WHAT ARE TYPICAL ESCROW TIMELINES?
Single Family Rentals: 30 Days
2-4 Unit Rentals: 30-60 Days
5+ Apartment Buildings: 60 Days
Physical Due Diligence Contingency:
Single Family Rentals: 17-21 Days
2-4 Unit Rentals: 17-21 Days
5+ Apartment Buildings: 21-30 Days
Single Family Rentals: 17-21 Days
2-4 Unit Rentals: 17-21 Days
5+ Apartment Buildgs: 21-30 Days
WHAT ARE THE 1031 EXCHANGE RULES?
The property you exchange into must be of “like kind,” meaning it must also be real property. Houses, 2-4 units apartment buildings, commercial buildings, retail, office all qualify -- as long as it is a real property.
The property exchanged into must be for immediate investment purposes, and not for owner occupancy purposes. If the exchange property is later converted to a primary residence, the owner will be subject to a 5 year hold period, of which the owner must occupy the residence for 2 of the 5 years before selling with the Section 121 exclusion. (121 exclusion states owners can exclude up to $250,000 of capital gains for a single person, or $500,000 for a joint filers).
WHAT IS A REVERSE 1031 EXCHANGE?
A reverse 1031 exchange is an exchange where you identify the “up-leg” prior to selling the subject property (or “down-leg”). A buyer must have enough cash to purchase the new property prior to selling the relinquished property.
CAN I DO A 1031 TAX DEFERRED EXCHANGE INTO ANOTHER STATE?
The short answer is yes, you can 1031 exchange into another state.
WHAT IS THE TIME FRAME FOR A 1031 EXCHANGE?
A traditional 1031 exchange time frame is, upon the close of escrow, 45 days to identify 3 like-kind properties. One of these three properties must close escrow within 180 days of closing escrow on the relinquished property.
SHOULD I DO A 1031 EXCHANGE?
From an income viewpoint, whether or not you should sell your rental property and exchange into something else depends on your ROE, your current return on your equity. This is a math formula that can be done efficiently by a broker. You can compare what your current ROE is and see what it would look like in another property. A 10 year analysis will show what the different scenarios look like down the line, and it becomes evident that scaling into larger buildings (more rental units) will always result in building more wealth.
From an income viewpoint:
What is $100 rent increase x 1 rental unit? $1,200 annually
What is $100 rent increase x 3 rental units? $3,600 annually
From an equity viewpoint:
Not to mention, if you have a $500,000 asset appreciating 5% annually, you have an additional $25,000 at the end of the year in equity. If you have a $1,000,000 asset appreciating 5% annually, you have an additional $50,000 in equity. This compounds over the next 10 years, putting you significantly more ahead in the larger property than the smaller one.
From a tax viewpoint:
A $500,000 asset can provide upwards of $18,181 in tax write-offs, whereas a $1,000,000 asset can provide $36,363+ in tax write-offs.
WHAT IS DEPRECIATION?
Depreciation is the perceived degrading quality of real property as it is used over time, which can be deducted from the owner’s taxes. For multifamily property in San Diego, you can calculate how much ‘depreciation’ you can use as a tax deduction by taking the assessed value at the time of purchase and dividing that by 27.5 years. Therefore, a $1,000,000 property will be able to deduct $36,363 from your taxable income.
SHOULD I SELL MY RENTAL PROPERTY?
Deciding whether to sell your rental property is a very personal decision and should be discussed among all of those involved, including heirs. Here are few reasons investors opt for selling (or exchanging):
You have a step-up in tax basis
You are out of depreciation and your taxes are higher
Your heirs don’t want to inherit a second job and may want to sell anyways
You are ready to retire from managing a rental property (or managing the manager)
Your property has deferred maintenance that’s needs tended to
You have enough equity to 1031 exchange to a better location
The loan term may be coming due
Your rents are below market and your equity could give you a better return in another investment
WHAT IS A STEP-UP IN BASIS?
A step-up in tax basis is when an asset is passed onto the beneficiary (such as when a spouse passes away), the property value is reappraised at the time of death. For example, if a property was purchased in 1970 for $100,000 and now is worth $1,000,000, the capital gains on the $900,000 equity will be wiped clear since at the time of death the property was reappraised at $1,000,000.
WHAT IS A CASH OUT REFINANCE?
A cash-out refinance is a loan that is taken on a property that you already own, and exceeds the amount of the necessary equity and closing costs, so that the borrower can utilize the equity they have in the property.
SHOULD I DO A CASH OUT REFINANCE?
A cash-out refinance is a good option for owners who would like to keep their original property but put some of their equity to work in another property (or use the equity for other life purposes).
WHICH IS BETTER FOR BUILDING WEALTH, A CASH-OUT REFINANCE OR 1031 EXCHANGE?
If you do a 1031 exchange, you can utilize the full amount of equity to purchase the exchange property, enabling you to afford more than you otherwise could have. The downside to doing a cash-out refinance is that you will not be able to tap into the full equity, since some needs to remain in the property for lending purposes and the appraisal on the refinance will likely come in shy of what a buyer would pay. The benefit of the cash-out refinance is that you get to keep the property and buy additional assets, allowing them both to appreciate over time. You can have your broker run both scenarios to see which would be a better option for you.
HOW MUCH CASH CAN YOU GET OUT ON A REFINANCE?
A residential single family rental or 2-4 unit rental will need 25% of the equity to remain in the property, so anything that exceeds 25% will be yours to take out.
A 5+ unit apartment building’s refinance requirements are largely based on the current income. The property needs to cover a debt-service ratio of 1.2%. Given that owners run their buildings differently, this could be anywhere from 50%-75% cash out, depending on the strength of the income.
HOW MUCH EQUITY DO I HAVE?
**See question “How much is my building worth?” run those figures, and subtract your loan amount to see how much equity you have. Otherwise, contact a trusted broker to calculate it for you.
Note: You can get a complimentary property evaluation through this website by filling out the form under the “Request a Valuation” tab.
DO I NEED TO FIX UP MY PROPERTY BEFORE SELLING?
Whether or not you should fix up your property depends on your goals. Generally, it's a good idea to make your property the most appealing possible, part of that is the broker’s job, and we have a few tricks up our sleeve to net you the most amount possible for your building, regardless of the condition. Contact us to see if we can net you more than what it technically should sell for (we’ve been known to do that).
DO YOU HAVE A LIST OF PREFERRED PARTNERS YOU WOULD RECOMMEND IN SAN DIEGO?
Yes, we have a long list of preferred partners we work with and our clients work with. This includes lenders, contractors, handymen, inspectors, builders, property managers and everything in between.
Feel free to reach out for any recommendations!
HOW CAN I GUARANTEE THE BEST PRICE FOR MY PROPERTY?
You can only guarantee that you obtain the best price possible from marketing the property to all of the potential buyers. This is done through marketing and listing the property for sale with a proven marketing campaign with a competent broker. Listing the property creates: price certainty, competition and buyer urgency, driving up the price past what an off-market sale could yield.
With that being said, some situations warrant ease of sale over squeezing every extra penny from a property, so it’s up to you and your family to decide which is best for you. ACI has 35 years of vetted buyers actively pursuing properties, so if ease of sale is most important then that can be accomplished.
I WANT TO SELL BUT I DON’T WANT TO BOTHER MY TENANTS, IS THAT POSSIBLE?
Yes, in most cases with rental property sales, buyers do not see the interior of a property until there is an accepted offer. If you have a good relationship with the tenants and they are willing to cooperate and allow showings, this would be a perk, but 75% of the time prospective buyers cannot see interiors until they are in escrow.
WILL YOU SOURCE OFF MARKET DEALS FOR ME?
ACI has conducted 4,500+ transactions over the past 35 years with countless clients. With 10-15 active brokers at any given time, we have a brokerage full of clients who will be buying, selling or exchanging this year and the next years to come. At ACI we share what our clients' needs are, so if someone else has a client with a situation that is a match to your needs, we will certainly connect the two. Otherwise, we have active direct mail and email campaigns monthly and weekly, so when it’s the right time we will be doing everything in our power to source you the best deal possible for you.