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Did You Know? Owning multi-family property in California requires nerves of steel

For owners of California residential investment property, it’s already been a harrowing 18-months. The COVID-19 pandemic put a huge burden on multi-family owners, many of whom are “mom and pop” owners who live off the income from their investment. For months, tenants didn’t have to pay full rent by stating that their income was significantly affected by the pandemic — but without providing any supporting documentation. That lack of documentation has been unfortunate because too many tenants have abused the goodwill of these laws. While this financial albatross has required owners to bootstrap like never before, what lies ahead may cause some owners to rethink investing in California.

During the pandemic, costs went up for many goods, primarily due to slower production and outpaced demand. It seems now, however, that this inflation is not fading away anytime soon. In the Bay Area, inflation jumped 3.2% in June and 3.8% in April (U.S. Bureau of Labor Statistics). Nationwide, the Consumer Price Index jumped 5.4% in June compared with the year before. Electricity rates went up 8.7%. With a proposed $3.5 Trillion “stimulus” in the works on the federal level, economists like Christopher Thornberg have drawn comparisons to the brutal bouts of rising prices that took place in the 1970’s. “Is the risk of inflation higher than we’ve seen in 30 or 40 years? Heck yeah. There is a lot to worry about,” he said.

According to the McKinsey Global Institute, California needs 3.5 million new housing developments to accommodate the population and mitigate soaring housing prices. Efforts, therefore, should be focusedon easing the path for development. In 2021, a California law went into effect to ease restrictions on building Accessory Dwelling Units (ADU’s), and that forward thinking needs to be brought to scale. Duplexes, triplexes, quads, and apartment buildings need to be developed with minimal red tape.

Instead, state legislators introduced California Assembly Bill 854 and 1188, one of which prevents owners from converting apartments to other uses, such as building a much larger condo complex, while the other law requires registries of renters, rental rates, and other intrusive information. Proposed laws like these are nothing more than sideshows that burden multi-family owners and prevent real progress on new housing construction.

The best real estate investments used to be in California, but as policymakers saddle property owners with unnecessary limitations and financial penalties, many are starting to wonder: Is it time to sell? Answering this question requires the individual investor to consider his or her tax strategy, projected proceeds, and investment alternatives while making a decision. Contact me for a review of your options and a complimentary analysis.