If you’re a buyer looking to purchase income property in the city of Los Angeles, you should familiarize yourself with the laws in place that protect tenants, as it could have a major impact on your plans for the investment.
A fantastic way of starting a real estate portfolio is to buy a duplex as your first property. A buyer could buy a duplex, triplex, or beyond with just about the same amount of capital as a typical single family home purchase of similar size. It does come with added landlord responsibilities, like collecting rent and maintaining the building in functioning order. However, in time the benefits can greatly outweigh the initial detriment, paving the way for a fantastic income-producing property you can keep in your portfolio for years to come!
Leveraging your Purchasing Power with an Income Property
Buying an income property is a great way to leverage your purchasing power with rental income to afford more property. For example, say we have a buyer who normally qualifies for a single-family home with a mortgage of about $2,500/month by themselves. Instead of purchasing a house, they could opt to purchase an income property, such as a duplex, with a mortgage of about $4,000. If the rental income from the other units is $2,000 or more, you will be able to qualify for the property, live in one unit and use the rental income to help pay the mortgage. *Your mileage may vary, but be sure to ask your lender about income property if it is of interest!*
This scenario assumes we have at least one unit available for the buyer to occupy, but that is not always the case. In fact, income property that is offered completely vacant will often command a much higher price than the same property with tenants in place. This is especially true if the current tenants are paying rents below market. If the rental property is not bringing in enough income, it could be challenging to make the numbers work for a new buyer. Adding to that challenge is the fact that if there are tenants, and you want to occupy a unit yourself, you would need to evict a tenant and pay them a relocation fee, which is often several thousands of dollars.
If you’re looking for clarity on rent control and the affects it could have on relocating tenants during a real estate transaction in Los Angeles City, you’ve come to the right place!
What is Los Angeles City Rent Control?
Los Angeles City rent control, otherwise known as the Rental Stabilization Ordinance (RSO), was enacted in 1978 with the intent to improve the affordability and availability of rental units. It established tenant protection laws:
“…as to safeguard tenants from excessive rent increases, while at the same time providing landlords with just and reasonable returns from their rental units.”https://codelibrary.amlegal.com/codes/los_angeles/latest/lamc/0-0-0-195213#JD_151.01.
Whether or not it has accomplished its initial intent is still highly debated.
Previously, only buildings built prior to 1979 would fall under rent control. However, in 2019 California launched a statewide rent control under AB 1482. Below are a few bullet points of some of the more important aspects of rent control in Los Angeles:
Rent Stabilization Ordinance for Los Angeles, CA:
- Applies to Income Property built in 1978 or earlier, including apartments, duplex, triplex, fourplex, and beyond
- Annual rental increase cannot exceed rate of inflation (3% – 8%), varies by year
- Does not apply to Single Family Residences: Houses, condos, etc.
- see the overview details here
Rent Stabalization Ordinance for California:
- Effect on Jan 2020 through Jan 2030.
- Requires a landlord to have a “just cause” in order to terminate a tenancy.
- Limits annual rent increases to no more than 5% + local CPI (CPI = inflation rate), or 10% whichever is lower.
- A tenant may not waive their rights to these protections and any agreement to do so by the tenant is void as contrary to public policy.
- Properties built between 1979 – 2005 are subject to the statewide CA rent control.
- Rent control will apply to any building 15 years or older.
What Cities are under LA City Rent Control?
LA city rent control pertains to several cities and communities. Some of the more popular areas are:
- Los Angeles
- San Pedro
- Harbor City
- Harbor Gateway
- Van Nuys
- Woodland Hills
- and many more
Buying Income Property / Tenant Occupied Property
Your Plan: Investment Property or Owner Occupying?
Buyers for income property are usually looking for one of two things: an Investment Property, wanting to rent all units on the property, OR a buyer looking to be an Owner Occupant of one of the units while renting the others.
In both circumstances, knowing local rent control laws is critical for everything from increasing rent, to the few just-cause reasons involved in legally evicting or relocating tenants in the city of Los Angeles. However, for buyers looking to be owner occupants, proper steps must be taken in order to legally relocate tenants. The process is outlined by the Los Angeles Housing Community Investment Dept. (LAHCID) and includes fees when relocating tenants.
Tenant Relocation Under Los Angeles City Rent Control
Under rent control, tenants can only be evicted/relocated for one of 7 just-cause reasons, and it must be done through the LAHCID. The 7 valid reasons to evict/relocate a tenant are:
- Permanent Relocation pursuant to Tenant Habitability Plan
- HUD Foreclosure
- Condo Conversion
- Eviction for compliance with government agency order
- Eviction for owner-occupancy / residential manager occupancy
- Withdrawal of all units from the rental market
Relocation Assistance & Fees
Aside from meeting either of the criteria above, a relocation fee must also be paid to the tenant. The relocation fee ranges depending on whether a tenant is Qualified or Eligible. The figures can be seen below. Qualified Tenants are considered anyone who is 62 or older, disabled or handicapped, or has minor dependent children living with them. Everyone else would be considered an Eligible Tenant:
As you can see from the table above, relocating tenants can get very expensive very fast, and is why vacant units are much more desirable than occupied units. The fees are calculated by unit, not by individual occupants.
- Eligible Tenants would receive $8,200 if occupying the property for less than 3 years. For more than 3 years of occupancy, they would receive $10,750
- Qualified Tenants would receive $17,300 if occupying the property for less than 3 years. For more than 3 years of occupancy, they would receive $20,450
As a buyer, it is possible to relocate a tenant for owner-occupancy / residential manager occupancy or by withdrawal of all units from the rental market. In both circumstances we would be require to withdraw at least one unit form the rental market.
- The landlord shall pay the relocation fees to the tenants within 15 days of service of the
written notice of termination.
- The landlord may elect to pay the relocation fees directly to the tenant or through an escrow account.
- HCIDLA contracts with a Relocation Assistance Consultant. They are responsible for determining the amount of relocation fees the tenant is entitled to and to provide the tenant with replacement housing listings, along with relocation services, such as transportation to inspect replacement rental units.
- Requests for a hearing to appeal a decision regarding a tenant’s relocation assistance eligibility must be filed and received by HCIDLA within 15 calendar days of Relocation Determination date.
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Procedures for Withdrawing Units From Rental Market – Ellis Act
Though lengthy, the process for withdrawing rental units from the market can be accomplished using the forms that are provided by LAHCID. They are:
- Call (213) 808-8537 to schedule an appointment for application submission.
- Landlords must file a Notice of Intent to Withdraw Units from Rental Housing Use (Notice of Intent) with HCIDLA. Appointments are required for submission.
- Landlords must record a memorandum with the County Recorder summarizing the non-confidential provisions of the Notice of Intent and provide HCIDLA with a copy of the recorded memorandum at the time the Notice of Intent is filed.
- Landlords must serve each tenant with a Notice to Tenant of Pending Withdrawal (Form E3) and the Notice to Landlord of Interest in Renewing Tenancy (Form E4) within five days of filing the Notice of Intent. The notice to tenants must include an advisement on specific
- tenant rights.
- All tenants being evicted under an Ellis Act withdrawal are entitled to a minimum of 120days notice from the date the Notice of Intent was filed with HCIDLA.
- Senior (62+) and disabled tenants are entitled to an extension of their tenancies up to 1 year, provided they notify their landlord within 60 days of the filing date of the Notice of Intent.
- Landlords may elect to extend the tenancies of other tenants up to 1 year.
- Extended tenancies must continue under the same terms and conditions as existed on the filing date of the Notice of Intent.
- Tenants are entitled to relocation assistance payment from their landlord except for when the tenant has signed a relocation assistance waiver. Waivers must be in accordance with LAMC 151.09 G.4 (b or c). However, tenants who have resided in the unit for at least 1 year are still entitled to relocation services.
- Buying an income property as a first home can greatly leverage your purchasing power and ability to buy property, but comes with added responsibilities, as you WILL be a landlord!
- Under LA Rent Control, a new buyer for an income property can relocate a tenant, but it comes with a cost between $8,200 – $20,450 per unit and is determined by several factors with regards to the tenant.
- Relocation of a tenant would require withdrawing the unit from the rental market through LAHCID.
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