Q: I own property in the Silicon Beach area, and I’m close to retirement. With rents being so high and people making so much money from renting on AirBnB, is there any downside to simply renting my property out for steady income instead of selling it?
A: I have been asked this question several times recently. As a real estate broker and attorney, it is my job to stay informed on all issues that impact real property ownership. When it comes to income property, having represented landlords for many years, I am especially attuned to developments- and boy, are there developments.
First, let’s go straight to what is behind this question. With rents in the L.A. area notoriously expensive and on the rise, the monthly income potential for your home could be significant. Not to mention what you may have seen some neighbors making for renting their places out short term on AirBnb! Why not turn your own home into a cash cow, providing reliable income for the rest of your life? Of course, each homeowner has a different set of personal and financial circumstances that must be taken into account to best answer this question, so this column will focus on the generalities.
For some, keeping your home as a rental may be a good option. You have already heard about the advantages, and now want to understand the disadvantages. Here are a few things you should think about:
1. Being a landlord. The checks don’t just roll in, uninterrupted, without effort. No amount of vetting potential tenants can guarantee against job loss, illness, or any personal issue that causes your tenant to default on rent. If you are dependent on that rental income, you must have backup funds sufficient to anticipate loss of rent, potential eviction, or even just time between tenants. Throughout the tenancy, you must continue to make repairs. If your heater breaks down mid-winter, not only will you need to pay to replace it, but you may have to pay for the tenants to stay somewhere else until it’s in working order. Managing a rental property, especially from a distance, can be extremely stressful. A property manager can be a great solution for this if you are willing to give them a percentage of the rent.
2. Beware of rent control. You may think that your single family home or condo is exempt from rent control. Well, generally, you are right, but maybe not for much longer. This November, Californians will vote on Proposition 10, a measure that would repeal Costa-Hawkins, the set of regulations enacted by California in 1995 to provide certain restrictions and protections against extreme forms of rent control. It is Costa-Hawkins that prevents cities from subjecting your home to rent control restrictions. Considering that measures benefitting tenants usually have no trouble getting votes, imagine your future as a landlord under rent control. Not only does rent control prevent you from charging market rents, what many don’t realize is that it can create virtually lifetime tenancies. You can only reclaim your home under certain circumstances, and even then, you will pay steep relocation fees. If your tenant is a senior or handicapped, and has been a tenant for a certain number of years (varies by City), you may be absolutely prevented from relocating them. You’ll also be paying fees for rent registration, code inspections, and enforcement. Not to mention that becoming subject to rent control can reduce your property value by up to about 20%. If your home is in the City of Los Angeles, expect to be subjected to rent control- the mayor has already stated publicly that he is in favor of expansion.
3. Short-term rental regulations are coming. Los Angeles is preparing to regulate short term rentals for all but your primary residence, and even for that, will be setting a cap on days per year you can rent. By the way, if your property is subject to rent control, short term rentals are prohibited. My point is- don’t count on this premium income for too long. If they do become more regulated or even prohibited, many will likely be put up for sale, and the dumping of real estate is not good for values. You may not be able to sell then for the price you can sell for today. If short term rental is your plan, take a close look at long term rents (potentially under rent control) to determine if it will work for you should you need to shift.
There you have it- being a landlord can be profitable, but there are risks and limitations that any potential landlord must take into consideration before making the decision. I’m always willing to answer questions about these issues and to help with a personal analysis, but I hope I’ve given you some information to consider. If you think you might ever become a landlord, make sure you get out and vote against Prop 10 on November 6th! Good luck, future real estate moguls!
Disclaimer: This article is intended to be primarily for entertainment purposes, and is not to be considered legal advice.
ABOUT LISA PHILLIPS, ESQ./ CA Dept. of Real Estate, License #01189413
Lisa Phillips is an active Realtor® in the Los Angeles area, with more than twenty years as a Real Estate Broker and Attorney. Lisa is also a member of the National Association of Realtors “Green Resource Council”, and achieved its “GREEN” Designation. Her unparalleled knowledge of real estate, from local markets and pricing to legal issues and deal-making, has made her a trusted and valuable asset to her clients. In addition to her real estate and business savvy, Lisa is passionate about helping others, and works tirelessly for her clients, as well as several charitable causes. For more information, please visit www.LisaPhillipsRealEstate.com.
