Cap rate & appreciation implications due to California statewide rent control AB 1482

Cap rate & appreciation implications due to California statewide rent control AB 1482

The passing of California statewide rent control AB 1482 is creating uncertainty among investors and an interesting investing atmosphere.

Rent control caps of 5% plus the change in CPI of 3.3% for the LA Basin area creates a total annual rent cap of 8.33%. Additionally, the just cause provisions added will make it a slightly lengthier and more expensive project to renovate. This information concerns many multi-family real estate investors specifically those conducting business in the value-add realm. Though it also creates some interesting opportunities the savvy investor should be aware of. According to a study done by RCA of 12 rent-controlled markets, 10 of them experienced increased cap rates for apartment buildings. What happens in situations such as this is investors are less willing to pay top dollar for under market rents causing a short-term devaluation In purchase price and with no change to GSI causes a jump in Cap rates.

Cap rate = NOI (net operating income)/Purchase Price

Where this gets particularly interesting is when we look at the historical appreciation rates of analogous markets. Since the 1960’s Buckingham Investments has been collecting data on southern California markets.

In the south bay, we can analyze San Pedro when it became rent-controlled in 1978 compared to other non-rent-controlled such as Inglewood, Hawthorne, and Lawndale through 1984. What we find is that San Pedro had the greatest rate of appreciation at 82% versus Inglewood at 81%, Hawthorne at 52% and Lawndale at 40%. So, the combined short-term devaluation of under market rent buildings and the trend of heightened appreciation of rent-controlled areas creates a unique opportunity for the long-term real estate investor following the passage of AB 1482.

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