By Esther Hickman
Did you know that Santa Monica multi-units have the lowest average cap rates in all of Los Angeles County? There are a lot of factors playing into this, but one thing is for sure, multi-unit transactions have remained strong and steady. How is that possible? Here’s one fun example:
Our listing, 717 9th Street, North of Montana Avenue: Four Mid-Century Modern bungalows under rent control were listed during the holidays. Despite its underwhelming capitalization rate (in the mid-3’s) it received almost a dozen offers, over asking, in just under a week! Listed at $2,995,000, it ended up selling way over ask at $3,362,500. Yes, the bungalows had quintessential charm, in a superb location but the income in relation to price, and nearly all properties of this type in Santa Monica, are still among the lowest in the country.
So WHY you might ask, do they continue to sell at a steady pace? Many reasons. Some buyers are looking for an inflationary hedge, long term equity appreciation, or simply owning a piece of land in Santa Monica. Other investors look to take on the arduous but often lucrative path of converting multi-unit rentals to condos or townhouses. Still others look to convert a more affordable multi-unit into a single family home.
We are currently at an approximate 6-month absorption rate for residential income properties, which is commendable given all the local, county and state legislation existing, and coming down the pipeline in 2022. The devil is in the details and no matter what your political ideology happens to be, it matters more than ever to pay close attention to every ballot measure and who you will be electing into office. This will be impacting your primary residence investment and income properties.
People often ask, can you find me a deal? I used to say it depends. Now, I have learned to just say no, but I can get you information. Recently, on September 1, 2021 the Santa Monica Rent Control Board updated the allowable annual increase for rent controlled units in the City to a 1.7% increase up to a maximum or “cap” of just $39.00 per month. This is a hard pill to swallow with drastically rising construction and labor costs, coupled with supply chain delays, when multi-unit owners are trying to keep up with costly repairs such as SB 721, the mandatory balcony inspection law.
I had a prospective Seller lament a month back, “Why have Realtors been saying my multi unit is worth the same price that it’s been over the last 5 years while I’ve seen single family homes skyrocket in value throughout the city.” Much of the answer lies in legislation concerning income properties.
If you are overwhelmed trying to keep up with all the laws regarding investment properties, property taxes, landlord/tenant law, local and state rent caps, the moving targets on eviction moratoriums, retrofit mandates, zoning restrictions, and so much more, you aren’t alone. How does one stay on top of all the ever-changing rules? One great resource that I like to use is AAGLA, the Apartments Association of Greater Los Angeles, which is a great way to stay informed of the laws and how they impact your Santa Monica Investments. For a small annual fee you can also have access to legal advice by on-staff attorneys as well.
Just a few more things to remember and be aware of:
- On January 26, 2022, the Los Angeles County Board of Supervisors enacted eviction protections for nonpayment of rent, to take effect on April 1, 2022.
- Phase 1, April 1, 2022 – May 31, 2022: Tenants are protected for nonpayment of rent incurred on or after April 1, 2022 if they self-certify as to COVID-19 financial hardship.
- Phase 2, June 1, 2022 – December 31, 2022: Protections apply only to households with income at or below 80 percent of Area Median Income. Qualifying tenants are protected for nonpayment of rent incurred on or after April 1, 2022 if they self-certify as to COVID-19 financial hardship.
- The City of Santa Monica continues a long standing prohibition against Vacation Rentals.
- 2022 Ballot Proposal: Regarding Senate Bills 9 and 10, local land use and zoning laws to override conflicting state laws. This could also impact current Ellis Act and Costa-Hawkins.
- 2022 Ballot Proposal: Increase Homeowners real property tax exemption and provide supplemental renter’s tax credit. Increases taxes on high value properties, limits local restrictions on housing development.
- 2022 Ballot Proposal: Revisiting Proposition 19. Eliminates property tax reassessment for certain family real property transfers.
- Affordable Housing and Financial Accountability Act, would amend the state constitution to authorize local jurisdictions to issue bonds to build, renovate, maintain or subsidize affordable housing for targeted groups, with the cost paid by raising the property tax rate above Proposition 13’s limit of 1%.
- AB 2053 to establish Social Housing in California. AB 2053 will create the California Housing Authority (CHA) to produce and preserve mixed-income homes that are union built, sustainable, collectively owned, affordable for all income levels, and are financially self-sustaining.
- AB 854 Ellis Act reform bill failed to move forward
Income property in Santa Monica is clearly still an attractive investment opportunity for buyers and sellers – but it pays to understand what has impacted a market to create among the lowest cap rates in the country and how future decisions by our legislators will continue to influence those numbers. The real key to success here is working with an informed real estate agent if you are considering jumping into the world of multi-unit investment properties and mapping out a winning game plan for your investment.
“If you don’t know where you are going, you’ll end up someplace else.” – Yogi Berra