My First Rental Unit: Rent Control Nightmare
In 1990, I came to UCLA to attend law school. For the first time, I attended a public University, and having saved some money, I was able to pay my own tuition especially after establishing residency in California after the first year. The first couple of months, I lived with my cousin in South Pasadena. She lived on her own and was happy to have me as company. After a while, the commute really got to me. LA traffic jam during rush hour was something I had never experienced before. It was difficult to drive a hour to attend law school, drive an hour back home and study. My parents decided to help me invest in a condo in Brentwood, a 10 minutes bus ride to UCLA.
The condo we invested in was a one bedroom on Barrington Ave. In 1990, it cost $180,000. My parents purchased the property with a 50% down payment under the names of my sisters and myself, thinking that it would be an investment for the three of us. I got to live there. The monthly mortage and homeowners association fee was about $700 which my parents paid for two and a half years.
I got married in 1993 a few months before graduation. My husband and I stayed in that condo and took over the payment of the mortgage. After graduation, with a dual income, we decided to buy our first jointly owned house. My sisters and I explored selling our condo unit, but by that time, the real estate market had crashed. Our real estate agent tells us that she received one offer for $120,000 to buy the condo. We would have taken a significant hit. As a result, we said no, and decided to rent out the condo.
I was such a naive newbie to being a landlord and looked down on the responsibilities of being one that I made so many rookie mistakes.
Mistake No. 1: Not checking the rental value of the condo. I placed an ad in the local newspaper to rent the condo out for $700, the amount of mortgage that I was paying. I figured that so long as the mortgage was covered, I was good for shelling out the additional $150 in HOA fees. I was making good money, so it didn't matter.
Mistake No. 2: I rented the apartment to a young couple from Australia who wrote me a letter saying that they are new to this country therefore had no credit. They both found jobs here, so will I accept them as renters? I loved the idea of helping out these young couple who are foreigners trying to establish themselves for the first time that I happily accepted them as my renters. Over the years, they paid their rent, but often, the rent was late and I had to call or write repeatedly to collect rent. If there were things that needed fixing, my husband and I did the work ourselves. If the dish washer broke, we replaced it with a new one. We were young and had no kids. Doing handyman work was not that big a problem.
Mistake No. 3: Never increasing rent for five years. I was comfortable just having my renters pay me that $700 to cover my mortgage that I never upped the rent on them for five years. However, while my mortgage didn't go up, my HOA fees did. For various common area improvements, the HOA fees kept going up from $150 to over $200 each month. At some point, I realized that I needed to increase the rent to cover my costs.
Mistake No. 4: Not realizing that the rental unit was rent controlled. This was the biggest shock I experienced. I sent my tenants, whom I thought were nice and reasonable people, asking to increase the rent by $50 a month. I figure that not having increased the rent on them for five years, a $50 increase was reasonable. I gave them a nice letter with 30 days notice. Next thing I know, I got a letter from their attorney, telling me that they would sue me for increasing the rent on them by that much since the condo was rent controlled. What the...????? What is rent control? I had no idea what that was. I looked up the information about Los Angeles City rent control law and found out that indeed, apartment or condo units built before 1979 were subject to rent control. The building where my condo was was build in 1978, which means I cannot increase the rent on my condo by more than 3% each year. Which means I could only increase the rent by $21. Asking for a $50 increase was way beyond rent control dictates, but had I increased the rent by 3% each of the five years I rented the place out, I would have easily achieved the $50 I was asking for and then some, but stupidly, I thought I was doing my tenants a favor, and never increased their rent to my own detriment! I started to raise the rent by the 3%, but the whole experience and confrontation left such a bad taste in my mouth that I decided that I didn't want the headache of managing the condo anymore and settled on selling it instead.
Once I decided to sell the condo, I came across additional rent control issues: Tenants in rent controlled units have certain rights. I cannot evict them to collect higher rents from new tenants. I cannot evict them unless I plan to move in myself, or sell the property. But to do so, I also must pay them a significant move out fee to evict them, otherwise I would run afoul of the rent control laws. In the end, I hired a negotiator who specializes in negotiating between landlord and tenants. The tenants agreed to move out if I agreed to pay them each $4000. So in the end, between paying the negotiator and the tenants, I shelled out about $10,000 to get rid of this headache. It felt so worth it at the time, even though that was more than a full year of rent.
When I went to inspect the condo the day my tenants moved out, I saw them. The meeting was cordial, and I noticed that the wife was pregnant. I congratulated them. To this day, I count myself lucky that they took the move out fee and left. Had they had their baby, I would have had to add another $4000 to pay them to leave. Whew!
Mistake No. 5: Once the tenants left, I could have rented the condo out at market rate. This may or may not be a mistake but I decided to forego the headaches of being a stupid landlord again and sold the condo. At the time, I sold the condo for $290,000, a $110,000 increase over what we paid for the unit. Not bad. However, had I kept the condo, rented it out at at the 1999 market rate, even with rent control (Yes, remember, the condo building was built before 1979 and thus still subject to rent control) and sold it now in 2017, I could have asked for $500,000 given the explosion in real estate value in Los Angeles, and especially in the tony Westside enclave of Brentwood. I say this may or may not be a mistake only because I don't think I could have stomached the experience of being a landlord of a rent controlled unit again for another 17 years. On the other hand, had I hired an experienced agent to handle the headache for me, I could be having a nice rental income, paid off my mortgage by now and enjoyed the significant increase in value of that property. Hind sight is 20/20.
My take away from this experience: Research the property before you buy. Rent control is a big issue in the city of Los Angeles, Santa Monica, West Hollywood, and a few other cities in southern California (and other locations). It rightfully protects tenants who do not have the means to pay market rent, but for landlords, it ties their hand as to what they can do with their own property. If I am a renter, rent control is great. If I am a mom-and-pop real estate investor and landlord, I would avoid units that are subject to rent control at all cost. I would leave rent controlled apartment and condo investment to professionals.
Note: Single family homes in Los Angeles are not subject to rent control even if they are built before 1979. Only multi-units properties are. Buying a single family house also avoids the headaches of dealing withe homeowner associations of condo units whose approval is needed if you contemplate making any changes to your unit or parking spot in the common garage.
The condo we invested in was a one bedroom on Barrington Ave. In 1990, it cost $180,000. My parents purchased the property with a 50% down payment under the names of my sisters and myself, thinking that it would be an investment for the three of us. I got to live there. The monthly mortage and homeowners association fee was about $700 which my parents paid for two and a half years.
I got married in 1993 a few months before graduation. My husband and I stayed in that condo and took over the payment of the mortgage. After graduation, with a dual income, we decided to buy our first jointly owned house. My sisters and I explored selling our condo unit, but by that time, the real estate market had crashed. Our real estate agent tells us that she received one offer for $120,000 to buy the condo. We would have taken a significant hit. As a result, we said no, and decided to rent out the condo.
I was such a naive newbie to being a landlord and looked down on the responsibilities of being one that I made so many rookie mistakes.
Mistake No. 1: Not checking the rental value of the condo. I placed an ad in the local newspaper to rent the condo out for $700, the amount of mortgage that I was paying. I figured that so long as the mortgage was covered, I was good for shelling out the additional $150 in HOA fees. I was making good money, so it didn't matter.
Mistake No. 2: I rented the apartment to a young couple from Australia who wrote me a letter saying that they are new to this country therefore had no credit. They both found jobs here, so will I accept them as renters? I loved the idea of helping out these young couple who are foreigners trying to establish themselves for the first time that I happily accepted them as my renters. Over the years, they paid their rent, but often, the rent was late and I had to call or write repeatedly to collect rent. If there were things that needed fixing, my husband and I did the work ourselves. If the dish washer broke, we replaced it with a new one. We were young and had no kids. Doing handyman work was not that big a problem.
Mistake No. 3: Never increasing rent for five years. I was comfortable just having my renters pay me that $700 to cover my mortgage that I never upped the rent on them for five years. However, while my mortgage didn't go up, my HOA fees did. For various common area improvements, the HOA fees kept going up from $150 to over $200 each month. At some point, I realized that I needed to increase the rent to cover my costs.
Mistake No. 4: Not realizing that the rental unit was rent controlled. This was the biggest shock I experienced. I sent my tenants, whom I thought were nice and reasonable people, asking to increase the rent by $50 a month. I figure that not having increased the rent on them for five years, a $50 increase was reasonable. I gave them a nice letter with 30 days notice. Next thing I know, I got a letter from their attorney, telling me that they would sue me for increasing the rent on them by that much since the condo was rent controlled. What the...????? What is rent control? I had no idea what that was. I looked up the information about Los Angeles City rent control law and found out that indeed, apartment or condo units built before 1979 were subject to rent control. The building where my condo was was build in 1978, which means I cannot increase the rent on my condo by more than 3% each year. Which means I could only increase the rent by $21. Asking for a $50 increase was way beyond rent control dictates, but had I increased the rent by 3% each of the five years I rented the place out, I would have easily achieved the $50 I was asking for and then some, but stupidly, I thought I was doing my tenants a favor, and never increased their rent to my own detriment! I started to raise the rent by the 3%, but the whole experience and confrontation left such a bad taste in my mouth that I decided that I didn't want the headache of managing the condo anymore and settled on selling it instead.
Once I decided to sell the condo, I came across additional rent control issues: Tenants in rent controlled units have certain rights. I cannot evict them to collect higher rents from new tenants. I cannot evict them unless I plan to move in myself, or sell the property. But to do so, I also must pay them a significant move out fee to evict them, otherwise I would run afoul of the rent control laws. In the end, I hired a negotiator who specializes in negotiating between landlord and tenants. The tenants agreed to move out if I agreed to pay them each $4000. So in the end, between paying the negotiator and the tenants, I shelled out about $10,000 to get rid of this headache. It felt so worth it at the time, even though that was more than a full year of rent.
When I went to inspect the condo the day my tenants moved out, I saw them. The meeting was cordial, and I noticed that the wife was pregnant. I congratulated them. To this day, I count myself lucky that they took the move out fee and left. Had they had their baby, I would have had to add another $4000 to pay them to leave. Whew!
Mistake No. 5: Once the tenants left, I could have rented the condo out at market rate. This may or may not be a mistake but I decided to forego the headaches of being a stupid landlord again and sold the condo. At the time, I sold the condo for $290,000, a $110,000 increase over what we paid for the unit. Not bad. However, had I kept the condo, rented it out at at the 1999 market rate, even with rent control (Yes, remember, the condo building was built before 1979 and thus still subject to rent control) and sold it now in 2017, I could have asked for $500,000 given the explosion in real estate value in Los Angeles, and especially in the tony Westside enclave of Brentwood. I say this may or may not be a mistake only because I don't think I could have stomached the experience of being a landlord of a rent controlled unit again for another 17 years. On the other hand, had I hired an experienced agent to handle the headache for me, I could be having a nice rental income, paid off my mortgage by now and enjoyed the significant increase in value of that property. Hind sight is 20/20.
My take away from this experience: Research the property before you buy. Rent control is a big issue in the city of Los Angeles, Santa Monica, West Hollywood, and a few other cities in southern California (and other locations). It rightfully protects tenants who do not have the means to pay market rent, but for landlords, it ties their hand as to what they can do with their own property. If I am a renter, rent control is great. If I am a mom-and-pop real estate investor and landlord, I would avoid units that are subject to rent control at all cost. I would leave rent controlled apartment and condo investment to professionals.
Note: Single family homes in Los Angeles are not subject to rent control even if they are built before 1979. Only multi-units properties are. Buying a single family house also avoids the headaches of dealing withe homeowner associations of condo units whose approval is needed if you contemplate making any changes to your unit or parking spot in the common garage.
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