Some thoughts about raising rents amid rampant inflation - there's more than meets the eye
As we emerge on the other side of the pandemic and inflation becomes rampant, it is tempting for landlords to raise rents for existing tenants. Should they?
As for rental property owners with units that are not occupied, there is a titillating question: how much to set the rent to fill the vacancy while making a profit?
There is no easy answer to these questions but one emphatic statement we can make is that whatever the “right-sized” rent amount is, we have to take a methodical approach in coming up with it.
Economists we are not, but clearly, we have not seen sticker shocks like this since we were watching Dallas and the Jeffersons on television.
According to a grim report, consumer prices in the Bay Area skyrocketed in April, just falling shy of the 21-year high they reached earlier this year.
For landlords, it is beyond paying more at the pump and at the grocery checkout. What is not adequately reflected in the Consumer Price Index (CPI) is the climbing costs attendant to running a rental housing business. Prices for appliances. What contractors demand for making repairs. Costs for building materials, rising property taxes, and so forth.
We have repeatedly said throughout the pandemic that rental housing providers were asked to absorb an inordinate amount of damage from the economic fallout. With ever-extending eviction moratoriums, our industry was the only one to our knowledge asked to provide a service for free.
Landlords are once again bearing the brunt of a situation beyond their control by being put in a straitjacket with limitations on rent increases as prices go up and up.
Is help on the way?
For those of you only subject to statewide rent control (AB 1482), you will soon see an appreciable spike in the allowable rent increase. In some locales like San Francisco, Berkeley, and Richmond, we are sorry to report that allowable rent increases are negligible because the rules do not fully appreciate the sticker shock we are experiencing today.
Oakland landlords will be in a slightly better spot, as rent increases are pegged to the full increase of the regional CPI. With Oakland tenants facing a 6.7% rent hike, there is a proposal being floated by Councilmember Carrol Fife that calls upon the city to cap rents at 3%.
The unresolved question is whether rents should be raised just because the landlord is allowed to do so. This will depend, in part, on the value of the current tenant(s).
A timely paying tenant who takes good care of the property is worth their weight in gold. It may or may not be prudent to raise rents if the result is driving out an ideal resident and letting the rental unit languish on the market while another tenant willing to pay higher rent is found.
By the way, a new resident may be willing to pay more rent, but there is no guarantee that the new face(s) will be a bed of roses. That extra rent amount may not be paid. Newcomers may damage the property and create additional problems, making the landlord wish that they kept the good tenants. It may be better to leave all enough alone.
A snapshot of the market is instructive, but it isn't 100% reliable.
It's been reported that asking rents in San Francisco have ticked up but are below pre-pandemic levels while asking rents in Oakland remain effectively unchanged as of April. This provides some good perspective, but we are not all that convinced by the raw math.
We’ve always been somewhat bewildered by the term “asking rents.” This seems experimental in nature, to discover what the market is willing to pay. You can wish for a winning lottery ticket but it doesn’t mean you will get it. Moreover, there are a host of intangibles in right-sizing the rent. Online tools don’t cut the mustard.
Some of you may or may not know that our founding attorney is the broker of record for Bay Property Group, a property management company that has many tools in its repertoire to get baseline rents. More than “market comps,” there are many factors to consider when deciding what the rent is. We’ve said many times and in many ways that technology is no substitute for some old-fashioned personal sleuthing.
Tenant surrender of possession agreements remains a viable option.
For those landlords who have no convenient or legal means to evict, Bornstein Law remains a big proponent of tenant buyout agreements because we know that typically, rents can be raised when the tenant voluntarily vacates the unit.
For those landlords who are drowning in Alameda County because of archaic eviction moratoriums, a tenant buyout agreement is especially attractive because, barring a threat to public health and safety, there are few reasons to evict a nonpaying tenant.
To our comrades there, we say that our firm can assist in effectuating an ironclad, proper, ethical buyout agreement that gets you cash flowing again by having a clean slate through the proper transition of a tenant.
At any rate, a rent increase should always be approached with a bit of arithmetic, a forensic accounting of the tenancy up until today, and proper counsel. There are many costly missteps that can be avoided.
The first and foremost consideration when raising rents is whether or not it is permissible to do so, and exactly at what point in the tenancy the rent can be raised. In several jurisdictions, we need to put a finger on “anniversary dates,” taking into account when the tenancy began or when the last rent increase occurred. These dates are not cast in stone; in some circumstances, they can be “shifted.” To add to the complexity, landlords may or may not be able to “bank” rent increases. Questions abound.
When San Francisco landlords are contemplating a massive rent increase, even if the property is enveloped by Costa-Hawkins and not subject to rent control, please consult an attorney.
Courts have upheld the city's tenant protection law that says a shocking rent increase may be tantamount to tenant harassment and designed to displace the tenant, in violation of public policy.
City Attorney David Chiu was quoted as saying, "when a tenant's rent is doubled or tripled, that is just an eviction by another name." He goes on to say that landlords should not be allowed to sidestep local limits on evictions.
After California's Supreme Court rejected a challenge to the eviction protection law, this matter seems settled.
What rules do you have to abide by? This is the first riddle to solve.
Bornstein Law will gladly dialogue with you to determine what law or ordinance applies to your rental property. Get in touch for informed guidance.