How Much CAN You Raise the Rent?
As a rental property owner in California, the answer as you might have guessed is, “It depends…”. San Diego landlords are subject to rent control ordinances that limit how much and how often they can raise the rent. These laws were put in place to protect tenants from excessive or unreasonable rent increases, and landlords must understand and follow these guidelines.
Legal Requirements for Raising Rent in San Diego
Before implementing a rent increase, it’s crucial to familiarize yourself with the local laws and regulations that govern rental properties. In San Diego, there are specific rules related to rent control, notice periods, limitations on rent increases, and tenant rights.
California Tenant Protection Act (AB 1482)
One of the significant legal considerations when raising rent in San Diego is understanding the protections provided by AB 1482, also known as the California Tenant Protection Act. This law caps rent increases at 5% plus the local rate of inflation. It’s important to remember that these regulations apply to most residential properties in San Diego, with some exceptions (see below), such as single-family homes or condos not owned by corporations or trusts. If your property falls under AB 1482, you must provide tenants with an official notice stating that their tenancy is subject to these protections.
How to Calculate Rent Increase Limitations
Calculating the rent increase limitations under the California Tenant Protection Act (AB 1482) requires a two-step process. Firstly, determine the local rate of inflation. In San Diego, you can find this information through reputable financial reports or city government resources.
Secondly, add 5% to that local rate of inflation. For instance, if the local inflation rate is 2% per the Consumer Price Index (CPI), the maximum allowable rent increase would be 7% (5% + 2%).
It’s essential to note that this calculation will vary from year to year as inflation rates fluctuate. Always ensure you’re using the most current inflation rate when calculating your rent increase limitations.
Properties Exempt from Rent Control
While the California Tenant Protection Act (AB 1482) broadly covers most residential properties in San Diego, there are certain exceptions you should be aware of as a landlord. Single-family homes and condos are generally exempt unless they’re owned by a corporation or a real estate investment trust. Furthermore, any housing that was first occupied within the last 15 years is also exempt. This means that new constructions are not subject to the rent control provisions of AB 1482. However, these exemptions do not automatically absolve landlords from other obligations, such as providing adequate notice of rent increases.
AB 1482 Exempt Properties:
- Single-Family Homes and Condominiums: These properties are typically exempt from the rent control regulations provided by AB 1482, unless they are owned by a corporation, a Real Estate Investment Trust (REIT), or a limited liability corporation (LLC) where one of the members is a corporation. The single-family exemption also does not apply if the lot contains more than one dwelling unit or a dwelling unit on the lot that cannot be sold separately.
- New Constructions: Any housing that was first occupied within the last 15 years is not subject to the rent control provisions of AB 1482. This means newly built properties are generally exempt.
- Owner-Occupied Duplexes: Duplexes where the owner occupies one of the units as their primary place of residence are also exempt from the law.
- Affordable Housing Units: Housing units with rent levels that are controlled or regulated by a governmental unit, agency, or authority (low-income housing) do not fall under the provisions of AB 1482.
- Long-Term Tenants in Owner-Occupied Housing: If an owner is sharing their home with no more than two individuals or families, the law does not apply.
- Dormitories Owned and Operated by an Educational Institution: Such school-owned housing facilities used primarily by students are exempt from AB 1482.
- Housing Accommodations in Which the Tenant Shares Bathroom or Kitchen Facilities with the Owner Who Maintains Their Principal Residence at the Same Location: These housing arrangements are also typically exempt from the law.
- Hotels: AB 1482 does not apply to transient accommodations like hotels, motels, inns, tourist homes, boarding houses, and lodges.
- Hospitals, Extended Care Facilities, and Senior Housing: These types of facilities are also generally exempt from the state rent cap law.
Remember, if your residential real property is exempt from AB 1482, landlords are required to provide tenants with notification of the claimed exemption. Any new leases or rental agreements executed after July 1, 2020 are required to have the following language to claim an exemption from AB 1482:
“This property is not subject to the rent limits imposed by Section 1947.12 of the Civil Code and is not subject to the just cause requirements of Section 1946.2 of the Civil Code. This property meets the requirements of Sections 1947.12 (d)(5) and 1946.2 (e)(8) of the Civil Code and the owner is not any of the following: (1) a real estate investment trust, as defined by Section 856 of the Internal Revenue Code; (2) a corporation; or (3) a limited liability company in which at least one member is a corporation.”1940(b).”
Be sure to check with a local real estate attorney or property management expert to ensure full compliance with all rent control laws and notifications before claiming any exemptions.
How Much SHOULD You Raise the Rent?
Let’s assume you have determined how much you legally CAN raise the rent on your rental property with the help of the information above and now you need to decide how much you SHOULD raise the rent. Deciding how much to raise rent is a delicate balancing act. While the California Tenant Protection Act (AB 1482) provides a maximum limit, it doesn’t necessarily mean you should increase the rent by that full amount. There are several factors to consider some of which include:
- Market Conditions: Look at the current rental rates for similar properties in the San Diego area. If your rent is significantly lower, an increase may be justified. However, if your rent is already on par with or higher than the market average, raising it could lead to vacancies.
- Inflation and Cost of Living: If the cost of living in your area has increased, a rent increase might be necessary to keep up with your increasing expenses.
- Property Improvements: If you’ve made significant improvements to the property that increase its value, you may be able to justify a modest rent increase.
- Tenant Retention: Consider the impact of a rent increase on your current tenants. A good tenant is worth their weight in gold. If your tenants always pay on time, take good care of the property, and are long-term, consider whether a rent increase might push them out. Losing a good tenant could end up costing you more in lost rent and turnover expenses.
Rental Market Insight & Data
Understanding and leveraging comprehensive market data is fundamental to making informed decisions in the rental property business. Such data provides an objective insight into the prevailing San Diego market conditions, local rental rates, occupancy rates and even tenant preferences. This wealth of information is key to determining if a proposed rent increase aligns with the current market dynamics or if it runs the risk of alienating tenants and leading to costly vacancies.
Investing in rental market analysis tools can be beneficial but often expensive for landlords and property managers. Tools like Rentometer and Zillow’s Rent Zestimate offer valuable insights into market trends, helping you understand how your property stacks up against others in the same area, but often requires expensive or unwanted subscriptions.
San Diego landlords can utilize Crestmont’s Quarterly Rental Market Report for your specific rental market or zip code. Updated quarterly, Crestmont’s exclusive Rental Market Report offers landlords insight into current San Diego County rental market conditions. Request your FREE report here.
Rental Property Analysis & Comparables
In addition to market analysis, San Diego landlords should also obtain an in-depth analysis of their specific property. This process includes a comprehensive assessment of the property’s condition, amenities, location, and nearby comparables. Tools like Zillow, Rentometer, and RentCast offer limited free data as well as paid offerings for more in-depth analysis.
Also consider Crestmont’s Rental Property Analysis as a great alternative for San Diego landlords who are looking for an in-depth analysis of their specific property, relevant nearby comparables, and recent trends. Request your FREE report here.
The Value of Data-Driven Decisions
The value of rigorous analysis and data-driven decisions in a complex rental market like San Diego cannot be overstated. In this dynamic and competitive landscape, a well-informed decision could be the difference between achieving profitability or facing a financial setback. Intuitive decisions, though occasionally beneficial, may not always yield favorable results.
By contrast, decisions guided by robust data and comprehensive analysis offer more predictable outcomes and significantly reduce uncertainty. They allow landlords to discern patterns, identify trends, and predict future market movements, thereby enabling them to proactively adjust their strategies. Thus, landlords who employ data-driven decision-making practices are more likely to attain a competitive edge, optimize their rental income, and ensure the longevity of their investment.
How to Communicate a Rent Increase
Once you’ve determined your legal obligations when raising rent and determined the specific amount you want to raise the rent, it’s now time to communicate with your tenants.
Best Practices for Communicating Rent Increases to Tenants
Clear and timely communication is vital when informing tenants about a rent increase. Here are some best practices to follow:
- Provide ample notice: Give tenants the required notice period specified by San Diego’s rental laws. This notice period allows tenants to adjust their budgets and plan accordingly.
- Explain the reasons: Communicate the reasons for the rent increase, such as rising property taxes, maintenance costs, or market conditions. Providing valid reasons can help tenants understand the necessity of the increase.
- Offer alternatives or incentives: If feasible, consider offering alternatives or incentives to tenants, such as longer lease terms, upgrades or improvements to the property, or additional services. This can help mitigate any negative impact the rent increase may have on tenants.
- Be professional and empathetic: When communicating the rent increase, use a professional and empathetic tone. Acknowledge any potential inconvenience this may cause for tenants and assure them that you value their tenancy.
- Provide written notice: It is recommended to provide written notice of the rent increase to tenants, either through mail or email. This serves as legal documentation and proof of the communication.
Timing Considerations for Rent Increases
Timing plays a crucial role when raising rent. Consider the following factors:
- Lease renewal periods: It’s generally recommended to raise rent during lease renewal periods. This allows tenants to make an informed decision about whether to renew their lease or seek alternative housing.
- Avoid major life events or holidays: Timing a rent increase around major life events or holidays can create unnecessary stress for tenants. Choose a time that allows tenants to plan and adjust their finances accordingly.
- Avoid mid-month increases: Implementing a rent increase in the middle of a month can add unnecessary complexity for both landlords and tenants. By aligning annual rent increases with the beginning of a new month, you provide a clear, easy-to-follow timeline that accommodates budget planning and helps avoid potential misunderstandings or disputes.
Still Not Comfortable?
If you know you need to raise the rent but just aren’t comfortable doing so, don’t feel bad. You’re not alone; this is a common situation. Perhaps you’ve developed a close relationship with your tenant and worry about delivering the news or simply aren’t comfortable with the various rent control laws. This is where a professional property management company can step in and make a difference.
A property manager can serve as an effective liaison between you and your tenant, delivering the necessary news in a professional and empathetic manner while ensuring your investment continues to produce the best ROI possible. Property Managers take care of complex tasks, allowing you to maintain your relationship with your tenant while ensuring the business aspect of your rental property is handled effectively and efficiently.
While rent increases can be a sensitive topic, it is an important aspect of managing a rental property. By following these tips and considering the impact on your tenants, you can ensure a smooth and fair process for both parties involved. Remember to communicate clearly and provide ample notice, avoid major life events or mid-month increases, and seek the help of a professional property manager if needed. With proper planning and execution, rent increases can be a beneficial part of maintaining and growing your rental property investment. So, do not hesitate to make necessary changes to ensure the success of your rental business.