Brokerage Establishes Property Management Group To Help Clients Navigate Rent Control Laws
New rent control measures and increased popularity in owning multifamily assets in the Bay Area led to Silicon Valley Multifamily Group to launch a new property management division. The team will be overseen by recently hired Vice President of Property Management Jody Marshall.
“Local multifamily owners believe in the long-term strength of their assets, but changing market dynamics — including increasingly stringent rent control regulations — have made it difficult to manage properties,” SVMG founder and managing broker Michael Shields said.
Rent control has become increasingly popular among tenant advocates amidst rising rents, but it is leaving many landlords with a lot of questions. One of the biggest challenges of newer rent control regulations will be weeding through the complicated city ordinances to stay in compliance and to find ways to maximize the value of a property, he said.
“A number of owners in the South Bay … are really getting confused by rent control,” Shields said.
In San Jose, landlords are restricted to an annual allowable increase of 5%. Previously, the allowable increase was 8% each year. The new regulations also did away with the ability to save the rental increase for the second year, when landlords could then increase rent 21%, according to Shields. When Mountain View enacted rent control, it rolled back rents to 2015 levels and capped the rents according to the consumer price index, Shields said.
The new ordinance in San Jose adds tenant protections, which make it more difficult to evict problem tenants. Landlords are limited to about a dozen reasons they can evict tenants, of which seven require compensation and five deal with problem tenants that would have to go through an eviction process, according to Shields.
“The tenant protection ordinance is very confusing and extremely overwhelming,” Marshall said.
Landlords also have to document any notices for nuisances served more than once with the city, which small owners are not used to, Marshall said.
All of these restrictions will result in more careful screening of prospective tenants, according to Marshall. This will mean landlords will require higher FICO scores, more reference checks to make sure there were no prior evictions and making sure a resident is more creditworthy than in previous years, she said.
“[Rent control] is going to knock out the people it was meant to help because the qualifications [to rent] will get stronger,” Marshall said.
Navigating Through Rent Control
The team will initially manage existing SVMG investment and provide limited, value-add management services to the company’s existing brokerage clients owning up to 50 multifamily units. The team plans to pursue large-scale assignments and consult on opportunities for owners with over 50 units in the future.
Rent control also has been impacting where investors will purchase properties. Many prefer properties that are not rent-controlled, Shields said. This will eventually result in a decreased property value for rent-controlled properties and an increased value for properties in cities without rent control, Shields said.
The property management group will focus on increasing the property’s net operating income through rent increases within the rent control laws, reducing operating expense reductions, increasing property value through property maintenance and improvement, and protecting the value of the property through insurance, inspections and maintenance.
Maintenance will be increasingly important, especially since tenants can file a petition with the rent board if services and maintenance are not up to standards, Marshall said.
Many landlords have been struggling with ways to keep up maintenance on buildings now that their revenue is capped, Shields said. SVMG will provide a plan on how to implement these improvements and bid accordingly.
“If the landlord doesn’t have the money to upgrade and improve the properties, they will fall into disrepair and more problem units will be on the market,” Shields said.