Many people have the misconception that owners of Los Angeles Multifamily properties are huge, faceless corporations that will stop at nothing to squeeze tenants for every dollar. The reality is that the Los Angeles multifamily market is largely a small property owners’ market consisting primarily of ‘Mom & Pops’ who have owned and operated their properties for in many cases many decades upon decades. For many reasons, this group of small investors are sadly getting squeezed out of the business entirely. Here are a few reasons why:
Increased Government Regulation
California (and in particular Los Angeles) happens to be one of the most highly-regulated regions when it comes to the business of rental housing. State Bills and Propositions all proposed or passed in the last handful of years such as AB 3088, SB 91, AB 1482, Proposition 10, Proposition 15, Proposition 19 and now AB 854 – all have imposed stricter rent control, moratoriums on evictions, and have created an atmosphere that is largely pro-tenant at the expense of landlords.
Increased Operating Expenses
If you operate a multifamily property in the city of Los Angeles, you have almost certainly experienced a handful of expense increases over the past few years. The RecycleLA program, which created trash pick-up zones and eliminated a property owner’s choice of Trash companies caused waste bills to increase as high as 3x what they originally were. Government-imposed capital expenditures such as seismic retrofitting which can run upwards of $100,000 have forced many owners to sell their properties. Other expenditures imposed by insurance companies on their annual inspections have become all too rampant. The cost to operate for some has just become too high.
Barrier to Entry is Very High
As these smaller owners exit the real estate business, I am seeing less and less actually enter the business to replace them. Instead, smaller owners are being replaced by larger, middle-market and even institutional owners with deep pockets and ample capital to deploy. From a returns standpoint, it’s virtually impossible for a young couple nowadays to purchase a property with a 20% down payment and have that deal actually pencil. Where apartment buildings are priced with respect to their rents today, you would have to come in with a minimum 50% down payment to barely cash flow. On a $2,500,000 it is difficult for an average investor to scrape together $1,250,000 as a down payment. On many of our small listings, the buyers who show up on even a 5-unit deal own 500+ units.
All of these things are forcing ‘Mom and Pops’ to retire out of the business and they are not being replaced by younger ‘Mom and Pops.’ For better or for worse, the multifamily market is slowly but surely shifting towards more institutionalized ownership.