For multifamily investors in Los Angeles, staying ahead of regulatory changes is essential. The city’s newly proposed adjustments to its Rent Stabilization Ordinance (RSO) reflect the mounting pressure to balance tenant protections with landlord sustainability. These changes, aimed at creating “equitable rent,” could have far-reaching effects on your investment strategy. At Lucrum, we believe that informed investors make smarter decisions, so let’s break down the key takeaways.

The Problem: A Housing Market Under Strain

Los Angeles, home to over 650,000 RSO units, faces a severe affordability crisis. Nearly 42% of the city’s renters live in units governed by rent control, many of which were built before 1979. The city’s study revealed that rents for RSO units lag significantly behind market rates, with average RSO rents 25% lower than non-RSO units over the last three decades.

At the same time, landlords face rising operational costs. Between 2010 and 2022, operating expenses for low-income housing increased by 67%, far outpacing the 38% rise in consumer inflation during the same period. Smaller landlords, who own 30% of RSO properties, often struggle the most, as their margins are tighter and their properties generate less revenue per bedroom compared to larger buildings.

The Plan: Four Key Proposals

The city’s proposed changes target the formula for allowable rent increases under the RSO. Here’s what’s on the table:

Switching to the All-Items Less Shelter Index

Instead of tying rent increases to the broader CPI, the city wants to use an index that excludes shelter costs. This change could limit future increases by removing the feedback loop caused by rising housing costs inflating the CPI itself.

Lowering the Minimum Annual Increase from 3% to 2%

A tighter floor on increases would reduce landlords’ ability to recover costs during low-inflation periods.

Capping Annual Rent Increases at 5%

This hard cap means any calculated rent increases above 5% would roll over into future years. For landlords managing properties with deferred maintenance or other high-cost issues, this cap could delay financial recovery.

Eliminating Utility Pass-Throughs

The current 1%–2% annual rent increases allowed for landlords paying for gas and electricity would be scrapped. This change could disproportionately affect smaller “mom-and-pop” landlords, who often cover utility costs to attract tenants.

The Impact: What It Means for Investors

The proposed changes could reshape the economics of multifamily ownership in LA:

Pressure on NOI (Net Operating Income):

Lower allowable increases and caps mean that NOI growth could slow while operating costs like property taxes, insurance, and maintenance continue to rise. For smaller landlords, this could push cash flow into the red, leading to greater financial strain.

Reduced Flexibility in Managing Risk:

The elimination of utility pass-throughs and stricter caps limit landlords’ ability to adjust rents in response to unexpected costs, such as rising insurance premiums, which have doubled in some cases over recent years.

Shifts in Property Valuation:

Historically, RSO properties have benefited from rising rents and long-term appreciation, with values doubling over the last decade. However, capped increases may reduce future appreciation, particularly in areas with high tenant turnover and market-rate competition.

The Opportunity: Navigating the Changes

At Lucrum, we see opportunity where others see obstacles. Here’s how investors can adapt:

Refine Your Financial Models:

Update your projections to account for slower rent growth. Build in contingencies for increased operating costs and evaluate whether your debt coverage ratios can handle these changes.

Target Underperforming Assets:

Properties with deferred maintenance or operational inefficiencies present opportunities for value-added investments. Improvements that enhance tenant satisfaction and energy efficiency could offset the limitations on rent increases.

Diversify Your Portfolio:

Consider balancing your holdings with non-RSO properties or assets in markets outside Los Angeles. Cities with more landlord-friendly regulations may offer better growth opportunities.

Advocate for Balanced Policies:

Engage with policymakers to share how these changes could affect landlords’ ability to maintain quality housing. Organizations like the Apartment Association of Greater Los Angeles can amplify your voice.

The Bigger Picture

Los Angeles isn’t alone in revisiting rent stabilization policies. Over 33 California jurisdictions now have rent control ordinances, many of which tie increases to CPI with ceilings similar to the proposed 5% cap. While these policies aim to address housing affordability, they also challenge landlords to operate within tighter margins.

For seasoned investors, staying informed and adaptable is key. Lucrum specializes in helping multifamily investors navigate complex regulatory landscapes while identifying opportunities for growth and stability.

Let’s Talk Strategy

Are these changes keeping you up at night? Let Lucrum help you cut through the noise. Schedule a consultation with our team today to assess your portfolio, identify opportunities, and craft a strategy that works in this evolving market. Together, we’ll ensure your investments continue to thrive—even in challenging times.

Source: ECONOMICRT