For decades, owning apartment buildings in Southern California has been one of the primary ways local investors have built long-term wealth. But the investment environment has changed.

For decades, owning apartment buildings in Southern California has been one of the primary ways local investors have built long-term wealth. But the investment environment has changed.

Operating expenses are higher. Insurance has become more expensive. Tenant protections have expanded. Rent growth has slowed in many markets. Higher borrowing costs have affected what buyers can afford to pay. At the same time, apartment values in many Southern California markets have adjusted from their previous highs.

That has many long-time apartment owners asking an important question: Does it still make sense to own multi-family property in Southern California?

The answer depends less on whether California is a “good” or “bad” market and more on what you own, where you own it, how the property is performing, how much equity you have invested, and what you want that equity to accomplish over the next 5 to 10 years.

What Has Changed for Southern California Apartment Owners?

Five years ago, apartment investors were operating in a very different environment. Property values were rising. Rents were increasing. Financing was inexpensive. Those conditions could sometimes make an average investment decision look better than it actually was.

Today, the margin for error is smaller. Apartment owners now have to account for several pressures at the same time:

• Higher insurance, utility, labor, repair and maintenance expenses
• Slower rental growth in some markets
• Higher borrowing costs
• State and local rent restrictions
• Just-cause requirements and other tenant protections
• More complicated local landlord regulations
• Greater legal exposure when procedures are not followed correctly

This is particularly important in Southern California because regulations can vary significantly from one city to another.

During our recent Apartment Owners’ Strategy Webinar, eviction attorney Mike Brennan explained that much of the regulatory activity affecting landlords is increasingly happening at the local level, including just-cause and right-to-counsel ordinances. He also discussed a growing number of tenant attorneys pursuing claims against property owners outside of traditional eviction cases.

For an investor who owns apartments in Los Angeles County, the San Gabriel Valley, Pasadena, the Inland Empire, Hemet or another Southern California market, understanding the rules of the specific jurisdiction has become part of evaluating the investment itself.

The property may not have changed. The environment surrounding the property has.

Why Southern California Is Not One Apartment Market

One of the biggest mistakes an investor can make is looking at headlines about “California real estate” and assuming they describe their property.

Our analysis of Southern California multi-family sales and rental data has shown something different. Some markets appear to be stabilizing. Others are still repricing. Buyers are returning in certain areas, while rental performance varies substantially depending on location and unit type.

An apartment building in Pasadena may face a different combination of rent growth, buyer demand and regulation than a building in the San Gabriel Valley. An apartment property in the Inland Empire may have a different tenant base and employment picture than one in Los Angeles County.

The panel also emphasized the relationship between employment and apartment demand. When evaluating a property, investors should understand the jobs and wages supporting the tenant base surrounding that property.

In other words, don’t simply ask, “What is going to happen to Southern California apartments?” Ask: “What is happening to apartments like mine, in my specific market?”

That is a much more useful investment question.

Will Lower Interest Rates Bring Apartment Values Back?

Many apartment owners are waiting for interest rates to decline with the expectation that values will automatically return to previous highs. That may be too simple.

Interest rates clearly affect apartment values because they influence borrowing costs, loan proceeds and the returns buyers require. But rates are only one part of the equation. The panel discussed other factors now influencing valuations, including regulation, operating expenses, rent growth, affordability and investor perceptions of risk.

As a result, even if interest rates decline, it does not necessarily mean apartment values immediately return to where they were several years ago.

For buyers, however, a changing market can also create opportunities. Gil Figueroa discussed situations in which today’s lower pricing can potentially be paired with loan structures designed to preserve flexibility, such as interest-only periods or loans without prepayment penalties. Those structures may allow an investor to protect current cash flow while retaining the ability to refinance if financing conditions improve.

Waiting for the old market to return is not an investment strategy. The better question is whether today’s numbers make sense today.

The Question Many Apartment Owners Overlook: What Is Your Equity Earning?

This may be the most important calculation for a long-time apartment owner.

Many owners tell me: “My property is doing great. I bought it 20 or 25 years ago. I barely have any debt, and it produces positive cash flow.”

That can all be true. But cash flow doesn’t tell you whether your equity is being used efficiently.

Consider a simple example. Suppose your apartment building is worth $3 million, you have little or no debt, and it generates $100,000 of annual net income.

$100,000 ÷ $3,000,000 = 3.3% return on equity

The question therefore isn’t only, “Does my apartment building cash flow?” A better question may be: “What is the equity in my apartment building earning me?”

That calculation can lead to an entirely different conversation about holding, refinancing, improving the property, purchasing additional units, completing a 1031 Exchange, moving into a passive investment, or selling.

Why Multi-Family Investors Should Pay Attention Now

The right decision for a 45-year-old investor trying to build a larger apartment portfolio may be completely different from the right decision for a 72-year-old owner who has spent decades managing properties and whose children have no interest in becoming landlords.

For one investor, today’s market could present an opportunity to exchange from a smaller property into more units. For another, the better strategy may be improving the existing property and increasing Net Operating Income. Another investor may decide the return on equity no longer justifies the management burden and risk. And another may want to use a 1031 Exchange and a Delaware Statutory Trust (DST) to move from active property management toward a more passive investment structure.

That is why there isn’t one answer for every apartment owner.

Your investment strategy should change when your property, your market or your personal objectives change.

Key Takeaways for Southern California Apartment Investors

• Don’t evaluate your property based solely on cash flow. Calculate what your total equity is earning.
• Don’t treat Southern California as one apartment market. Values, rents, regulations and buyer demand can vary substantially by city and submarket.
• Don’t assume lower interest rates automatically restore previous values. Financing is important, but so are NOI, cap rates, regulation, expenses and investor risk.
• Know the laws where your property is located. A strategy that works in one Southern California city may create problems in another.
• Evaluate your property against your current goals. The right investment 20 years ago is not automatically the right investment for the next 10.

What Should Apartment Owners Do Next?

The first step isn’t deciding whether to sell. It is understanding exactly where you stand.

1. Determine Your Property’s Current Market Value
   Apartment values have changed. Before making a major decision, determine what buyers would realistically pay for your property in today’s market—not what it was worth several years ago.
2. Calculate Your Current Return on Equity
   Look beyond gross rent and monthly cash flow. Compare your property’s annual net income with the equity you currently have invested in the property. You may discover your equity is working harder than you thought—or considerably less.
3. Compare Your Alternatives
   Once you know your value and return on equity, you can begin comparing realistic strategies: Hold the property? Improve NOI? Refinance? Add units or ADUs? Exchange into a larger apartment property? Reduce management responsibilities? Move toward a passive investment? Sell and redeploy the capital elsewhere?

The purpose isn’t to force the property into a predetermined strategy. The purpose is to determine which strategy best fits you.

The Southern California Apartment Market Has Changed. Has Your Strategy?

There are still reasons to own multi-family real estate in Southern California. People still need housing. Properties are still trading. Buyers are still investing capital. And well-located apartment buildings can continue to play an important role in building and preserving long-term wealth.

But owning apartments today requires a more deliberate strategy than it did when values and rents were rising rapidly and financing was inexpensive.

As a multi-family broker and investor, I believe owners should periodically evaluate their properties the same way they would evaluate a new investment.

If you own multi-family property in Southern California and are concerned about what today’s market means for your portfolio, contact The Apartment Dealer for a confidential property evaluation.

We’ll evaluate your property’s current value, income, expenses and equity position and help you compare the available strategies—whether that ultimately means holding, improving, refinancing, exchanging or selling.

The objective isn’t to convince you to make a move. It’s to make sure the move you eventually make is based on the right numbers.

Frequently Asked Questions

Are apartment values going down in Southern California?
There is no single answer for all of Southern California. Some of the markets we track have shown signs of stabilization, while others continue to reprice. Property performance can vary significantly based on location, unit mix, rents, expenses and local regulation.

Is Southern California still a good place to own apartment buildings?
It can be, but the investment needs to be evaluated property by property. Higher expenses, regulation and financing costs have increased the importance of professional management, accurate underwriting and understanding the local market.

Will apartment values increase if interest rates fall?
Lower borrowing costs can support apartment values, but interest rates are not the only factor. Net operating income, cap rates, rent growth, expenses, local regulation and buyer expectations also influence value.

How do I calculate the return on equity in my apartment building?
A simple starting point is to divide the property’s annual net income by your approximate equity in the property. For example, $100,000 of net income on $3 million of equity represents approximately a 3.3% annual return on equity before considering appreciation and other factors.

Should I sell, hold or 1031 Exchange my Southern California apartment building?
That depends on your property’s current performance, available equity, tax situation, management burden, age, investment objectives and available alternatives. A property evaluation can help establish the numbers before you decide which strategy makes the most sense.