There was a story shared by an inquirer looking for investment properties in Santa Monica who struggled with tenant management. They found it difficult to raise rent as they wished, and the process of evicting tenants was complicated. There are valid reasons for this in the area.

Since the rent control charter amendment was enacted in April 1979, Santa Monica has maintained some of the strictest regulations in California. Buildings that received occupancy approval before April 10, 1979, are subject to these rules, including most multi-family buildings such as duplexes and triplexes. As of September 2026, the general adjustment increase rate is 2.6%, and units with a maximum allowable rent of over $2,674 are capped at a maximum increase of $70. While the strict regulations limit flexibility in raising rents to market rates, they also mean that existing tenants tend to stay longer, resulting in a relatively low vacancy risk. However, under California state law, the Costa-Hawkins Rental Housing Act, landlords can reset the rent to market levels when a tenant voluntarily vacates and a new tenant moves in. The longer existing tenants stay, the greater the rent gap becomes, but when a vacancy occurs, there is an opportunity to close that gap all at once.

Looking at rent levels, the average rent in Santa Monica is $3,746 per month, which is a 1.82% increase from a year ago (Rent.com). Two-bedroom units are around $4,472. However, when considering only rent-controlled units, the median rent has actually decreased by 8.8% to $2,302, highlighting the significant difference in potential rent based on whether a property is subject to regulation. For example, if you buy a rent-controlled unit for $800,000 and charge $2,300 per month, it falls far short of the $8,000 required by the 1% rule. Conversely, units that have recently become vacant and have been reset to market rates often see significant rent increases, so it is essential to check the current rent of each unit rather than the entire building when viewing properties.

Loan conditions are similar to other areas. The down payment is typically between 15% and 25%, which is higher than for owner-occupied properties, and credit scores can be assessed starting from 620, but a score above 740 is needed for favorable rates. Interest rates are also set 0.5 to 0.75 percentage points higher than for owner-occupied properties (based on Fannie Mae and Freddie Mac). Rental income is only recognized by banks up to about 75% of the expected amount.

Annual expenses should also be considered. The effective property tax rate in Los Angeles County is approximately 0.82%. In areas with strong regulations, the need for landlord insurance or property management increases, with management fees typically ranging from 8% to 12% of the rent, and it is common to set aside about 1% of the asset value annually for maintenance. In areas with strong rent control, missing eviction procedures or notice requirements can easily lead to disputes, so many investors choose to hire property management rather than manage directly.

At the time of sale, it may be worth considering a 1031 exchange to defer capital gains tax. Given the various advantages and burdens present in this area, it is essential to develop a habit of considering whether rent control applies and the current rent gap of the unit when evaluating a property.

Santa Monica has limited potential for rent increases but also offers the advantage of stable tenant retention. Which aspect to prioritize depends on the investor's preferences. If stability is a priority, the area's strong regulations may feel like a solid barrier, while if prioritizing profit through rent increases, it may be better to compare with other areas. This article does not constitute investment or legal advice, and it is recommended to consult with a professional to review individual circumstances before making any agreements.