The Real Cost of Owning a Small Multifamily in California Just Went Up. Here Is What Central Coast Landlords Need to Know.

By Owen Schwaegerle, The Schwaegerle Real Estate Team

If you own a duplex, fourplex, or small apartment building on the Central Coast, you already feel it. Rents have not kept pace with expenses, insurance renewals arrive with numbers that do not seem possible, and every year in Sacramento seems to bring another law that shifts more cost and more risk onto the owner. None of this is in your head. The math of owning small multifamily property in California has genuinely changed, and it keeps changing.

We work with multifamily owners across San Luis Obispo County every week, and the conversation has shifted. It used to be about maximizing rent. Now it is just as often about whether it still makes sense to hold on at all. This post walks through what is actually driving costs up for small landlords right now, and the exit strategies owners are using when the math stops working.

1. Deferred Maintenance on an Aging Housing Stock

A large share of the multifamily stock in SLO County was built decades ago. Roofs, water heaters, panels, and plumbing systems that were installed when a property was new are now due, or overdue, for replacement all at once. Add in labor and material costs that have climbed sharply since 2020 and a shortage of contractors who will even bid on smaller multifamily jobs, and a repair that used to be a manageable line item can now be a five-figure surprise. Owners who deferred maintenance through the pandemic years are often facing several of these bills in the same year.

2. Tenant Headaches Cost More Than They Used To

Removing a problem tenant or repositioning a unit is no longer a simple month-to-month decision. Under the statewide Tenant Protection Act, once a tenant has been in place for twelve months you generally need a qualifying "just cause" to end the tenancy, and a no-fault termination (such as moving in a family member or taking a unit off the market) typically requires paying the tenant relocation assistance equal to one month's rent. That is a real cost added on top of turnover, cleaning, and lost rent while a unit sits vacant.

3. The Rent Cap Squeeze (AB 1482)

Most multifamily rentals in California are capped under AB 1482 at 5 percent plus the change in the regional Consumer Price Index, or 10 percent, whichever is lower, in any twelve month period. In practice, elevated CPI in recent years has pushed many California regions close to that 10 percent ceiling. Los Angeles, for example, is currently sitting at 8.7 percent for its allowable increase period. That sounds generous until you compare it to how fast insurance, property tax, and repair costs have actually climbed. When your biggest expenses are rising faster than the cap allows you to raise rent, your margin compresses every single year, whether or not you raise rent to the maximum.

4. SB 721 Balcony Inspections: The Deadline Has Already Passed

If you own a building with three or more units and any elevated exterior element such as a deck, balcony, walkway, or stairway supported by wood, state law required a licensed inspection by January 1, 2026. That deadline has come and gone. Inspections typically run $1,500 to $3,000 for a small building and $4,000 to $7,000 for a mid-size complex, before any repairs the inspector requires. If you have not completed this inspection, you are currently exposed to civil penalties that can run $100 to $500 per day per violation, and re-inspection is required every six years going forward. This is one of the few items on this list with an immediate, actionable deadline attached, so if you are not sure whether your property was inspected, that is worth confirming this month.

5. Security Deposits Just Got Smaller

As of mid-2024, most California landlords can collect only one month's rent as a security deposit, down from the previous two months (or three for furnished units). There is a narrow exception if you are a natural person, or an LLC or family trust made up entirely of natural persons, who owns no more than two rental properties totaling four or fewer units, in which case you may still collect up to two months. Even then, active service members are capped at one month regardless. For most small owners, that means less of a financial cushion to cover damage and turnover costs at exactly the moment those costs are rising.

6. Mandatory Point of Sale Requirements: Coming to a City Near You?

In much of the Bay Area, cities including Berkeley, Oakland, Alameda, Piedmont, Burlingame, San Bruno, and Morgan Hill now require a sewer lateral inspection before a sale can legally close, and sometimes an energy audit or seismic retrofit disclosure as well. Passing the inspection alone can be enough, but if the lateral fails, which is common on older properties, full replacement becomes mandatory before or shortly after closing. That replacement typically runs $9,000 to $15,000 in today's market, and if the work is not finished before closing, buyers are often requiring those funds held back in escrow instead. These ordinances did not exist everywhere at once. They started in a handful of cities and spread over time, the same way soft story seismic retrofit mandates spread from Los Angeles and San Francisco to dozens of other cities. San Luis Obispo County does not have these requirements today, but the direction of travel across California has been consistently toward more mandates at time of sale, not fewer. Owners who wait until they are already in escrow to find out what their city requires tend to like the surprise a lot less than owners who plan ahead.

7. Insurance Costs Are Climbing, and Coverage Is Shrinking

We are watching this hit our own clients directly. We have seen small multifamily owners here on the Central Coast go from paying around $1,800 a year to $4,000 a year for the same property at renewal, and some owners cannot secure adequate coverage at any price and are being pushed onto the California FAIR Plan, the state's insurer of last resort, as their only option. The FAIR Plan itself just approved a statewide rate increase of 29.1 percent effective this fall. The moratorium that had frozen wildfire-related non-renewals expired in January 2026, so carriers have resumed dropping policies, in some cases based on satellite imagery alone, citing roof condition, electrical panels, or missing gas shutoff valves. The FAIR Plan now covers rental properties up to four units with dwelling limits as high as 3 million dollars, but it excludes liability, theft, and water damage, meaning most small multifamily owners who end up there still need a second wrap policy just to get coverage comparable to what a standard policy used to provide, often at a fraction of the old value.

8. Property Taxes Keep Climbing, and Prop 13 Is Under Renewed Attack

Proposition 13 still limits your annual assessment increase to 2 percent while you own the property, but that protection is under active political pressure again. A statewide "split roll" push would remove Prop 13 protection specifically from commercial and investment properties, subjecting them to annual reassessment at market value while residential owner-occupied homes keep their protection. Voters rejected a similar measure, Proposition 15, in 2020, and a defensive measure to strengthen Prop 13 protections has itself qualified for the November 2026 ballot. The fight is not settled, and multifamily and other investment property is squarely the target every time this idea resurfaces.

9. Prop 19: The Estate Planning Time Bomb for Rental Property

This is the one that catches families most off guard. Before Proposition 19, a parent could pass a rental property to their children and the children could keep the parent's original, much lower tax basis. Prop 19 eliminated that exclusion for rental and investment property entirely. When you pass away, your heirs' rental property is fully reassessed to current market value, not your purchase price from years or decades ago. A property that has been in a family for a long time, with a modest assessed value, can see its annual tax bill jump ten times, fifteen times, or more the moment it transfers. We have seen real examples where a bill that had been running around 1,300 dollars a year jumped to roughly 20,000 dollars a year overnight. For many families, that new tax bill alone makes it impossible to keep the property, forcing a sale that was never part of the plan.

So What Are the Options?

We are not going to tell you that selling is always the answer, because it is not. But if you have read this far and recognized your own property in several of these points, there are three exit and restructuring strategies worth understanding.

Sell and Leave California for Friendlier Landlord Territory

A growing number of our clients are selling Central Coast rental property and redeploying that equity into states with lower property taxes, no rent caps, and landlord-tenant laws that make it far easier to manage a rental without the layers of compliance California now requires. This does not have to mean giving up California real estate entirely. It often means keeping your primary residence here while investing the rental equity somewhere the numbers, and the rules, work better.

1031 Exchange into a DST for Truly Passive Income

If you are tired of the 2 a.m. phone calls but not ready to give up the tax deferral a 1031 exchange provides, a Delaware Statutory Trust, or DST, lets you exchange out of active ownership into a fractional, professionally managed interest in institutional-grade real estate. You keep your 1031 tax deferral, you stop being the one who deals with tenants, toilets, and trash, and you receive passive income instead. It is a common move for owners who are ready to step back from active management, simplify an estate, or who are approaching retirement and want the depreciation benefits and cash flow without the operational load.

Owner Financing to Compete in Today's Rate Environment

With 30-year mortgage rates sitting above 7 percent, a wide pool of buyers cannot pencil out a purchase at conventional financing terms, and that shrinks your buyer pool at the exact moment you want to sell. Offering owner financing, or seller carryback financing, lets you attract buyers who cannot qualify or do not want current bank terms, often at a purchase price and interest rate that work in your favor. You become the bank, collect interest income, and in many cases can structure the sale to spread out capital gains over time through an installment sale rather than taking the full tax hit in one year.

This article is for general informational purposes only and does not constitute legal, tax, or financial advice. Laws referenced above, including AB 1482, AB 12, SB 721, Proposition 13, and Proposition 19, are subject to change and may apply differently to your specific property. Please consult a qualified attorney, CPA, or financial advisor before making decisions based on this information.

Owen Schwaegerle, DRE #02040597  |  Camille Schwaegerle, DRE #02107467  |  The Schwaegerle Real Estate Team