Successfully investing in real estate—with “success” covering a wide range of outcomes that generally all involve financial returns—requires careful research and planning. The old adage that the three most important considerations in real estate are “location, location, location” certainly holds true for San Diego real estate investing. Familiarity with the area in which one intends to invest is essential, along with knowledge of current market conditions and trends in both the area and the broader region. As of late 2017, the San Diego residential real estate market appears to offer many potential opportunities for investors, but as with any venture, it also presents risks. A few factors for prospective investors to consider are how the area compares to similar locations in other cities, property values and prices, trends in new construction, and the potential for rental income.
A “Hot” Real Estate Market
State law in California requires property owners to make certain disclosures as part of any lease agreement for that property. When a lease involves commercial property, lessors must disclose certain matters related to accessibility for people with disabilities and their compliance with accessibility laws. The Americans with Disabilities Act (ADA) of 1990 is perhaps the most well-known statute addressing this issue. Businesses that serve the public are required to meet various requirements under the ADA. To encourage ADA compliance, California created the Voluntary Certified Access Specialist (CASp) program. Commercial lessors must disclose to lessees whether a CASp has inspected the leased premises, along with the extent of improvements to the property resulting from an inspection. California real estate investors involved in leasing commercial property need to know about both their duty under accessibility laws and their disclosure obligations.
A typical lease agreement involves a landlord (lessor) that allows a tenant (lessee) to use real property owned by the landlord, in exchange for the payment of rent. The landlord owns the real property and all of the improvements, while the tenant owns any personal property they bring with them. This works for short-term periods, during which the landlord does not plan to make any major improvements to the property.
Another type of lease, known as a “ground lease,” allows landlords and tenants to enter into long-term agreements involving the development of real property. California real estate investors can be involved in ground leases as landlords, such as if they want to extract value from a large parcel of land; or as tenants, such as if they want to develop a property for commercial purposes.
California’s tourism industry is a source of pride across the state. For a savvy real estate investor, vacation rentals might seem like an obvious venture. Tourists need places to stay, after all, and why not offer them an alternative to hotels? Well, not so fast. The legal status of vacation rentals in California is not at all clear. Numerous restrictions may apply, including city ordinances and homeowners’ association (HOA) rules. The “sharing economy” has further complicated the legal landscape throughout the state. San Diego real estate investors should be extra diligent when considering going into the vacation rental business.
What Is a Vacation Rental?
Real estate investment can take many forms and offers many ways to obtain a return on one’s investment. Some investors purchase real property in order to make improvements and sell it, while others may purchase property with the goal of leasing it for rental income. Leases on real property can be broadly divided into two categories: residential and commercial. While residential leases are subject to a wide range of legal restrictions aimed at protecting tenants, commercial leases allow far greater flexibility. Both types of leases involve their share of risks, from the hassle of collecting unpaid rent to the possibility of serious damage to the property. Commercial real estate investors in San Diego should be aware of the opportunities—and liabilities—that commercial leases have to offer.
How Are Commercial Leases Different from Residential Leases?
Investing in real estate involves far more than just buying and selling land. A real estate investment can consist of a complicated web of assets, obligations, and contractual relationships. This latter category is crucially important for California real estate investors to understand, since the duties created by contracts can have far-reaching effects. Leases are a type of contract in which the owner of real estate (the “lessor”) allows someone (the “lessee”) to use that real estate as their home or for business purposes. A lessor has multiple duties under a typical lease agreement, and California law imposes numerous additional obligations on lessors in residential settings.
What Is a Lease?
A lease is a contract between a lessor and a lessee. According to the statute of frauds, a lease agreement must be in writing. It is possible—but generally not advisable—to have an enforceable oral agreement for a month-to-month lease.
The lessor provides the exclusive use of the leased property, and the lessee pays rent. If either party fails to fulfill their obligations, they may be liable to the other party for breach of the lease. California law makes a distinction between residential and commercial leases. It generally imposes more restrictions on lessors in residential lease agreements.