Why Small Landlords Are Leaving California (and How to Stay Profitable)

Published February 18, 2026

California's regulatory environment is pushing small landlords out. But for those who stay, well managed properties are still generating strong returns.

Why Small Landlords Are Leaving California (and How to Stay Profitable If You Do Not)

I talk to at least two or three owners every month who are seriously considering selling their California rental properties. They are worn down by regulations and insurance costs, and tempted by the simplicity of passive investments or out of state markets.

I understand the frustration. But I also think many owners are making an emotional decision that does not hold up under the math.

The Regulation Stack

California landlords operate under layers of regulation that do not exist in most other states.

AB 1482, the statewide rent cap, limits annual increases to 5 percent plus CPI or 10 percent, whichever is lower. For owners used to setting market rents freely, this feels like a fundamental constraint on their property rights.

Local rent stabilization ordinances in cities like Inglewood, Santa Monica, and Los Angeles add stricter caps on top of AB 1482. Some allow only 3 to 4 percent annual increases.

Just cause eviction protections mean you cannot simply choose not to renew a lease. You need a qualifying reason, and you need to follow specific procedures.

Relocation assistance requirements in many jurisdictions mean that certain no fault terminations require payments of $5,000 to $20,000 to the tenant.

SB 721 mandates professional inspections of exterior elevated elements on buildings with three or more units. SCEP brings proactive city inspections. Fair housing requirements are actively enforced at the state and local level.

Each regulation individually is manageable. Stacked together, they create a compliance burden that feels overwhelming, especially for owners who bought their buildings before most of these laws existed.

The Insurance Crisis

This is the one that has genuinely changed the economics in the last few years.

Property insurance premiums across Southern California have increased 30 to 40 percent since 2022. A policy that cost $8,000 three years ago now costs $12,000 to $14,000. Some owners in fire adjacent areas have seen even larger increases or have had policies non renewed entirely.

There is no managing around this one. The increase is a hard cost that goes straight to the bottom line.

Why Some Owners Still Should Not Sell

Here is where the emotional decision making gets expensive.

Prop 13 is the single biggest financial advantage for long term California property holders. If you bought your building in 2005, your property tax basis is locked near that purchase price. You might be paying $7,500 in annual property taxes on a building that would generate $38,500 in taxes if purchased today at current assessed value.

That $31,000 annual tax advantage is enormous. It improves your cash flow every single year, and you cannot replicate it by selling and buying elsewhere.

Capital gains taxes on a sale will consume 30 to 40 percent of your appreciation when you combine federal and California state taxes. On a building you bought for $1.2 million that is now worth $2.8 million, you are looking at $480,000 to $640,000 in taxes unless you do a 1031 exchange.

And if you exchange into an out of state property, you give up your Prop 13 basis forever.

I had an owner in Manhattan Beach who wanted to sell after a tenant caused $15,000 in damage. He was emotionally done. I asked him to sit down and look at the numbers with me. His building had generated $380,000 in net income over the previous five years. The damage was 4 percent of his five year income. When he saw it framed that way, he authorized the repairs and kept the building.

What Profitable Ownership Looks Like

Let me walk through real numbers on a 10 unit building in the South Bay.

Gross scheduled rent: $25,200 per month, or $302,400 per year.

Occupancy rate: 97 percent (one vacancy turn per year).

Effective gross income: $293,328.

Operating expenses:

Property taxes (Prop 13 basis): $12,000.

Insurance: $13,200.

Maintenance and repairs: $18,000.

Landscaping and common area: $4,800.

Utilities (owner paid water and trash): $9,600.

Management fee at 7 percent: $14,566.

Total operating expenses: $72,166.

Net operating income: $221,162.

On a building purchased for $1.8 million with current debt of $1.2 million at 5.5 percent, annual debt service is approximately $81,700.

Cash flow after debt service: $139,462.

Cash on cash return on remaining equity: 7.8 percent.

That is a real, sustainable return that includes professional management, full compliance, and proper maintenance. On paper it looks modest next to what some out of state markets promise. In practice it pays reliably, keeps its tax advantages, and the building appreciates underneath it.

The Out of State Grass Is Not Always Greener

Every owner who tells me they want to sell and buy in Texas, Florida, or Tennessee has already read the blog posts about 12 percent cap rates and no state income tax.

What those blog posts do not mention:

Tenant turnover in many out of state markets runs 40 to 60 percent annually compared to 15 to 25 percent in the South Bay. Every turnover costs $2,000 to $4,000 in make ready expenses plus vacancy loss.

Tenant quality, measured by income to rent ratios and payment reliability, tends to be lower in markets where cap rates are highest. Higher cap rates reflect higher risk.

You are managing remotely, which means you are entirely dependent on a local manager you have never worked with, in a market you do not know, with tenant laws you have not studied.

Property taxes in Texas can run 2 to 3 percent of assessed value annually with no Prop 13 equivalent. That $400,000 building has $8,000 to $12,000 in annual property taxes that increase with market value every year.

I am not saying out of state investing never works. But the comparison needs to be honest, including all costs and risks, not just headline cap rates.

How Owners Who Stay Profitable Do It

The owners in our portfolio who consistently generate strong returns share a few habits.

They raise rents every year. Steady and small, never punitive. A 3 to 4 percent annual increase on a $2,500 unit is $75 to $100 per month. Skip that for four years and you are leaving $300 to $400 per month per unit on the table. On a 10 unit building, that is $36,000 to $48,000 per year in revenue you never collect.

They invest in the building strategically. New flooring on a turnover costs $2,500 and supports a $150 rent increase. That is a 72 percent annual return on the improvement cost.

They maintain proper insurance and reserves. An underfunded reserve just schedules the emergency for later.

They use professional management. Their time is worth more elsewhere, and the risk transfer is worth the fee.

They stay educated on regulations so they are never surprised by a compliance deadline or a new ordinance.

The Decision Framework

If you are thinking about selling your California rentals, run these numbers before you list:

What is your Prop 13 tax advantage worth annually?

What will capital gains cost you on a sale?

What is your actual cash on cash return with current operations?

What return do you need from a replacement investment to match your current after tax position?

Most owners who run this analysis honestly end up keeping their buildings. The ones who sell are usually in one of three situations: they inherited a property they never wanted, they need the capital for another investment, or the building has physical issues that make continued ownership genuinely uneconomical.

For everyone else, California real estate continues to be one of the best wealth building vehicles available, if you manage it properly.

Kellie Schofield

Founder, Schofield Properties

El Segundo, California

Topics: California landlord, small landlord, property management, rental property investing, South Bay rentals

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Schofield Properties is a family run property management company at 323 Richmond St, El Segundo, CA 90245. We have managed the South Bay since 1972 and personally oversee about 186 doors today. Book a call to talk about your property.