The California Purchase Dilemma

Why long-term owners see what out-of-state investors miss

I engage with investors nationwide daily. While the overall decision-making process is currently evolving, there is always the question, “What do you think will happen in California? Should we invest there now?" Having owned and managed portfolios of income property in California for over forty years, I can confidently say there are ebbs and flows, but more flows. Several factors contribute to this, including Proposition 13’s property tax treatment (property assessments are based on the purchase price and only increase by 2% annually as long as ownership remains unchanged) and a strong Buy and Hold dynamic. Our portfolio includes properties purchased in the early 1990s for $11M, now appraised for over $100M, with annual cash flows equaling the original down payment. Refinances have provided the desired cash flow for new investments. The operating margins improve with each year of ownership due to the strong and every increasing demands and property taxes, usually the single largest property related expense, remain low.

The Prop 13 Moat: Why Operating Margin Improves Every Year of Ownership

Starting with the mechanics. Proposition 13, passed in 1978, capped the base property tax rate at 1% of full cash value, and limited annual increases in the assessed (base year) value to no more than 2% per year as long as ownership doesn't change. The text is codified in Article XIIIA of the California Constitution. The base year value is set at the purchase price. That number gets frozen.

What this means in practice: a property bought in the early 1990s sits on a tax basis that hasn't moved in three decades except for those 2% annual bumps. If market value has tripled or quadrupled in that window — which it has across most of coastal California — the assessed value has only roughly doubled. The gap between market value and taxable value compounds, year after year, for as long as the owner holds. The structural math of acquisition-value taxation, not a market call.

The compounding gap

When market value rises faster than 2% per year — true in coastal California for most of the past three decades — every year of held ownership widens the operating-margin advantage. This isn't a cyclical benefit. It's structural and only ends when you sell.

Hold Economics vs. Exit Liquidity: Where Institutional Models Go Wrong

The mistake I see most often from out-of-state institutional capital is screening California real estate on current cap rates plus a five-to-seven-year exit assumption. That model is correct for how institutional money typically underwrites — but it has almost nothing to do with how serious long-term holders actually operate in California.

When you sell, you trigger reassessment for the next buyer, you pay transfer taxes and capital gains, and you give up depreciation recapture. When you hold and refinance instead, none of that happens. The compounding Prop 13 advantage stays in place. Refinances have funded most of our subsequent acquisitions over the years — the existing portfolio works as collateral for the next round, with the tax basis untouched.

Institutional capital often sees California's high transaction costs and frowns. Long-term holders see the same costs and never pay them. The proper accounting for California real estate isn't a five-year IRR — it's the operating margin compounded over twenty or thirty years. Those are different businesses being analyzed.

"Fleeing California" Is a Residential Story, Not a Commercial One

The headlines about California out-migration are real, but they're being applied to the wrong asset class. California's Department of Finance reported a net domestic loss of about 216,000 persons in fiscal year 2024-25, following losses of 140,000 in 2023-24 and roughly 250,000 in 2022-23. The state characterizes the 2024-25 figure as returning to levels consistent with 2018 and 2019  net domestic out-migration has been negative for over twenty years. This isn't new.

Those are mostly individual residents — younger wage-earners priced out of homeownership, white-collar workers now working remotely, retirees relocating to lower-tax states. What they aren't is the commercial real estate owners, the multifamily landlords, the institutional family offices that own LA, San Diego, and Bay Area income property. Those owners hold through LLCs that don't trigger reassessment on owner transitions. They renew leases at allowable rent-cap maximums. They watch the migration data, but they don't sell.

At the asset level, the demand picture is stronger than the population narrative suggests. Yardi Matrix reports Los Angeles multifamily occupancy at stabilized assets running near 96% — about 130 basis points ahead of the U.S. average — with rents averaging around $2,628 per unit at the end of 2025. The well-located properties still have buyers, still have tenants, still have rent. The headlines describe a residential affordability story. They are not describing a commercial yield story.

The politics in California, particularly in Los Angeles, are diverse, and the ongoing balancing act offers each community a sense of individuality and opportunities for diverse activism. Are some residents desiring home ownership leaving due to being priced out? Yes, but many are staying because it is an interesting and inclusive place to live. There is still very strong demand in prime locations. Traffic is indeed an issue, but any LA resident can share ten hacks to navigate the city. Plus, it's nice to enjoy 80-degree weather in January…

The Math on a 20-Year-Held LA Multifamily vs. a Fresh Texas Acquisition

Let me put real numbers on it. Imagine two roughly comparable 20-unit multifamily assets. One in Los Angeles, purchased in 2005 for $4 million. One in Austin, purchased in 2025 for $7 million.

The LA asset's assessed value in 2025, after twenty years of 2% annual increases, sits around $5.94 million. Property tax at the 1% base rate equals roughly $59,400 annually. Add another 0.25-0.30% for voter-approved local bonds and you arrive at around $73,000 total per year.

The Austin asset's assessed value in 2025 is the purchase price: $7 million. Texas has no Prop-13 equivalent, and effective property tax rates in major Texas metros run around 2.1-2.5% all-in. So the Texas tax bill is roughly $147,000-$175,000 annually — twice to two-and-a-half times the LA bill, on a more expensive property.

If both assets generate similar gross rents (say $50,000 per unit per year = $1M total), the LA owner is paying property tax equivalent to ~7.3% of gross rents. The Texas owner is paying ~15-17% of gross rents. That's a 700-1000 basis point operating margin gap, and it widens every year the LA owner holds.

takeaway

When you screen a California asset, look at the assessed value field on the tax bill, not the market value. Notice how long the current owner has held the property. The property-tax-to-gross-rents ratio tells you the story the headlines don't.

This is the inversion: "California is high-tax" describes the moment of acquisition, not the math of ownership. After a decade or two of holding, the narrative flips.

The Bear Case: Insurance, Rent Caps, Prop 13 Reform

I'd be doing you a disservice if I didn't acknowledge the real headwinds. They exist, and they affect underwriting.

Insurance is the biggest. State Farm and Allstate have both pulled back significantly from California's homeowners insurance market — State Farm non-renewed about 30,000 homeowners and 42,000 commercial apartment policies in California by March 2024, totaling roughly 72,000, citing inflation, regulatory costs, and catastrophe exposure. The California FAIR Plan, the insurer of last resort, grew to 668,609 policies in force, with a roughly 39% jump in policies in the fiscal year ending September 2025. Commercial multifamily has more options than single-family residential, but premiums are real and rising. They show up as a line item in operating expenses — not as a thesis-killer.

Rent caps under AB 1482, the Tenant Protection Act of 2019, limit annual rent increases on most multifamily older than 15 years to 5% plus local CPI, or 10%, whichever is lower. That affects pricing power at the margin, but it doesn't break the long-hold math — operators bake the cap into underwriting and renew at the allowed maximum where the market supports it.

Reform attempts on Prop 13 itself have come and gone. Proposition 15 in 2020 would have created a split-roll system reassessing large commercial properties to market value; it failed 52% to 48%. The risk of future reform exists. California voters have so far consistently sided with the existing structure.

None of these break the thesis. They tighten the underwriting.

Conclusion

Observe the actions of California property owners who are doubling down on their multifamily and commercial investments. Ask them why and find out the ownership benefits far outreach the market dynamics.

The ebbs are real. The flows are bigger.