I own rentals in California and keep running into a disconnect when underwriting deals.
Cap rates look bad. Rent control limits upside.
But depreciation often materially changes the outcome, especially in year one.
I’m curious how others here are thinking about this in practice:
- Do you assume cost segregation up front when underwriting CA deals, or only after acquisition?
- What % of purchase price do you typically model as accelerated depreciation for SFH vs small multifamily?
- How do you factor this into high-cost, low-yield markets without overfitting the tax benefit?
- Any gotchas you’ve run into with CA properties specifically (rent control, partial personal use, ADUs)?
Not looking for vendor recommendations or tax advice.
Just trying to understand how experienced owners here think about depreciation before calling a CPA or engineer.
Would love to hear real numbers or heuristics people actually use.
How are people underwriting cost segregation in California rentals?
byu/Samtyang inrealestateinvesting
Posted by Samtyang
3 Comments
Yeah I usually bake in around 20-25% of purchase price for accelerated depreciation on SFH when I’m running initial numbers. For small multi it’s closer to 30% since there’s usually more components to segregate
The key thing I learned is don’t let the tax tail wag the investment dog – if the deal doesn’t work without cost seg then it probably doesn’t work period. I use it more as a nice bonus that improves IRR rather than making or breaking the deal
CA rent control is definitely a wildcard though, especially if you’re banking on appreciation to make up for crappy cash flow
If you need the IRS ‘s help to make a deal work, it’s not a good deal. An asset needs to be able to stand on its own.
I stopped investing in residential rentals 20 years ago. California is too hostile to residential rental property owners. I’ve 1031 into triple net corporate commercial.