Purchasing a rental property is a complicated matter. It takes a solid understanding of real estate trends and tracking of the market you’re interested in purchasing in, to be sure you have located a profitable area. California is home to a number of the largest cities in the country, making it an obvious option for rental investments, as a large population requires a large number of housing options. With the prices of real estate in California currently among the highest in the country, getting into the market now can seem like a daunting prospect. However, the high prices can lead to the highest returns, and can be telling of the future of California’s real estate and rental markets.
As a whole, California is facing a housing shortage. The constant lack of housing across California is compounded by the prices of homes in the state. A high median price means that when general housing supply is short, housing that is affordable becomes even scarcer. Unsold inventory across California dropped significantly at the end of 2019, with the largest drop in inventory found in November, down 22.5% from the prior year.
The California Association of Realtors reports that the end of 2019 saw a slight dip in home sales from prior months, though it still saw over 5% increase from the year prior. This decrease is despite low mortgage rates and seemingly flat home prices (the overall median home price in California is still $589,770, which is well above the national average, and is expected to increase to closer to $608,000 by the end of 2020).
Reports show that the sales of homes between $500k and $1 million raised over 15%, while the sale of homes under $300k dropped significantly, nearly hitting a 15% drop. It is believed that these numbers are most reflective of a drop in available housing under $300k, forcing people who want to purchase homes in the state to end up in the higher price bracket, or to abstain from purchasing at all. Sales of lower-priced homes across the state have fallen due to a shortage of homes available in the lower price bracket or those offering rent control.
Overall home prices are expected to maintain, and likely will result in raising rental prices as well.
Purchasing a home is generally no longer considered a great investment unless it is being purchased to rent out. As the saying goes, “you can’t eat a house at 65.” While rental property investments are still incredibly lucrative, purchasing a home as a retirement investment is no longer seen as a great idea, as there are dwindling affordable options for housing once the live-in investment is sold.
In 2018, the US officially became a “renter nation,” with the scales finally tipping as the number of people renting surpassed the number of homeowners. In addition to the stress of making a large down payment and taking on the commitment of monthly mortgage payments, there are other factors that keep renters renting. Along with no mortgage commitments, renting a home or apartment means lower home and property maintenance costs, no chance of buying a home with hidden issues, no worrying over appliance breakage or being tied to one location.
The highest demand for housing has been seen in large metros like Los Angeles, San Diego, San Francisco and the Bay Area, and gradually pushing further inward toward San Bernardino, Sacramento, and Riverside. These are the markets expected to see the largest increase in rental rates over the coming year.
According to research and real estate data from Mashvisor, the following are the best cities to buy a house in California to rent out in 2020:
Hawthorne
Median Property Price: $844,685
Price/Square Foot: $495
Price-to-Rent Ratio: 17
Monthly Rental Income: $4,081
Oakland
Median Property Price: $770,186
Price/Square Foot: $495
Price-to-Rent Ratio: 22
Monthly Rental Income: $2,859
Sacramento
Median Property Price: $413,177
Price/Square Foot: $266
Price-to-Rent Ratio: 22
Monthly Rental Income: $1,585
Riverside
Median Property Price: $481,070
Price/Square Foot: $254
Price-to-Rent Ratio: 19
Monthly Rental Income: $2,116
San Bernardino
Median Property Price: $338,253
Price/Square Foot: $235
Price-to-Rent Ratio: 16
Monthly Rental Income: $1,813
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