Best Cities in California to Buy Rental Investment Property?
Looking for an investment condo or house to rent in the Golden State? A lot of people still are.
The California housing market is coming back slowly. Home prices are rising and rents are still on the rise in some cities.
Interest in investing in revenue generating California real estate definitely weakened during the pandemic, yet it seems demand for property never ends here. California is a special place and it’s unlikely that supply will ever meet demand.
In a world of digitally remote work, close to Silicon Valley, tech workers and non-tech workers alike find the Golden State’s allure hard to resist.
From the beaches of So Cal, to the glitz of LA, to the world’s most fantastic mountain parks, and the charm of the NAPA valley wine region, no place on earth compares with California. A perfect climate, adventurous lifestyle, high technology business, productive farming region (Monterrey, Fresno, Tulare, NAPA, San Joaquin, Ventura, San Diego), coastal vacation cities (San Diego, Orange, Los Angeles), and more entice vacationers and new residents.
The Atmospheric River
Home prices and rent prices were taking a bit of a break. The economy was being crushed by Fed rate hikes, but it looks like the big squeeze is about to end. And California’s water drought appears to be ended too with January’s unprecedented rain and snowfall. Important reservoirs that feed California’s vital agricultural and tourism industries will feed economic activity in 2023/2024. Yosemite Park will likely be at its spectacular best this year.
Combined, these two major forces could revive demand for rentals. Home prices across the state continue to be excessively and artificially high. Given building regulations discourage development, investors must look to current existing properties to carve out a profitable portfolio.
There is however an opportunity for creative investors in the modular and built to rent markets. These products are not only build for current consumer demand, but also to fit this stat’s demand construction regulations. These developments, if they meet conservation mandates could be more likely to succeed.
Investors should have a more innovative mindset here, and embrace new technology which delivers efficiencies and creative new business models. Those who approach the market with a 1990’s mindset will find only disappointment. As it happens, PropTech in all its dimensions is the path to profitability in all housing markets.
The economic recovery might be rocky, and California cities remain some of the best cities to buy property.
Support for Profitable Rental Investment in California?
Before calculating individual rent yields and cap rates, see the big picture first.
Attom Data most recent report reveals that the average annual gross rental yield (annualized gross rent income divided by median purchase price of single-family homes) across 495 counties was 7.7% for 2021, down from an average of 8.4% in 2020. Of course those are pandemic numbers.
Attom Data, headquartered in Irvine California also reported that renting is more affordable than buying.
Their just released 2023 Rental Affordability Report shows that the average 3-bedroom rental is more affordable than owning a comparably sized median-priced home in 95% U.S. counties analyzed in the report.
However, even better news for investors is that rent is rising faster in Southern California. That supports the revenue issue you’re calculating. In fact, Orange County, Monterey County and Riverside County are listed among the least affordable in the US. With a recovery this year, rent prices could surge along with home prices.
California has lost a lot of businesses and residents through the pandemic and the high taxes here are an issue. Yet, as I mention, the macroeconomic factors seem to be brightening.
The Best of California
Below, you’ll find a revised, updated list of best California communities and cities to buy rental income property.
These are communities offering the best neighborhood character, schools, safety, jobs, and other key factors for homeowners, investors as well as renters. Check out the rental property report for more info on US rental housing. and best cities to buy rental property. Surprisingly, the experts pick Northern California cities as more desirable.
What are Rental Property Investors/Management Firms Doing?
Much of the growth of investment in the rental income property sector is from those smaller investors and firms owning 3 to 100 properties — what we might call SMB property investors. With high interest rates, many of these mom and pop investors may have to sell their portfolio. This means corporate investors are looking to capture some bargains.
New efficiencies in acquisition, financing, and property management were fueling a strong growth in property portfolios of 3 to 10 rentals and from 11 to 100 rental properties.
Attom Data launched a new rent yield calculator tool that uses their database of rental properties. You’ll likely want to try out this service.
Let’s get to Attom Data’s most recent report on California rent yields (2019) in selected major California cities.
- In the San Francisco/Oakland region, rent yields are down 6% however renter wages are up 18% in 2021 and gross annual yield is 4%.
- In Los Angeles, rent yields dropped 7%, while renter wages are up 9% in 2021 and gross annual yield is 4.7%.
- In San Diego, rent yields dropped 8%, while renter wages are up 11% in 2021 and gross annual yield is 5.2%.
- Butte County where rent yields rose 7%, while renter wages are up 9% in 2021 and gross annual yield is 8.1%.
- Shasta/Redding rent yields rose 20%, while renter wages are up 9% in 2021 and gross annual yield is 7.6%.
- and in Sonoma where rent yields rose 1%, while renter wages are up 11% in 2021 and gross annual yield is 5.6%.
Most California cities went through a rough period of declining yields, but with rising wages and employment it comes down to picking the right rental types in the best neighborhoods.
Screen Capture courtesy of Attomdata.com
But Should California be Your First Choice?
California is one state that always draws keen interest for rental properties. Maybe it’s the beaches and ocean views or maybe it’s the perfect weather, or it’s just the state’s resilience. Google, Oracle, Wells Fargo, Apple, Intel, Synnex, and many more of the largest US corporations are located here.
California Housing Outlook
As you can read in the California housing predictions, construction was on the upswing with new developments in Los Angeles, San Francisco and San Diego. Lately, it’s flat which is helping raise resale prices.
See the Los Angeles, San Francisco and San Diego, and Oakland housing reports for apartment rental demand.
The prices in California’s major cities makes them a tougher place to buy and rent out profitably. Yet some urban neighborhoods could have possibilities. See the lists below of the best neighborhoods in Los Angeles and the Bay Area.
Top Ten from Home Snacks
Here’s Home Snack’s new Top Ten list of best communities to buy in California for 2023:
- Dos Palos
- Big Bear Lake
- La Habra Heights
- Indian Wells
California.com’s Best Picks (lower ratio is best)
- Douglas City – $324,167/2,723 = 119
- Yuba City – $355,716/1741 = 204
- Elk Grove — $497,829/1848 = 269
- Rancho Cordova — $417,083/1364 = 305
- Winchester — $494,314/1733 = 285
- Blythe — $164,936/795 = 207
- Hawthorne — $734,096/1753 = 419
- Lake Los Angeles — $354,623/1220 = 290
- Stanton — $569,319/1851 = 307
Niche.com Chimes in with Their Top Communities to Buy Rental Property.
- Newcastle, Sacramento
- Seal Beach, Los Angeles
- Madeira Acres, Fresno
- Green Acres, Bakersfield
- Pacheko, Oakland
- Gold River, Sacramento
- Woodbridge, Stockton
- Mountain House, Tracy
- Desert Edge, Riverside
- Los Altos Hills, San Jose
- Folsom, Sacramento
- Eldorado Hills, Sacramento
- Sunnyside, Fresno
- Lincoln Village, Stockton
- Clovis, Fresno
- Val Verde, Los Angeles
- Rolling Hills, Los Angeles
- West Park, Fresno
- Valle Vista, Riverside
- El Dorado Hills, Sacramento
- Vineyard, Sacramento
- Mentone, Sacramento
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See also: All in One Property Management Software | Best Cities for Rental Property | Best Type of Property to Buy | Will Rent Prices Fall? | Rental Listings | Short Term Rental Market | California Property Management Companies | Software for Landlords | Property Management Accounting Software | California Housing Predictions 2022 | Landlord Tips | Property Management Conferences | Real Estate Housing Market