What You Need To Know To Invest In California Real Estate In 2021
For many years investing in California real estate has been a breeze. Half a million more people needed housing each year. And they wanted to live mostly in San Francisco or Los Angeles, places that are already full; Rents and house prices rose, investors couldn’t miss it.
Aerial view of the Pacific Heights neighborhood of San Francisco, California. (Photo by Smith … [+]
Now the story is different. California’s population rose by zero in 2019 and 200,000 people moved, due to high housing costs and few new jobs. They moved to Idaho, Colorado, Utah, Arizona in the countries neighboring the Opportunities.
There are still 15 million homes in California and a million of them change hands every year, so the real estate market is far from dead. But investors now need to be much more careful about where exactly they are putting their money and what type of investment they are making.
The pandemic complicates the whole situation. The extremely low mortgage rates in response to the economic catastrophe resulted in an increase in home sales in 2020, which weighed on demand from 2021 onwards. The financial pain from the worsening pandemic will lead to evictions and foreclosures. The permanent loss of jobs will result in more people moving elsewhere. The housing situation will only become clear after the pandemic is over – and we still don’t know when that will be.
In these circumstances, it is best for investors to follow the numbers, focus on investments that are preferred by the local economy, and stick to the “middle” of the market (more on this below).
To aid this plan, we have compiled statistics from Local Market Monitor for 28 local California markets, divided into geographic areas: North, Bay Area, Central Valley, and South.
Statistics for 28 local California markets
Local Market Monitor, Inc.
The most striking statistic is the first – the lack of population growth in virtually all of these markets. Your investment strategy is fundamentally different when a market is not growing because it is a zero-sum game. You need to assess which segment of the existing demand is strongest. Single family houses? Apartments? Ownership or Rental? The high or the low end of the market?
Will growth accelerate again in about a year? Can we just ignore this temporary setback? No. Population growth is in waves, and the wave in California peaked long before the pandemic
A second important statistic is the high percentage of renters in most of these markets – the national average is only 35 percent. That correlates with real estate prices; The higher the average price, the fewer people can afford to buy something. But even in the Central Valley, which has the lowest prices in the state, a large proportion of the people are renters. That’s because it’s expensive to live in California. Californians pay the highest rents in the country for their income.
The next statistic, the rise in house prices over the past year, is a measure of local demand for all apartments, not just single-family homes. Last year it was very weak in the expensive Bay Area and much firmer in the Central Valley. Like the population, real estate prices go in long waves, so I expect this trend to continue.
The last statistic – the ratio of the average home price to the average annual rent – measures the extent to which the owner and tenant market segments overlap. It is a guide to the types of investments that are preferred in each market. For example, you don’t want to buy a million dollars right now in San Francisco, where the ratio is 47, and look for a tenant who can afford the high monthly payments – there are a few, just not very many. In Visalia-Porterville, however, where the ratio is 19, a direct rental will have a much larger pool of potential tenants.
If the value for money is above 22, apartments or the division of single-family homes into multiple rental units are generally preferred investments. If the rate is below 16 (not currently in our 28 markets, but in some of their sub-markets), demand is very weak and all-family homes without expensive improvements are the best choice.
Between the ages of 22 and 16, all types of investments can be considered: housing, subdivision, upgrading real estate to higher rents or prices, and flipping (when prices rise sharply)
An important point: the average tenant moves within two years. This means that the risk of your investment in a rental property is not currently clear. You won’t know when to find new tenants for a year or two.
If you’re looking for California’s real estate markets with the best long-term potential, look to the Central Valley. Property prices are still low, the land is still cheap, and the conversion of more agricultural land to real estate development is inevitable. Even now you can see that it is one of the few parts of the state that is growing.
If you have already decided on a particular market, keep in mind that this is a difficult time: be careful, stick to the types of investments suggested in the price / lease ratio, and stick to the middle of the tenant market – where you have the lowest risk that your property will be empty.
The “middle” of the market is the rental range, where you will find the greatest concentration of existing tenants, where you can find replacements most easily when your tenants turn around. Census data can help you figure this out, and of course our reports show this for local zip codes.
With lots of renters, California is still a good place to invest in rental properties, but it pays to be a little more careful these days.