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California has long been famous for its sunshine, surf, national parks, bustling cities, and movie stars — just to name a few of the draws. Most everyone wants to visit the Golden State at some point in their lives to see what all the hype is about. The result? California is the most populated and most visited state in the U.S.
As a real estate investor, you may see that demand and want a piece of it. But is California one of the best places to buy rental property? While you can find some markets that will be profitable, the biggest and most popular cities aren’t looking so good.
We analyzed California’s four most populous cities based on home affordability, investment potential, rental rates, and amenities. We found four places you do NOT want to buy a rental property right now.
Still, if you have your heart set on owning an income property in the Golden State, our friends at Clever Real Estate can help. Clever is a free, no-obligation service that matches home buyers with talented local real estate agents across California and nationwide, arming you with an expert negotiator who knows how to navigate challenging markets. You can meet as many agents as you like until you find the best one to advise you on your real estate investment journey.
Best of all, if you find your agent through Clever, you'll get up to 0.5% cash back after closing. In California, where the median home price is nearly $775,000, that puts up to $3,875 back in your pocket.
California Real Estate Trends (2022 Data)
Similar to many U.S. states, the housing market is going wild in California in 2022. As of March, the average sale price hit $849,080, up 12% year over year.
Despite high prices, homes are selling lightning fast in California. A typical home sits on the market for a mere eight days, and the unsold inventory index is just 1.7 months, according to the California Association of Realtors. Pandemic-driven shifts, rising rates of remote work, and record low-interest rates are continuing to drive these trends in 2022 — but how long can prices continue to soar?
At the peak of the housing bubble in 2006, right before the crash, housing prices averaged $646,790, which was the highest point in history. Now, we’re far past that — and 65% of U.S. Regional housing markets are now overvalued, according to CoreLogic.
Industry-leading sources such as Fannie Mae and Bank of America predict that despite rising interest rates, home prices will still climb in the coming year, albeit at a slower rate. But prices could drop in the not-too-distant future. Rather than investing at the market's peak, we recommend waiting for a more opportune time when the market favors buyers.
1. The Worst Place to Buy Rental Property in California: Los Angeles
Los Angeles is, by far, the most populated city in California — home to almost 4 million people. It’s also the most visited with well-known attractions like Hollywood, Disneyland, Universal Studios, and the Getty Museum.
It’s no surprise that Los Angeles home prices are amongst the highest in the state, currently averaging $965,684 and up 17% since last year. After 20% down, your estimated monthly mortgage payment would be steep — around $4,800.
If you rent out your investment property long-term, you can expect to get an average of $2,661 per month, based on typical rent prices in Los Angeles. Short-term rentals are roughly comparable, with an average daily rate of $205 and a 71% occupancy rate. The result is a median monthly revenue of about $2,600.
In either case, you’re going to end up paying nearly half of the mortgage out of pocket each month.
Looking back to January of 2015, Los Angeles home prices averaged $552,000. If you bought back then, you’re likely sitting on a nice chunk of equity so now could be a good time to sell. However, buying now is a risky move as prices are higher than ever before, rental income can’t keep up, and future trends are a bit unpredictable.
2. San Diego
San Diego is arguably one of the most desirable places to live in the world. Residents and visitors alike are drawn to the city's year-round 70 degree weather, beautiful beaches, and calmer atmosphere compared to nearby Los Angeles. In fact, San Diego is one of California's top tourist destinations and the second most populated city in California with a little over 1.4 million residents. However, once again, high demand comes with sky-high housing prices.
These wildly high prices would put your monthly mortgage payment at around $4,793 after a 20% down payment. The average rental price is sitting at $2,756 — far less than vacation rentals, which bring in a monthly median revenue of $4,100.
Still, although San Diego's vacation rentals are much more lucrative than Los Angeles, the city's rental property opportunities still fall short of average mortgage payments.
3. San Jose
San Jose is home to around one million residents, making it the third most populated city in California. The area attracts visitors who want to see the stomping grounds of some of the world's biggest tech companies, including Google, Apple, and Facebook.
With a 20% down payment, you’d be looking at a mortgage payment of $7,318 — far, far above the national average of $1,159. You can probably guess that the typical rental income isn’t going to cover that. Current average rental prices sit at $2,754, while vacation rentals bring in a median monthly income of $2,200.
4. San Francisco
Last but not least: the windy city of San Francisco. There’s no place in the world quite like San Fran, and it attracts people from all over the world. Around 884,000 residents enjoy the city's unique beauty, from the Golden Gate Bridge to Alcatraz Island, Pier 39, and the city's famous cable cars. San Francisco rakes in billions in travel-related spending each year.
While it may sound like a great place to invest in a vacation rental, San Francisco's typical home value is higher than any other city on our list, sitting at a shocking $1,608,937. Homes have increased by just over 12% since 2021 and around $1.1 million since 2015.
If you put 20% down on a $1.6 million home, you’re looking at a monthly mortgage payment of around $7,941. Yet the average rent is $3,230, and the median income on a vacation rental is $3,000. The investment just doesn't make much sense right now.
Make the Most of Any Rental Property Investment
It isn’t the best time to buy a rental property in California’s four most populated cities.
However, that won’t necessarily be the case forever. If rising interest rates slow demand and home prices do come down significantly, they could reach a point where the numbers begin to make sense again.
Whether you're investing now or in the future, you'll want a great agent on your side. A knowledgeable real estate agent can help you identify promising rental property opportunities, compete with other buyers, and even help you snag properties before they hit the MLS. Our friends at Clever Real Estate have built a network of trusted partner agents in California and beyond. It's free to get matched with agents through Clever, with zero obligation!
In an expensive real estate market like California, you'll want to make every dollar count. You can receive up to 0.5% cash back after closing — thousands of dollars — just for finding a full-service agent from a top brokerage like Keller Williams or Coldwell Banker through Clever.
What is the worst place to buy rental property in California?
Los Angeles is the best place to buy rental property in California, followed by San Diego and San Jose. Learn how population growth, job opportunities, and home values impact rental property investments.
Is rental property a good investment?
In general, rental property is considered a sound investment, but a rental property's success or failure depends on both local market conditions and business strategy. California's four biggest cities feature sky-high home prices that prevent rental property investors from achieving profits. Learn why market conditions aren't favorable for California real estate investors.
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