Why is California a poor rental market?

Question

I live in California and have seen many close family and friends kill it in the rental market here. Why is most of the US against rental market in California and should I invest elsewhere?

Will Barnard · Answer

CA is not a poor rental market as that is an improper assessment in my opinion. That said, CA rental laws severely favor the tenant over the landlord and price to rent ratios are much higher in most parts of the state compared to other areas of the country. So from a “cash flow” standpoint, CA is less favorable over other options, but if you buy right, time it right, and have a long term outlook, CA can provide some of the highest appreciation rates in the country and when you apply leverage responsibly, your total returns can be quite large.

One needs to decide their goals and then have the abilities and desires to get there.

Theresa Harris · Answer

From what I've heard: the high price of homes combined with many rental restrictions makes a better deal for the tenant than the landlord.

Will Barnard · Answer

This is an excellent point and spells out one of the root causes for the price points here in CA and in NY. Especially in CA, with the laws the way they are, it makes for higher costs and as such, investors look elsewhere to place their money. The housing shortage is a real problem as far as price points are concerned. Not to get political but politicians and law makers shout out about the homeless problems and think that making laws to add ADU units or lower income housing will solve the problem, well . . . .  It won’t.

Trevor Ewen · Answer

@Jared Lomker

It's a desirable place to live (or has been). In the last decade, inward migration has brought many white-collar buyers. They build very little housing in comparison to the actual need. Standard supply / demand pushes prices up. Policy makers have responded by imposing higher regulatory burdens on landlords. This is a double threat.

In pure economic terms, California is hard to make work given the retail competition and low inventory. When you throw in the regulatory burdens, it starts to look even worse than comparably valuable markets (certain parts of Florida would be a reasonable comparison). All investors have opportunity costs when they decide to invest in a market. If policy-makers make a rental environment less friendly for landlords, they should not be shocked when those landlords (with huge opportunity cost) take their interest to other states. I have watched 10 straight years of former New York and New Jersey landlords slowly move their operations toward the south. The same thing happens in California, and will continue to happen in the status quo.

Karen Margrave · Answer

@Will Barnard Sorry. I meant are you specifically buying properties to add ADUs? Are you doing conversions or building stand alone units? What are you finding as far as impact fees being charged, etc.? I've fought with Shasta County for years on an ADU conversion, they wanted $10,000 in impact fees, as they misread what was actually the existing law, which stated impact fees couldn't be more than what "actual impact" was, and since there was no impact to the county, they couldn't charge me for new construction. (it was a conversion of space that already had toilet, sink, etc. and was 2500 sq. ft.)

Will Barnard · Answer

Not familiar with Shasta County but here in LA, I have not seen that problem and all of my previous have been existing structures like detached garages that were converted to an ADU. But now, with the new CA laws, it opened the door to so much more for investors and home owners.

But good news for you and all California home owners, impact fees for any county are eliminated for any ADU that is under 750 SF and capped at 25% of the standard impact fee for what it would be to build the main home is over 750 SF. Plus, regardless of lot size or FAR (floor area ratio), you are now guaranteed the ability to build up to 800Sf ADU and the set back is cut down to 4 feet.

Bill B. · Answer

You can always buy where you want to retire. My most expensive “rental” is on lake Minnetonka in MN. It generates a profit of about $10k per year but it’s negative cashflow of $9k per year. (I did a 15 year as i want it paid off if I decide to live there as I don’t deduct personal interest.) it also generates almost $20k in depreciation helping to offset my other income and traveling to it on business allows me to stop and see my family that live near by.

Anthony Gayden · Answer

@Jared Lomker

The problems with California investing is that there are high barriers to entry in large parts of the state.

Keep in mind the median household income in Los Angeles County is $68,093/yr. Real estate investing in much of the state is only an opportunity for the upper middle class and wealthy. People who have hundreds of thousands of dollars to invest. A newbie with $10,000 can’t house hack when a duplex costs $650,000. Heck a newbie making the median household income can’t even qualify for a loan that large.

Bill B. · Answer

I think it’s mostly the horror stories about it being illegal to evict tenants for anything other than extreme cause or raise rents, being forced to pay relocation fees in the tens of thousands. Or it could be the evictions for cause that might still take 6-12 months. Or the fact that California chases you out of state for taxes on 1031 exchanges. Or the $800/year per llc fee. The high income tax and property taxes or the high price to rent ratio.

Or maybe it’s something else I haven’t thought of.

I’m not saying can’t make money there, people do it every day. I’m just saying you’re pretty close to Las Vegas or Phoenix which seem to be much easier. It’s probably a great place to househack in expensive areas as long as you don’t get stuck with the tenant from hell.

Lance Ayar · Answer

Hello all,

Well, first off, California is unfortunately one of the most (if not, THE MOST) tenant friendly state! Top that off with high prices (harder to catch the desired and acceptable 1% rule) and high taxes... you pretty much get a recipe for a very salty cookie! It looks good, but tastes horrible!

California sure is a dreamy place with it's great weather, abundance of sunshine, gorgeous beaches, mountains etc. But in terms of investing, the sun don't shine all that much... at least for us investors.

Why is California a poor rental market?

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