Is it still a good time to buy a rental in California?

[San Patel]

It seems like market is cooling down a bit. Summer time it may pick up a little. Is it better to wait for Q4 to buy a rental in California?

[Dan H.]

California is a big state. The market at 29 Palms is very different than in San Diego or Los Angeles. Similar for much of Northern California excluding the coastal areas near San Francisco is different.

I suspect however you are referring to the high appreciation markets (San Diego, Orange County, Los Angeles, San Francisco area).

In those markets it is challenging to not have initial negative cash flow. To have positive cash flow typically requires a below market purchase or a value add that will boost the rents and the market price. The competition for these properties is significant. Purchases made at retail without a value add will have negative cash flow.

Long term the outlook is positive. Indicators like diverse employment, rising wages, not easy to build (but currently constantly getting easier), housing shortage, low vacancy rates, great climate, etc. point to the high appreciation CA cities having continued long term appreciation (market and rent).

I hinted at the state level movement to increase housing. The state has ADU rules that are fairly lax. In addition, parking requirements of just a couple of years ago are being reduced/eliminated. There are regulations at the state legislature proposing allowing any Single Family house be converted to a duplex.

In addition, there have been cities that have enacted rent control (parts of Los Angeles and San Francisco). There is a state wide regulation that limits what RE can have rent controls applied (Contra-Hawkins). Repealing this legislation was put before the voters and voted down easily. However, there is still a movement to apply rent controls. San Diego recently had a 3 year period where average rents on a single family house went up $500/month (so averaged $166/month increase per year). That type of increase is difficult for almost all tenants and realize that was the average, there were many that had increases above the average (but none of our tenants).

Is it a good time? Not compared to 2011 to 2016. Maybe not compared to almost any other recent time except for just before the Great Recession. However, we continue to look and placed an offer last month (not accepted).

Good luck