We have been spending a lot of time looking at great places to buy a home around the greater Los Angeles area. Now let’s switch gears and look at the best places to own rental property. On a national level, the rental market represents about 60% of the total housing market, and in 2018 renter growth outpaced homeowner growth in all but three of the top 100 cities in the United States. Given how expensive, comparatively, California homes are, it’s no surprise that a big segment of the population rents. So for those in a position to buy an investment property, where are the best locations?
San Diego is the only California city that made the Forbes Top 20 list for 2019. With a slight increase in job growth, property values increasing 7%, and an average home price is $514,000, San Diego’s average rent price of $1,631 makes renting an attractive option. Of the Top 20 cities named by Forbes, San Diego has the highest average home price. Cities like Orlando, Raleigh, and Cleveland—all in the top 5—have average home values in the high $100,000s to high $200,000s. Rent in these cities ranges from $808/month to $1208/month. However, the next most expensive city, Silver Spring, MD, came in at #6 on the list, so the average home price is not everything. And that’s not to say that there aren’t a lot of other great places in California to invest in rental property.
East Los Angeles
Moving closer to home, East Los Angeles is looking very strong in 2019 for the investment property market. According to Forbes, it is “emerging as one of the top cities to own investment property in California in 2019.” Geographically, it is well-positioned. Additionally, job growth is good, but the average income is not enough for purchasing homes. This means most people can afford rent even though they cannot afford to buy. In fact, a full two-thirds of East Los Angeles residents are renters, and the median rent is $2,334/month.
Further north in Los Angeles County, the city of Castaic caught the attention of Mashadvisor.com when it published its own list of best places in California for income property investment. Castaic’s median home value of $440,000 is more affordable than a lot of California cities. Its average rent of $2,300 and a price-to-rent ratio of 16 make it a great option.
That price-to-rent ratio is an important number in any market. It looks at annual rent compared to the average purchase price. The higher the ratio, the bigger disparity between renting and owning. This disparity means it’s cheaper to rent a given house than it would be to pay a mortgage on that same house. According to Rentberry.com, ratios between 16 and 20 fall into the “moderate” range, meaning it’s still to the resident’s advantage to rent rather than to buy. Ratios above 20 are even more advantageous for rental property investment. But experts caution that excessively high ratios can indicate a pending bubble burst.
Hawthorne’s rental market is strong—more than 73% of the population rents. Its price-to-rent ratio of almost 19 is a further indication that investors looking to buy rental property would do well to consider this area of southwestern LA county. According to Forbes, the median rent in Hawthorne is $2,851, and the annual rental income is just over $34,000. However, investors will need to have substantial investment capital to get a foothold in this market. The median property value is just under $650,000. That’s not unsurprising for southern California, but keep in mind that as a general rule, investors need to be prepared to put at least 20% down when securing traditional financing.
What to Look for in a Rental Property
The above list of housing markets is just a small sample. Ultimately, as a rental property owner, you need to find properties that align with your goals. Many investors are looking for properties they can purchase below market value to fix it up. This lessens the up-front costs while allowing for at-market rental income once the property has been rehabbed. However, distressed properties can have hidden issues that can be very expensive. Other investors may be looking for an income property that is already in great shape. It may even already have tenants in place. Though this road may be more of a “sure thing,” investors need to know their up-front costs to acquire the property will be higher. It will also take longer for the rental stream to show real profits.
If you are new to the investment property world, take the time to do your homework and develop a strategy. There are a lot of opportunities, but investment properties are not without their risks. Planning ahead means a better chance of success in a dynamic and growing market segment.