The Southern California market, like the entire California real estate market, is hot for investments at the moment. Both the traditional and the Airbnb rental strategies can be very lucrative because of the factors driving the local economy. People are both moving to Southern California for the long run and visiting as tourists or business travelers.
The Affordability Factor
Affordability is a major concern in the Southern California real estate market because property prices are quite high compared to the national levels. This is a big issue for homebuyers, but not so much for local real estate investors, who have the luxury of placing more priority on the return on investment (ROI) than the actual price of the property.
For example, the rental income in most SoCal is high enough to make real estate a good investment opportunity despite the high property prices.
Should I buy and hold?
Long-term rentals are profitable in all major SoCal cities due to the high price-to-rent ratio which creates a high demand from renters who simply cannot afford to buy a home. According to Mashvisor data from March-April 2018, currently in Los Angeles the price-to-rent ratio for traditional rentals is as high as 24, followed by 23 in Palm Springs, and 22 in San Diego. Anything above 21 means that it is much better to rent than to buy a property, from the point of view of tenants/homebuyers.
This means that these markets hold excellent opportunities for investing in traditional rentals as people need places to live. There is high potential even in Joshua Tree (price-to-rent ratio of 19) and Long Beach and San Diego (price-to-rent ratio of 18) as 16-20 indicates it is generally better to rent than to buy.
Should I invest in short-term rentals?
For Airbnb and other short-term rental properties, Southern California is again an ideal location because of the climate and the tourist attractions. Three cities really stand out for these types of rental properties: Joshua Tree, Palm Springs, and Anaheim.
The average cash on cash return for Airbnb rentals in Joshua Tree is 7.1% (Airbnb monthly rental income $2,300, median property price $219,000, Airbnb occupancy rate 49%), 5.8% in Palm Springs (Airbnb monthly rental income $4,470, median property price $450,000, Airbnb occupancy rate 55%), and 5.1% in Anaheim (Airbnb monthly rental income $4,240, median property price $572,000, Airbnb occupancy rate 60%).
While real estate experts usually recommend properties with a cap rate of 8% and above, this goal is unrealistic in many markets. I would suggest anything above 5-6% has a strong potential to generate high return.
Note: Keep in mind that these Mashvisor numbers are city averages. Investors may well find properties with much better performances or much worse.
Learn more about the Southern California Market at Think Realty’s Conference & Expo in Irvine, July 14-15. This event features a panel of local experts, discussing investment strategies, as well as well-known featured speakers like Sam Freshman and Bruce Norris. Space is limited, so get your ticket today!