In my opinion, California is a real estate investor’s paradise, and there’s no shortage of good investments to find. In fact, buying up foreclosures in Fresno helped launch my career as a house flipper, and my business wouldn’t be as healthy as it is today if I hadn’t.
But, as I learned early on in my career, California is also home to some of the worst investment opportunities that have the lowest chances of succeeding. If you invest in the state long enough, you’re bound to hear stories of reckless investors buying up entire city blocks that are conveniently located in soon-to-be ghost towns deep in the desert. Thankfully, it isn’t too hard to avoid making mistakes like that once you have a little background about the state’s property market.
In a nutshell, answering the question of is California real estate a good investment depends on a few things, including what stage your business is at, what strategy you prefer to use, and where you plan to compete. If you aren’t sure how or where to begin, don’t worry—I’ll walk you through it, starting with an overview of what’s going on in the market right now.
California’s Real Estate Market Today
As of mid-2022, California’s real estate market is one of the strongest and most dynamic in the country. That alone should answer the question of is California real estate a good investment, but it’s important to note that it’s also a sweeping generalization. The state’s market is so massive that it’s more like a collection of a bunch of very different submarkets which don’t necessarily have too much in common. I find that it’s helpful to have a category that’s associated with each submarket so that you can compare different areas more easily.
Take a look at these groupings and examples:
- Coastal cities like San Francisco and Los Angeles
- Inland cities like San Bernardino, Fresno, and Bakersfield
- Valley cities like San Jose and Chico
- Coastal towns like Eureka and Monterrey
- Inland towns like Mariposa and Atherton
- Desert towns like Indio and Calexico
Understanding the differences between these submarkets is key to finding one that’s right for you and your business. Let’s take a look at each in greater detail.
Coastal cities are where the market is booming.
In places like the Bay Area, San Diego, and LA, there’s no shortage of moneyed buyers or sellers, and property prices have been trending upward quite rapidly over time. Unlike with the east coast’s hot markets, coastal cities in California are rarely at a loss for buildable space, which means there is a constant stream of new constructions. With new constructions come new neighborhoods, and the rise of new neighborhoods creates a feedback loop of even more investment opportunities. And thanks to high-intensity economic activity in these regions, there’s a constant influx of new people who will need somewhere to live.
All of that makes California’s coastal cities especially attractive places to be a real estate investor as there’s enough activity and opportunity in the market for most strategies to work. Furthermore, you won’t be at a loss for excellent contractor talent—nor will it be difficult to find co-investors or business partners. Overall, the housing stock in the area is very new, which also makes for cheaper renovations on average, at least in theory. But what’s the catch?
The catch is that coastal metropolises are very tough places for new investors to get their businesses established. Competition abounds for everything from basic rental properties to contractor hours and even financing. And if you aren’t a highly-capitalized business, you’ll be at a major disadvantage when it comes to bidding for places and securing labor. You’ll need to nibble at the edges to get off the ground, targeting properties that are potentially an hour or more away from downtown.
Inland cities such as Bakersfield, Victorville, San Bernardino, Sacramento, and Stockton are considerably better for beginners than coastal regions. California’s inland cities tend to have real estate markets that are active enough to support most investing strategies, but not so crowded that they make things expensive and difficult. Properties sell and rent for much cheaper than on the coast, and there’s frequently a deluge of foreclosure properties to choose from if you’re interested (not to mention plenty of preforeclosures most of the time).
The inland agglomerations also tend to have a slightly older housing stock than on the coast, which means there are comparatively more opportunities to capture value via repairs and renovations. And contractors are both cheap and plentiful.
Especially in cities like Bakersfield and Stockton, you’ll also find a much more economically diverse set of buyers and sellers than you might on the coasts. The local economies are a bit less energetic, which gives way to a bit less affluence and considerably fewer upmarket opportunities for investment.
On the other hand, you’ll have a lot less competition from bigger fish when it comes to finding attractive deals. And you won’t need to limit yourself to opportunities that are on the edges of the sprawl as even the downtown sections are quite approachable and require minimum financing.
If I had to recommend an area to newer investors, it would be the inland cities.
Valley cities like San Jose, Escondido, and Chico are also attractive places for new real estate investors to launch their businesses.
Typically, the valley cities have relatively new housing stock, wealthy buyers, moderate property prices, and a moderately dynamic market. Expect more upscale properties to linger in the market for a couple of months if they aren’t priced competitively. At the same time, you’ll have no problem selling midmarket and upmarket properties very quickly if you’re willing to drop the price. In contrast, downmarket homes aren’t necessarily going to turn quickly as there may not be enough buyers with enough money to gobble them up.
Valley cities are less attractive for investing in rental properties, especially in the midmarket and upmarket. People in those segments will be looking to buy, and they have options. Rents are also much lower than on the coast. Still, good investors should be able to make most strategies work. The more versatile your investing skill set is, the more you’ll be able to take full advantage of the range of opportunities in valley real estate markets. There should be a few foreclosures and preforeclosures to choose from, with a few more popping up during periods of economic decline.
Don’t expect to resell tired-looking homes just because you priced them at a discount, though. Local buyers aren’t at a loss for fresh and favorably-located homes to purchase.
Finally, a note of caution: Valley regions are where local regulations and community preferences can be both unexpected and annoying. Remember, most of these aren’t major metropolises, and people might want to keep things that way, so don’t be too surprised if some of the locals aren’t too keen on what your business is trying to do, especially if you’re planning on working on high-density housing. Networking and cutting joint deals with local investors are both paramount as local contacts will massively help in greasing the right wheels.
Coastal towns like Berkeley, Eureka, and Monterey are interesting because they’re aggressively mid-market. Though there might be the occasional opportunity to invest in a more expensive property, the main appeal of these regions is that there are roughly enough buyers and sellers to stay busy, but not so many that the activity is too much to keep a comprehensive view of what’s going on. You’ll have some competition from other investors, but for the most part, the biggest challenges will be finding leads and recruiting good contractors.
For new investors, coastal towns seem like a gentle place to start. You’ll have the occasional opportunity to pick up a home at a foreclosure auction, and the housing stock is often old enough to benefit from a facelift before resale. But rental properties aren’t likely to be lucrative investments, and there isn’t enough turnover to justify being a wholesaler. And you might find it difficult to identify potential co-investors as you could potentially be the only real estate business operating in the area.
The final difficulty with coastal towns is that the peculiarities of municipal ordinances and community desires are even more intense than in the valley cities. Getting enmeshed with the community and learning how to navigate its rules and preferences can take some time, and it’s very possible that you won’t be able to generate enough of a deal flow to make it worth your while.
Inland towns such as Mariposa, Atherton, Paradise, Davis, and Red Bluff are a mixed bag, but nothing in the mix is suitable for inexperienced investors.
Extremely affluent areas like Atherton are practically exclusive to upmarket buyers and sellers, but the housing stock is so new and the likely market participants so wealthy that most investing strategies are non-viable. There’s not much turnover in the market either, and there’s no market whatsoever for rentals.
Buyers are likely to be sophisticated, discerning, and uninterested in settling for less than perfection. Sellers will almost never be pressed to close a deal, and there’s no foreclosure activity to speak of. Neighborhood associations and community groups vastly more powerful than you will be quickly alerted to your presence, and they’ll sometimes be inclined to use their influence to exclude your business from operating in the location.
Less affluent inland towns have the problem of attracting new people and sustaining a stable economy. Though there might be some foreclosure activity, you’ll constantly need to be asking yourself if there will be a buyer waiting at the end of your renovation process if you’re thinking of doing a flip. Similarly, you’ll likely encounter a few motivated sellers, often in blighted or otherwise declining areas. On the bright side, these midmarket-dominated towns are rarely aggressive towards new investors.
In closing, I don’t recommend that you try to start your business in these inland municipalities. And once you’re more experienced, it’s also likely that you’ll grow your business faster elsewhere.
Last but not least are the desert towns like Indio, Bishop, and Calexico, all of which are quite inhospitable to most investors by virtue of minimal turnover in the market. The housing stock in desert towns tends to be either new or very old. The main issues here are that the old homes are typically in a poor state of repair and exist in declining towns with few economic prospects for recovery. There might be some foreclosure activity, and prices tend to be on the low side in general.
Rentals are practically a non-starter as most of the desert towns rarely get inflows from people who aren’t originally from there. Additionally, you’ll struggle to find enough leads to keep your deal book full, which makes wholesaling an ill-advised strategy. If you plan on fixing and flipping homes, you’ll have a hard time finding skilled contractor staff, and it’s also a given that construction materials will be pricier and in shorter supply than elsewhere.
The silver lining here is that you won’t have any other investors competing with you in desert towns. That’ll make it quite hard to build your network and find co-investors, though.
Key Market Trends
Now that you’re up to speed on the competitive landscape in California, it’s time to look at a few trends.
The most important trends in the California market right now are:
- Wealthy population outflows from coastal metropolises
- Low-wealth population inflows to inland cities and some valley cities
- Rapidly rising interest rates putting severe pressure on lending
Let’s examine these trends in more detail to really appreciate their implications for your investment strategy.
You may have heard the rumor that many in the Silicon Valley are ditching their overpriced Bay Area domiciles in favor of moving to greener pastures like Austin, Texas. Though I’m of the opinion that this trend has been hyped up quite a bit, it is true that some people are leaving California’s hottest markets.
The practical takeaway is that there are a few more homes for sale on the markets in these localities, and they tend to be on the upscale side. Still, there’s no shortage of buyers, and the alleged exodus over the last few years hasn’t exactly stopped real estate prices from continuing to rise, though the rate is slowing. It’s also unclear how much wealth is actually going to be filtering out of the state over time, as at the moment it appears to be minimal.
The second most important trend is that the prosperous inland cities of California are seeing an influx of people looking to rent and buy homes. Many of those people don’t have the money to buy in the midmarket as it is now, so they’ll be renting for the time being. And while public transportation isn’t a major feature of most of the inland municipalities, it’s important to know that the people most likely to be immigrating are those who are likely to want access to public transit options. That means investors who position themselves in the rental markets of these inland cities are likely to find that real estate in California is a good investment.
The downside of increasing populations in these regions is that you’ll face more competition for downmarket properties, especially at foreclosures.
Rising Interest Rates
As you probably already know, the Federal Reserve plans to keep hiking the core interest rate at which businesses can borrow money in the country. That affects the California real estate market by making average mortgage rates and commercial loan rates rise, which in turn reduces the size of deals that investors can approach and the size of homes that buyers consider to be within their price range. And that’s going to throw a wet blanket on many of California’s sizzling regional markets.
Though the details are in flux from month to month, investors should expect rates to keep rising quite quickly over the next couple of years. Given that the cost to borrow money will also be rising, you may need to adjust your strategy to prioritize the downmarket where many formerly midmarket buyers will soon be looking. Beyond that, rising rates will mean that there are fewer capable buyers.
Eventually, some of the people who bought property during the period of low rates via an adjustable rate mortgage will find that their homes have become unaffordable due to higher rates, and they’ll be looking to sell. Expect a slight uptick in foreclosures. Finally, because home ownership will likely continue to get more expensive, it would make sense to consider investing in midmarket and upmarket rental properties. Why? Because there will be a big population of renters who will want to be comfortable despite not having enough money to purchase a property by themselves.
Getting The Resources Your Business Needs
So, is California real estate a good investment? With all of this information in hand, you have another piece of the puzzle that can help you answer that question. But it can still be hard to get yourself off the ground, especially if you don’t have a background in real estate investing. Thankfully, there’s a way to launch your business and get the training you need to make investment opportunities worthwhile. And it starts by owning an independently owned and operated HomeVestors® franchise.
HomeVestors® franchise owners leverage a collection of proprietary tools and software to make their investments in California real estate absolutely worth it. You’ll learn the tricks of the trade, including how to use home valuation software and different types of marketing campaigns to generate leads. Plus, the HomeVestors® lead generation platform will keep your deal book busy.
As though that weren’t enough, you’ll also network with fellow investors and be mentored by highly experienced people in the industry. You’ll gain access to pre-vetted and high-quality hard money lenders so that your business will never be short of the financing you need to close a deal in California. Becoming a HomeVestors® franchise owner was one of the most important business decisions I ever made, and it answered the question of is California real estate a good investment with a resounding “yes!”
Want to learn more about the California real estate market? Or perhaps you’re interested in launching a new real estate investing business in the state? Request information about becoming a HomeVestors® franchise owner today.