Rising rents boost the bottom line, but California has some of the smallest returns for landlords
Are you dreaming about buying a house, leasing it out and pocketing some extra money every month? Well, let this might be the slap to wake you up.
California’s rental housing market has become a bit more challenging than the early evening commute in Los Angeles.
Blame higher mortgage rates, which are a blessing – and a curse – in the rental housing market.
As mortgage rates climbed during the past year, more consumers excited to buy a home are now forced to rent. So, the demand for rental homes remains solid and rents have increased in most markets (see table).
But the bottom line – the average annual gross yield on the investment (annualized gross rent income divided by purchase price) – for rental homes in California remains below the national average, according to ATTOM Data. And in some of the highest-priced regions, the annual gross yield is less than 5%.
CHEAPER HOMES GENERATE BIGGER RETURNS
Riverside and Bakersfield boast the best annual gross yield at 7.5% in California, followed by Fresno. But that figure only matches the national average.
Those cities benefit from being among the most affordable housing markets in the state while also enjoying double-digit growth in rental rates. Bakersfield’s 25% rental rate increase was the second-largest among the 12 markets reviewed, behind only Orange County at 33%.
The Bay Area and Southern California have the highest rental rates, including a state-leading $5,200 per month in San Francisco, but they also have the priciest homes.
Now, as home prices decline – they are down about 18% from the peak in May 2022, according to the California Association – and rents increase, the annual gross yield will improve.
In fact, three of the five biggest percentage gains nationwide were in California, led by Orange County at 43% compared to a year ago. San Mateo and San Francisco counties finished at 42% and 38%, respectively. Better but their bottom line figures remain below 5%.
And just down the road in Santa Clara County (San Jose), the annual gross yield was 3.3%, the lowest in the nation.
Keep in mind …
The ATTOM report does not include other costs, such as insurance, maintenance and property tax. All have significantly increased during the past three years. Plus, interest rates have doubled during the past year, another hefty cost for landlords with a loan on a rental property.
FLORIDA SHINES BRIGHT FOR LANDLORDS
Quite simply, California – and the West overall – is a much different market compared to the rest of the nation, especially the South with hefty rents and smaller home prices. Florida has three of the five best-performing rental markets, with Vero Beach boasting a nation-leading 15% yield, according to ATTOM.
Falling prices and rising rents are “benefiting the growing number of investors around the U.S. who rent out single-family properties,” says Rob Barber, CEO of ATOM. “Rents for single-family homes are growing while prices have flattened out, which has helped boost yields for landlords for the first time in at least several years.”
Better but not great in the Golden State.
Average rent for a three-bedroom house and annual gross yield
|County||Rent 2023||Rent 2022||% gain/drop||Annual gross yield|