Dreaming about buying an affordable house, becoming a landlord and watching the rent roll in?
Well, the dream starts – and ends – in New York City; Atlantic City, N.J.; or Birmingham and Mobile, Ala.
In California, it’s a lot more toss and turn for rental property owners.
Only 10 of 12 regions in the state exceeded or even matched the average gross rental yield of 7.5% nationwide during the first quarter of the year, according to ATTOM Data. (The gross rental yield is based on the annualized median gross rent divided by the median purchase price.)
High home prices – and, to some extent, higher mortgage rates – coupled with smaller-than-expected increases in rent are leaving owners of rental homes struggling in California, at least compared to many other markets in the U.S. Single-family rental rates were less than the inflation rate in January, according to Yardi Matrix.
Only Riverside at 8.7% and Bakersfield’s 7.5% matched the national average, thanks to more affordable home prices and rising rents. Riverside is the 75th best rental market in the U.S., the only region in the state to crack the top 100 of the 361-cities list.
NO QUICK FIX
The figure is based on buyers who entered the market during the first quarter, when they often had to pay more while rents were stagnant – and even slipped slightly in a few areas. Some of the worst-performing rental markets were in California, including San Jose (No. 361, also known as last place), San Francisco (No. 348) and Orange County (No. 346).
“The fallout from rising single-family home values is proving beneficial for longtime landlords, as increasing property prices drive rents higher,” says ATTOM CEO Rob Barber. “However, for new investors entering the rental market, conditions are becoming more challenging nationwide. Unless home prices stabilize or more properties become available for sale, this trend is likely to persist in the near future.”
Of course, consumers dreaming of owning a rental home – or maybe putting together a small portfolio of properties – should consider the gross rental yield, but also alternative investments, from a CD to the stock market, which has been volatile during the past several weeks.
Maintenance – often a decent expense for older homes – and property taxes can cut into the return on the investment. The ATTOM report is based on the purchase price and the median rental rate.
There is one more consideration for potential rental property owners – the value of their home could increase, generating a nifty payday down the road. But price gains have slowed in recent months, with a modest 2.8% increase in February compared to a year ago, according to the California Association of Realtors.
Lower-rent areas generate larger returns for landlords
| City | Gross yield | % change from a year ago |
|---|---|---|
| Bakersfield | 7.5% | +0.9% |
| Fresno | 6.5% | -6.0% |
| Los Angeles | 6.1% | -13.7% |
| Orange County | 4.7% | -6.0% |
| Riverside | 8.7% | -8.1% |
| Sacramento | 5.9% | +2.4% |
| San Diego | 5.0% | -8.2% |
| San Francisco | 4.4% | +12.6% |
| San Jose | 2.9% | +0.2% |
| San Luis Obispo | 4.3% | -7.1% |
| Santa Barbara | 7.4% | -26.1% |
| Sonoma County | 5.1% | +6.8% |
Source: ATTOM Data
Buy and hold, for a very long time
The California dream of buying a home often demands a lot of dollar-pinching (pennies are so 2024), financial planning and even some good luck on timing.
So, when consumers have saved enough for a down payment to purchase, they embrace another strategy from the stock market – buy and hold. And hold for a very long time.
California has the longest-tenured homeownership rates in the nation, with Los Angeles owners staying an average of 19.4 years in 2024, according to Redfin. The figure is almost eight years longer than the national average of 11.8 years.
San Jose homeowners remain the second-longest at 18.3 years, while San Francisco, San Diego and Riverside also had longer tenure homeowners than the national average.
The Sacramento region – from the capital city to Davis, Roseville-Rocklin and El Dorado Hills – was the only region in the state lower than the national average at 11.7 years (see table, below).
ATTOM Data has also shared similar tenure rates for homeowners in California.
HIGH MORTGAGE RATES AND LOW PROPERTY TAXES SWAY OWNERS TO STAY
Many Californians – and homeowners nationwide – are staying put longer because of their 4% and lower mortgage rates, a huge benefit for owners who save hundreds and even thousands of dollars every month. The current mortgage rate is about 7%, the highest in more than 20 years, according to Freddie Mac.
California homeowners also enjoy lower property rates thanks to Proposition 13. The proposition, approved by voters in 1978, mandates that owners pay property taxes of 1% of the assessed value of their home, and limits annual tax increases.
While homeowners enjoy the benefits of Prop 13, and rather low property taxes compared to many other states, home-shoppers must endure an ongoing shortage of homes.
“It’s a problem for young people trying to break into the state’s notoriously expensive housing market,” says Redfin senior economist Sheharyar. “Tight inventory only pushes home prices up more and adds to the generational homeownership divide.”
In 2019, voters approved Proposition 19, which allows older homeowners to keep their low tax rates when they move. So far, the proposition – and the ability for those older homeowners to transfer their low property tax rate to a new property – has done little to generate more sales.
Apparently, lower mortgage rates are a better incentive to enjoy home sweet home.
Home sweet home
| City | Avg. years of owning the home in 2024 | Compared to 2014 |
|---|---|---|
| Los Angeles | 19.4 | 14.5 |
| Riverside | 12.1 | 11.4 |
| Sacramento | 11.7 | 11.8 |
| San Diego | 14.7 | 12.8 |
| San Francisco | 16.8 | 12.6 |
| San Jose | 18.3 | 13.7 |
Source: Redfin
A critical housing crunch for the lowest-income Californians
Finding an affordable apartment for extremely low-income Californians is tough.
The state has about 24 affordable apartments for every 100 extremely low-income households, creating a huge demand for the hard-to-find units, according to the National Low Income Housing Coalition. San Diego and Los Angeles have among the fewest affordable apartments in the nation, at 16 and 21 units for every 100 extremely low-income residents.
Many affordable apartment communities, from San Diego to Eureka, have long waiting lists, from a couple of years to several years.
The state has about 1.2 million extremely low-income households in California, earning less than 30% of the area median income for their respective counties.
MARKET-RATE APARTMENTS ARE A HIGH-PRICED OPTION
With the critical shortage of affordable apartments, many extremely low-income households must live in market-rate properties. Almost four of five (78%) of these households spend at least half of their income on rent.
Affordable apartment communities are built with low-income housing tax credits, giving developer-owners financial incentives for the projects.
Residents must meet income requirements, earning anywhere from 30% to 80% of the area median income. In some cases, residents pay several hundred dollars for apartments that would cost three to four times more.
