The Bloom is not off the Rose. Orange County’s homebuying binge continued in February with sales up 13% and prices increasing 9.6% over 12 months to a record high according to the Case-Shiller Index. These price increases zoomed through the Spring of 2021. While some have accurately predicted future occurrences, few have predicted the future with an associated timeline. The question we try to answer in this Blog is, “Is it still a good time to buy an investment property?” If you are a Real Estate Investor (REI) and if 1 or all 10 of the below factors apply to you, the time is still right to buy:
  1. Opportunity: The California Legislature is on a density binge. The State Government determined that our Golden State needs more housing. While the News documents some resident’s exodus from California, the fact remains that rental and fee ownership housing in California is still in high demand. Recent Laws have passed making Accessory Dwelling Units (ADU’s) and Lot Splits easier to obtain. These additional residential units provide supplemental rental income that facilitates improved cash flows.
  2. Diversification: Volatile Wall Street investments are reaching new highs. Diversification into real estate provides relief when stocks retreat and is a trustworthy way to build and maintain wealth. Prudent investors should take some profits from the Stock Market and move into other asset classes. Real Estate Equity and Debt should be a substantial part of any investment portfolio.
  3. Affordability: California Association of Realtors (C.A.R.)’s Housing Affordability Index (HAI) measures the percentage of households that can afford to purchase a median-priced, single-family home in California. The index is considered the most fundamental measure of housing well-being for home buyers in the state. Currently the Index sits at 27% which is 10% over the estimated threshold where price increases start to diminish.
  4. Positive Cash Flow and Increasing Rents: Historically, low interest rate loans create enhanced opportunities for increased cash flow from a real estate investment. The low housing supply and the desire of many to try out a destination before committing to a purchase have led to a rental boom that parallels that of the sales market. These increasing rents and subsequent higher yields make investment properties more attractive.
  5. Supply and Demand Imbalance: California’s housing shortage will not be solved overnight. When demand outstrips supply, prices will continue to go up.
  6. Yield: Everybody needs cash flow. Investment properties in CA generally do not pencil at the minimum down payment, however if larger down payments are made with money from Stock sales, cash flow becomes positive.
  7. Options in Life: A rental property may be a rental today but a principal residence in the future. As Real Estate Investors age and evaluate 2nd Homes and other investments, a portfolio of properties provides living options and maybe a place for kids to live to later in life.
  8. Self-Directed IRA Availability: IRA funds can be withdrawn without penalty when the account holder is 59 ½ years old. Appreciated gains from these self-directed IRA investments are a great source for a down payment.
  9. Control: A rental property can sometimes be acquired for control vs. the absolute yield. While the old saying is true, “You can’t choose your neighbors”, an REI can sometimes purchase a neighboring property as a rental to ensure that unruly VRBO or AirBnB clientele don’t create havoc.
  10. Updated Housing Desirability: Whether the plan is to Fix and Rent or Fix and Flip, a plan to upgrade a property usually provides a 3:1 multiplier on the amount spent for the upgrade. Hence, a construction spend of $100k should bring $300k in additional revenue on the sale.
While we understand that California housing in some areas is at all time highs, the fundamentals mentioned above do not indicate a bubble or imbalance that would cause a price collapse. Should you be thinking of acquiring a rental property or pulling money out of one property to purchase another, please consider one of the many fast and professional loan programs provided by Mortgage Vintage. Please send us your loan scenario and we will respond the same day.