Fix and Rent: A Winning Strategy for a Strong California Rental Market

The cliche about real estate is that there are only three things that matter: location, location, and location. It’s true that location is often the most important factor and should be a major consideration when you’re setting out to make an investment. But timing is often just as important as location.

For example, if you started building a new subdivision right before the market crashed, you might have had a rough go. But if you bought upscale apartments right before rent control guidelines were eased, you probably got a great return on your investment. Understanding where the market is going to go is key to making the most of your hard money loan. Right now, the California rental industry is booming so rentals look to be a great investment.

Why the California Rental Market Is Going Up

In 2006, California had a homeownership rate of over 60%, an all-time high. That meant that only 40% of residents (approximately) were living in rentals. That number took a plunge in the following years and has now been locked below 55% for nearly a decade. That might not seem like a lot in terms of percentages, but in a state the size of California, that’s nearly two million more people suddenly moving into the rental market.

This has had a dramatic impact on availability. Of the five metro regions with the lowest vacancy rates in America, three are in California (Sacramento, Ventura County, and Riverside/San Bernadino). In fact, vacancy averages across much of the nation are close to 7%. In California, it is 4.5%. This narrowing of the market has been a boon for people with rooms to rent and for landlords. Those looking for a place to rent have less ability to pick and choose and so rates can reflect that demand is outstripping supply.

Rents have been going up as a result. Of the five metro areas with the highest rate changes, it’s no coincidence that three of them are in California (San Jose, San Francisco, Oakland/East Bay). This is a great time for landlords, and since California is expected to continue seeing a strong rental economy, this could be a great time to get in with a hard money loan.

Fix and Flip: Rent or Sell?

If you’ve recently purchased a distressed property, you might be wondering if you should sell after fixing it up or hang onto it as a rental. Although each localized market has its own variables, it’s reasonable to assume that, across much of California, particularly in Southern California, holding and renting might be your best option. There are a couple of reasons for that.

First, the housing market continues to improve, but it still has a bit to go before reaching its high point. Holding onto your property for a few more years could help you see a greater profit from your investment. The incredibly low vacancy rates also mean that you can charge a higher rent than you’d expect and make more money back.

Second, this “fix and hold” strategy is one that a lot of experts recommend, especially in areas with low vacancy rates. Flipping it might provide a more immediate return, but as a long-term strategy, holding onto the property and renting it out could provide much larger returns. Many areas in California see returns of up to 10% for residential rentals over the long-term.

Whether you are buying townhouses, an apartment building, or a single-family home to hold and rent, now is a great time to invest. A hard money loan can help get you there. A hard money loan takes the value of your property and your ideas into account. You might wait months for an approval with a traditional lender, but a hard money lender understands the need to work quickly to get into the market while it’s hot. Remember that timing, like location, is of the essence.

Your real estate assets are your best investments for the future. At Socotra Capital, we’re proud to be the premier direct hard money lender for California real estate. Contact us today to learn more about how we can help.

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