With rent control across the state and tenant protections firmly in place, California real estate investing comes with a lot of risks. Luckily, there are also some great rewards that offset those risks.
Santa Rosa is a unique market. People love living in this area, and that’s why it’s so easy to rent out a property. You can have a lot of success as an investor in San Jose and the surrounding California communities. But, you can also run into trouble.
When you’re investing in California, you need to have a lot of experience in the local markets or some great partners who will help you have a successful, low-risk experience.
As long as you’re prepared for the risks and rewards of investing here, you can navigate the laws, regulations, local neighborhoods, and tenant demands to have a very successful experience.
Let’s take a closer look at some of the risks and rewards that can be found when you invest in California real estate, specifically in a market like Santa Rosa.
Investing Rewards. Why Buy Rental Property in Santa Rosa?
Let’s start with the rewards of investing in real estate here in Santa Rosa. For starters, it’s a great community with a lot of opportunities for growth. The quality of life is enviable. You should buy a rental property in Santa Rosa for some of these reasons.
Enjoy Rising Property Values
The sales market over the last few years has been hard to keep up with. After an immediate drop in prices and demand during the worst of the pandemic, home buying suddenly took on a sense of urgency. Demand grew, inventory shrunk, and prices rose by a lot.
Now, there’s still a lot of demand and prices are still very high, but interest rates are also rising. Unless you’re paying in cash, you’re going to spend a bit more to acquire a property through traditional financing.
The Santa Rosa market is still competitive. Home values are high, and local real estate has been appreciating steadily over the last five years. This is a reward, especially to the investors who are committed to holding their assets for the long term. You can expect some solid appreciation, and you’ll find that your property is worth more year after year. By the time you’re ready to sell, your mortgage will likely be almost paid off. That’s going to give you a nice profit margin.
You’ll have to spend a little more in this market. But, the appreciation and the rising home values will make your investment worth the money you’re spending.
Santa Rosa homes are always going to be worth a lot of money. Even as the real estate market goes up and down, assets in California are always worth holding onto.
Demand is Still Higher than Supply
Another good reason to invest in Santa Rosa is that the rental market is just as competitive as the sales market. Perhaps even more competitive. Good rental housing is in high demand. Always. And the inventory is usually tight in this part of California. You still need to offer an attractive, well-maintained home in order to attract tenants. However, the market as it stands today has created a situation where residents are competing for your property.
What about the tax benefits? This is a major reward when it comes to investing in California real estate. Selling a property requires you to pay capital gains taxes unless you reinvest your earnings through a 1031 exchange. Buying a property immediately provides you with tax benefits. You can deduct several expenses associated with owning an investment property, including:
- Property taxes
- Mortgage interest
- Property management fees
- Property insurance
- Maintenance costs
- Additional professional service fees, like insurance or accounting or legal advice
These tax benefits will help you offset the income you’re required to report on your taxes.
Leveraging Your Santa Rosa Property
Owning real estate in California is lucrative. Depending on your investment goals, you’ll find you can leverage what you’ve purchased in order to buy additional real estate, conduct a 1031 exchange when you’re ready to buy a different property, or get some cash out of your property when you need it. A valuable asset here put you in a favorable position when you’re bargaining, applying for a loan, or leveraging other people’s money to finance your next investment.
Active, Qualified Tenant Pool
Right now, you don’t have to worry about finding a tenant. Nearly half (46 percent) of the households in Santa Rosa are occupied by tenants who rent. Rents are, on average, above $2,000 a month, and the vacancy rate is hovering at around 1.6 percent. You have a strong pool of tenants in Santa Rosa, and that’s going to be a huge reward when it comes to investing in this market.
Investing Risks. What You Need to Know about Santa Rosa Properties
Now that you’re aware of all the great reasons to invest in California real estate, what should you be worried about? There are always risks with any investment you make. You could pour all of your money into the stock market, for example, only to have it crash days before you considered cashing out.
The real estate investment risks are a little different. You’re dealing with tenants, and even good tenants can be unpredictable. You’re also forced to operate within some strict laws and legal requirements. Here’s what you need to know.
You’ll Need Money
The average home price in Santa Rosa right now hovers around $700,000.
When you think about when you can buy for the same amount of money in other markets, you have to be financially willing to risk a large amount of money on the investment you make in Santa Rosa. California is not a cheap place to own property. Plan your strategy for financing your purchase. You’ll need a sizable down payment if you’re hoping to get a conventional mortgage. You’ll need solid credit and financials that lead lenders to believe offering a mortgage to you is a good business decision. Other types of financing will come with their own levels of risk. Have a financial plan before you buy.
California’s Tenant-Friendly Rental Laws
California is well-known for the laws that protect tenants. There is statewide rent control in place for many properties, although there are also exemptions – most notably for single-family rental homes. There are also just cause eviction protections in place, which means you need a legally appropriate reason to evict a tenant or not renew a lease agreement. Tenants in California enjoyed a longer eviction moratorium than tenants in other states. There are laws that govern Section 8 tenants, fair housing laws that are stricter than federal fair housing laws, and security deposit requirements that are detailed and fiercely enforced by the courts.
Be prepared to understand the rental laws intimately if you want to avoid making an expensive legal mistake. Tenant screening is critical. You want to make sure you have residents who are financially prepared to pay rent every month.
Rental Property Expenses
We talked about the price points for the property being much higher in California than in other markets. There’s also the high cost of living in Santa Rosa and throughout Sonoma County. You’ll pay more for everything, including maintenance, repairs, professional services like property management and accounting, and insurance. Expect to budget more for everything than you would in other markets.
This is a risk because if you find yourself unprepared to meet the cost of keeping your property habitable, you could lose the investment. A long vacancy is unlikely in Santa Rosa, but if your property isn’t attractive to good tenants or you’re charging too much to attract anyone, you’re going to absorb some pretty insurmountable losses. This is a risk to consider when you’re looking at where you are financially. Make sure you’re prepared to pay for an investment that may not make you positive cash flow for several years.
Additional Considerations for Santa Rosa Real Estate Investors
Remember that just owning real estate in California means you’re making money. You may not see it in your day-to-day accounting, but the earnings and the value are increasing steadily, even if you can’t see it. Focusing only on positive cash flow and instant returns is risky. You’ll get discouraged and you won’t feel like you’ve made a good investment.
Network with other local investors. It can be a competitive industry, but you’ll also find that you can learn a lot. Not only can you learn how to be successful in a wild market like this one, you can also learn from the mistakes of more experienced investors.
Finally, invest in good property management. Even if you’re an experienced investor and you’ve bought and sold investment homes in California before, the market has shifted and the economic conditions are changing every day. This market isn’t the market we had a year ago or five years ago or 10 years ago. You need the professional resources and expertise of property managers who can help you make your investments successful.
If you’d like to talk through some of these risks and rewards, please reach out to us at Prestige Real Estate & Property Management. We manage homes in Sonoma County, including Santa Rosa, Windsor, Sebastopol, Petaluma, and Rohnert Park.