Best
rental properties for investors in Orange County, California
I created this web page
for both aspiring landlords and experienced investors, who wish to
increase their wealth through investing in real estate. There are many factors to
consider when purchasing a rental/investment property. Price is only one factor. Some of the others include
additional expenses like taxes, HOA dues, and maintenance. The
purchase price alone can be deceiving if the other expenses are high
enough that they eat up a lot of your profits. Also, your experience
level as a landlord. Are you just starting out? Have you owned and
operated a rental property before? Are you an experienced landlord?
The other consideration is appreciation and future re-sale. Is the
property in a desirable location with a good school district? Is
it upgraded? Is it close to a major employment area? This page will
address many of these questions.
What is the best
type of property based on your experience as a landlord?
Let's get right to it and
state which type of property is best for you, based on your experience
as a landlord. If you are just starting out, I recommend starting with
a condo. They are relatively inexpensive and much of the maintenance
is the responsibility of the home owner's association (HOA). A single-family home is also a good choice. It is also the most popular home type to
rent. Income or multi-unit properties are usually purchased by more experienced
landlords and are often professionally managed. See details below. There are
also links to my specialty pages and links for suggested units for sale for each
property type.
Beginner
- Just starting out
Experienced
Very
experienced
For newly
aspiring landlords, the best property to start off with is a
condo. Purchase cost is the lowest and maintenance is at a
minimum with a condo. Amenities like a pool, tennis court, etc,
are taken care of by the association. The condo should ideally
have at least 2 bedrooms and 2 baths (avoid 1-bedroom units). Look for one with lower HOA dues in a desirable
community.
For the
more experienced landlord, the best rental property, hands down,
is a single-family home. It should have a minimum of 3 bedrooms and 2
baths. The home should be ideally located in a city with low taxes and great amenities like
parks. Also, look for excellent schools, shopping, low crime, etc. A
single family will be the most desirable home for the majority
of people looking for a rental, so you will get the biggest
slice of the rental pie.
For very
experienced landlords with adequate capital, nothing beats an
income property like a triplex, fourplex, or commercial
property (5 or more units). Besides great economies of scale,
you will also get the best cash flow
with a multi-unit property. Best bets are properties that have
been well maintained and have a minimum of 2 bedrooms and 1 bath
per unit. Also look for separately metered utilities (gas
and electric). Having a garage or outdoor space for each unit is a
bonus and will gather higher rent.
* For all of the property
types I used selected cities with lower taxes, reasonable price ranges,
best minimums of beds and baths, and lower HOA dues. Suggested
properties are good starting points, but I will be happy to set up a
custom search for you based on your individual criteria.
Purchase price
and rental rates -
The bottom line
Regardless of how you spin
it, purchase price and rental rates are the bottom line for most rental property
investors. A smart investor knows how much they are qualified for
and what will work within their budget. They also want to know which
cities command the best rental rates. The net income of a property
divided by the purchase price, determines the CAP
Rate. This is a profitability index used by many investors.
The total monthly rent minus total monthly expenses, also determines
your Cash
Flow, and whether it will be positive or negative. Check out the
graphs below to see which cities in Orange County have the lowest
and highest purchase prices and rental rates.
Where
are the best priced cities or areas for rental homes in Orange
County? Check my sales statistics page here
What are some of the
characteristics of a good
rental property?
A good rental property
will have many of the same characteristics as any home you would
consider to live in yourself. You will get better rents if your property is
in a great neighborhood with a good location. Also, lots of upgrades,
a good school district, low
crime area, etc.
The other factor is cash flow/profitability and appreciation. These are impacted
when a property has high taxes, Mello Roos, high HOA dues, and/or lots
of deferred maintenance.
Location,
location, location
- Some of the characteristics of a property
with a good location include: a property with a view, away
from a noisy street, or close to shopping. Also. close enough to a freeway,
close to the beach, or walking distance to schools, Location is
important when you chose a rental property.
Upgrades
- Tenants like upgrades as much as you do, so all things being
equal, choose to buy an upgraded property over one that is from the
70s or 80s and largely in original condition. A house with
stainless steel appliances and granite counters, upgraded floors,
etc, will rent easier and rent faster.
Well
maintained
- This applies especially to a home or income
property that is older (20, 30, 40 or more years old). Many of
these properties may have a low purchase cost, but have lots of
deferred maintenance. The roof, appliances, electrical, plumbing,
windows, exposed foundation, fences, etc should all be carefully
checked out by a professional property inspector prior to closing if you hope to avoid any unpleasant (and costly) surprises in the
future.
Low
property tax rate and low to no Mello Roos
- These assessments
add to your cost of ownership and reduce your profitability. The
tax rate is often determined within a city. As an example, one city may
have a 1% annual rate and the city next door, a 1.3% rate. On a
$600,000 home, the annual taxes due would be $6000 vs $7800.
Low
to no HOA dues -
All condos and some single-family home
neighborhoods are within an HOA. These dues are often $300 or
much more per month, impacting your cash flow. Many communities
may also have additional HOAs (for example, one for the city and
one for the complex). Look for homes with lower HOA dues if
possible.
Good
school district
- Tenants want their children to attend
top-rated schools, so buying a property in a good school district
is a good investment. It is a good factor for re-sale also. You
can find lots of information on Orange County schools here.
Low
crime area
- Tenants do not want to live in a crime-ridden
neighborhood, Cities with low crime rates will be more desirable for
tenants and will command higher rents. There are many resources available on-line to
check crime statistics for an area you are considering for
purchase, Buyers are urged to do
their own due diligence and check crime statistics
carefully.
Job
market
- Most tenants prefer to rent a property that is closer
to their source of employment. If your rental property is too far
from major employment areas or if it is too far from a major
freeway, your property will command less rent.
Resilient
floors over carpeting - Flooring takes a beating in a
rental
property and nothing has more wear and tear than wall-to-wall carpeting. You can
often buy a rental property that has wood, stone, or laminate
floors. Else, you might consider changing out carpeting if it
came with your home purchase, as it is a high maintenance
item in a rental property. Best bets are laminate, stone, and
engineered hardwood. All of these should last for many years,
Which
OC cities have the lowest and highest property tax rates?
Property
taxes and Mello Roos assessments can greatly impact your bottom
line, so they are important factors to consider when buying a
rental. Click here to see which Orange County cities have the highest and
lowest property tax rates
Condos vs Single
Family homes vs Income Properties
What are some of the
advantages/disadvantages of three types of rental properties?. Read
about them here.
Rental
Factor
Condos
Single Family Homes
Income properties (2
to 4 units)
Purchase cost of
property *
Condos
are usually the lowest cost property category to purchase
SFRs are
the middle ground, costing from $500K to as high as $1 million
for typical rental properties.
Income
properties are usually the highest cost category of rental
properties, costing from $700K to $2 million or more.
Property taxes
Varies by city and
location, Usually 1% to as high as 2% or more.
Varies by city and
location. Usually 1% to as high as 2% or more.
Since most Income
properties are in older areas, property taxes are usually
low, around 1 % of purchase price.
Mello Roos
**
Many newer condo
complexes may have Mello Roos. The Mello Roos in older areas may
be expiring, so check to see how much is remaining.
Many newer SFR
complexes may have Mello Roos. The Mello Roos in older areas may
be expiring, so check to see how much is remaining.
Never have Mello Roos
HOA dues
All
condo and town home complexes have HOA dues and they can be very
high; typically, $300 or more per month, plus the dues can
increase over time.
Some
newer SFRs have HOA dues but they are usually substantially
lower than HOA dues for condo associations. Many other SFRs are
completely free from HOA dues
Rarely if ever have
any kind of HOA but some income properties do have them.
Yard
Always common areas
except for certain town homes that may have a patio or small
yard
Most SFRs have back
yards, so a landlord will usually have to pay for bi-weekly or
monthly gardening.
Some income properties
will have a private yard area or patio for each unit. If they do have individual or common yards, landlords may
have to pay for occasional gardening services.
Pool
Many condo
associations will have an association pool, spa, and other
common amenities, so no additional cost to landlords.
Many SFR rental
properties can be bought with a private pool In most cases, landlords
will pay for regular pool
maintenance. Other SFRs (a
smaller number) may have a community pool if they are
in an association.
Some (although very
few) Income properties have a private pool for all of the
units. If an Income property does have a pool, the landlord will
have to pay for regular pool maintenance.
Insurance
Condos have the lowest
cost for homeowner's insurance. Since condo units are attached, fire
insurance is always paid for through the HOA.
For an SFR, the
homeowner/landlord will need to purchase full homeowner's
insurance.
For income properties,
there is some benefit of the economy of
scale, since you insure the entire building instead of each
unit.
Maintenance
Condos generally have
the lowest cost of maintenance. Many associations cover much of
the exterior of the unit, including roofs and garages in some
cases.
For an SFR, the
landlord will have to maintain the interior and the exterior of
the property.
For an Income
property, the landlord will have to maintain the interior and
the exterior of the property.
Space for family or
room mates
Condos may have the
least space for a family. Typically, 2 bedrooms, 2 baths,
modest square footage, and little to no private yard. Some town homes may have an additional bed and bath, or
a yard/patio.
There is no question
that an SFR has the best space for a family. Usually 3 or
more bedrooms, several bathrooms, and full back yard. Also,
square
footage that can go from modest (1,200 to 1,700) to
very generous (3,000, 4,000 or larger square footage).
Income properties may
have 2 or sometimes 3 bedrooms, but living space in each unit is
usually smaller square footage. They are often not the best
units for growing families or roommates who are looking for a
lot of space.
Property manager,
experience needed to manage
Property
manager optional, but many landlords choose to manage the
property themselves. Easiest property type to manage.
Property
manager optional, but many landlords choose to manage the
property themselves. Fairly easy to manage.
Many
owners of income properties choose to hire a property manager
because of the multiple units and more frequent vacancies. Only for experienced landlords.
Turnover, vacancies
Most
condos are leased for a year at a time, but many renters may
out-grow a condo sooner than an SFR. This may result in higher vacancy
rates than an SFR.
SFRs are
usually leased out for a year at a time. Vacancies may be lower
because of the extra space and room for a family to grow. SFRs
may have the lowest vacancy rates.
Highest
possible vacancy rates because of multiple units. Lease
contracts for each unit can vary, so tenants may be coming and
going.
Location
Condos
can be found in almost all parts of Orange County, CA. There are
some areas that have none, like the canyon areas and certain
communities.
Found in
all parts of Orange County without exception.
Income
properties are found only in North Orange County and beach
communities. Master planned communities (prevalent in South
Orange County) usually don't have any income properties.
To
summarize
Advantages
Lowest
cost to purchase, lowest cost of maintenance and insurance, easy
to manage. Also, easy to upgrade because of smaller space. May be best
type of rental property for newer or inexperienced landlords.
Most
available space, most beds and baths, large back yards, low to
no HOA dues, most desirable rental for families, roommates, or
renters who appreciate privacy and space.
May have
best cash flow because of multiple units. Economies of scale for
repair, maintenance, insurance, etc. No Mello Roos or HOA dues.
Disadvantages
Highest
HOA dues, smallest square footage and least number of beds and
baths. Also, least amount of privacy. Not as desirable as a rental for growing
families.
Higher
cost to purchase, cost of monthly upkeep (Gardening, pool,
maintenance), Landlords need to maintain the interior and
exterior of the building,
Highest
cost to purchase, less space, usually no back yard. Many renters
may not like the stigma of living in a duplex, triplex,
etc Property manager often required. Hardest property type
to re-sell. Best only for experienced landlords.
*
Costs are averages of Orange County
real estate prices, as of 2018
Upgrading
your rental properties using a 1031 exchange
What is a 1031
exchange? - With IRC
Section 1031 of the US tax law, a 1031
exchange allows an investor to sell a rental property and
re-invest the proceeds into a new property (or multiple properties).
They then defer paying capital gains taxes on any profit they may have
made on the sale of their current property. The 1031 exchange is
typically handled during escrow through a 1031 intermediary. They
hold the funds before they are re-invested. With this type of
exchange, you have 45 days to identify one or more potential
replacement properties (although you do not have to purchase any of
these). You then have 120 days (6 months) to close on a replacement. The new
property must be equal to or greater in value. If your new property is
lower in value than what you are selling, you may have to pay some
capital gains taxes on the difference in value (called
"boot"). I can recommend an excellent 1031 facilitator to
you when you are ready to upgrade your rental.
Is a private
swimming pool a good idea?
I have been asked many
times if an investor/client should buy an SFR rental property with a
swimming pool. I would say NO in most cases, primarily because of the
extra cost and liability, However, there are also some advantages to
having a rental home with a pool. If you decide to buy a property with
a pool or if you already own a home that has a pool and you are planning
to rent it out, I would advise that you simply take several steps to
ensure safety and least liability:
Install a pool safety
fence
Install door alarms on
all doors that can lead to the pool
Lock all outside
access gates and ask tenants to keep them locked
Have tenants sign the
C.A.R. disclosure for pools (form PHSA, Pool, Hot Tub, and Spa
Addendum) as part of the lease agreement
Advantages
Pool homes are often very
desirable to tenants
Rental homes with pools can
command a higher monthly rent
Private pools can often add
extra re-sale value when you decide to sell the property
Disadvantages
Cost of on-going maintenance -
Most landlords will have to pay for bi-weekly or monthly
pool maintenance.
Cost of additional equipment
like a pool fence, door alarms, etc
Liability - Possible injury or
drowning of small children, tenants, or guests
Higher insurance cost - Some
insurance companies may charge a higher rate for a rental
home with a pool
More paperwork - Usually there
will be extra forms to complete
An additional
web page about investing in real estate. Fundamentals, game
plans, where to start, etc
I will be happy to help you find your perfect
rental property in Orange County! Call me to help you, whether you
are a beginner or an experienced investor. I can also help you lease your home and find great
tenants for you! I can also help you with a 1031 exchange and with
selling your current property. Do you have further questions? Call me today!
