In the second article of a two part series, imagine you need to invest in a property RIGHT NOW! Maybe you’re coming out of a 1031 exchange, maybe it’s for other tax purposes, OR maybe it’s because you have $500k burning a hole in your pocket – whatever. Right now, does it make good economic sense to buy an investment property in the East Bay? Or does it make more sense to start looking elsewhere?
This two-part article is a quick and dirty investment analysis of rental property in the East Bay, versus other up-and-coming California cities. In part two, we present some quick and dirty analysis of a handful of properties in different Cali markets.
Quick recap from the previous post: Essentially, we used some forecasting data available from the California Department of Finance to target particular areas within California that still seem to have expansion potential. The Bay Area was not one such area, according to this data.
REAL ESTATE INVESTING 101
First, we’re going to review a key metric that is used to rank the desirability of investment properties, the Capitalization Rate, or Cap Rate. In essence, it’s the percentage rate you get when you divide the net operating income (gross income minus operating expenses) by the price paid for the building. If you assume that you bought for all cash, Capitalization Rate equals return on investment. If you were investing in real estate during the last recession (2008-2012), cap rates in the 10-20% range were common. Nowadays, rising purchase prices mean that Bay Area cap rates have fallen drastically:
Cap Rate = (Gross Income – Operating Expenses) / Purchase Price
ANALYSIS: BAY AREA V. EVERYONE
The list on below includes active listings for multifamily properties from the cities cited above. We assume an all-cash buy. We’ve attempted to locate the most lucrative (i.e., highest cap rate) multifamily properties in each of the areas we assess. We eliminated properties with rental numbers that were not internally consistent, or seemed inaccurate (i.e., net income higher than gross income). Then, we added a few extra numbers for reference, including what the population growth forecasts are like for that county, and the average household income in the surrounding area. Between the cap rate, population growth figures, and average household income, you should get a pretty good base foundational analysis for a property that is in a region outside your area. Of course, you shouldn’t substitute these numbers for a in-person viewing of a property!
Income Properties: Bay Area vs. Beyond
| Annual Gross Income | Net Operating Income | Cap | List Price | City | County | Units | Zip Code | Average Household Income | Population Growth | ||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2025 | ||||||||||
| 1 | $24,480 | $24,235 | 11% | $225,000 | MODESTO | Stanislaus | 2 | 95354 | $56,149 | 1.18% | 1.11% |
| 2 | $26,160 | $24,560 | 10% | $245,000 | STOCKTON | San Joaquin | 2 | 95204 | $57,508 | 1.43% | 1.34% |
| 3 | $30,300 | $27,699 | 10% | $289,500 | MERCED | Merced | 2 | 95340 | $63,611 | 1.16% | 1.27% |
| 4 | $36,000 | $29,453 | 9% | $335,000 | W. SAC | Sacramento | 3 | 95691 | $75,312 | 1.12% | 1.10% |
| 5 | $67,200 | $61,848 | 7% | $950,000 | OAKLAND | Alameda | 2 | 94609 | $76,329 | 1.04% | 0.97% |
| 6 | $33,600 | $29,200 | 7% | $449,000 | FAIRFIELD | Solano | 2 | 94533 | $71,792 | 1.16% | 1.12% |
| 7 | $54,600 | $42,491 | 6% | $729,000 | RICHMOND | Contra Costa | 4 | 94801 | $59,272 | 1.14% | 1.07% |
| 8 | $61,776 | $49,776 | 4% | $1,128,000 | OAKLAND | Alameda | 4 | 94608 | $80,340 | 1.04% | 0.97% |
The properties (labelled 1-8) with the highest cap rates are all located outside the Bay Area. Further, note that these properties are all under the $500k mark. Interestingly, the properties with higher cap rates are usually areas that are forecasted to experience higher growth rates. East Bay properties require more cash for a lower cap rate, and are in lower population growth areas.
BIG PICTURE
The main takeaway we see from this data is that there are still deals out there, but you have to go beyond the Bay to find them. If you believe that population growth is a reasonable indicator of regional desirability, then it seems likely that one key driver of Bay Area growth may be limited in the future. In cash flow terms, more money can be made by investing elsewhere in California, and with arguably more future upside potential.
