Bay Area Rental Investing: Dead and Gone? (1 of 2)

In the first 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 one, we present some surprising data on what’s really going on with California’s population.

THE BACKDROP –WHERE IS A GOOD PLACE TO INVEST?

Clearly, just because a property is cheap doesn’t necessarily mean it’s in a market with long-term potential for growth. Developing top-notch criteria for analyzing regions for long-term investment can turn into a rabbit hole. Folks who routinely do this work dive deep into city economics, and often pay for costly private databases for other important metrics. Since we don’t have time to get fully into that here, we need a quicker and dirtier method.

“Wait, Erich”, you say “I want to manage this property myself and I can’t do it if it’s in another city. I’ll have to hire a property manager!” While finding the right property manager can take some time, there are tremendous potential benefits of leveraging yourself such that you don’t have to be everywhere at once. Let’s face it, if you are in a position where you can invest, you realize the value of your time. There is someone out there that can do the job. Focus your time on finding properties that are profitable enough that you can easily afford the extra 9% for the right property manager.

“People and organizations don’t grow much without delegation …
because they are confined to the capacities of the boss and reflect
both personal strengths and weaknesses”
Stephen Covey
7 HABITS OF HIGHLY EFFECTIVE PEOPLE

MYTH = PEOPLE KEEP MOVING TO THE BAY AREA IN DROVES

In percentage terms, California’s population growth is flatlining. Millenials in particular, are actually in the process of fleeing California’s urban centers[1]. Currently the places with the most population are the inland centers represented by cities such as Riverside, Stockton, Sacramento (remember that part of Sac is in Yolo County), and Merced. Take a look at the projections of future population growth in California cities predicted by the CA State Dept. of Finance.
[1] http://time.com/4748763/suburbs-millennials-moving-cities/

California Population Growth

BIG PICTURE

To give you a sense of what other states are experiencing, note that the Top 10 States in percentage growth from 2015 to 2016 were, Utah (2%), Nevada (1.95%) and Idaho (1.83%) . California is not even close to the top ten!
What do these population numbers say for our analysis? Population growth has been a huge driver behind the exponential increases in Bay Area real estate value. Without this force, it’s possible that the Bay Area isn’t poised to continue on the massive growth schedule that it has been on for the last five years. At the very least, there is good evidence to suggest we consider investment in areas in California where people are actually moving.

In the next article, we’ll move into some concrete analysis of actual properties in the up-and-coming California cities where this population growth is happening! Stay Tuned!