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.
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.
* 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.
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.
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,
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.|
|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
** What is Mello Roos ?
What is a 1031 exchange? - With I RC 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.
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
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
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
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!