The Best Real Estate Investment Locations in California

Disclaimer: This post is meant to be used for educational purposes only and does not constitute legal or financial advice. If you are considering a real estate investment in California, HomeLight always recommends doing your own research to determine which investment option is best for your situation.

If you’re looking to invest in California real estate, you could be in luck. While the real estate market in California was red hot in 2020 and 2021, the market has been shifting. December 2022 year-over-year data shows a 44.1% decrease in the number of homes sold. For the year as a whole, home sales were down 23.1 percent from 2021. At the same time, prices have held their own.

“Home prices are holding up relatively well, despite rising interest rates and falling housing demand in recent months, says Jordan Levine, vice president and chief economist with the California Association of Realtors (CAR). “Tight housing inventory was a primary factor preventing prices from free falling as new active listings continued to dip to reach the lowest level in at least the past five years.”

What does this market environment mean for California investors? And how can investors maximize their potential earnings within the Golden State?

In order to get to the heart of the real estate market in California, we spoke with Louise Juracek, a top real estate agent in Bakersfield, California. As an investor herself with 40 years of industry experience, Juracek provides a unique perspective both on what qualifies as a hot investment market and a good investment property in California.

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Factors of a great real estate market in California

Before we dive into specific California investment markets, it’s worth noting a few things that optimize an area for investment in general. As you’re looking into investment locations, keep the following factors in mind.

A desirable area

A great property at a great price is nothing if it’s not in a great area. Savvy investors spend time researching the location of the property, paying special attention to features that would make it desirable to renters or buyers.

With unique entertainment, beautiful national parks, and 3,427 miles of coastline, California is estimated to have received more than 259 million tourists in 2022. That’s great news for the short-term rental market! Those same features – beaches, trails, entertainment – increase the quality of life for residents as well. That’s great news for the long-term rental and fix-and-flip markets.

Juracek notes that California as a whole has proven to be very desirable, as property values continue to increase. “Appreciation is a huge advantage of purchasing in a market like California.”

As you’re researching a local market within the state, consider what makes that area particularly attractive. Is there something –– such as a university, industry, or natural feature –– that will continue to draw tourists, renters, or buyers to that area?

A growing economy or job market

According to a recent Ibis economic analysis, California’s economy looks promising, despite post-COVID difficulties:

“California’s gross state product (GSP) in 2022 reached $2.9 trillion, with growth of 2.9% over the five years to 2022. Businesses in California employed a total of 21,155,273 people in 2022, with average annual employment growth over the past five years of 0.7%. The top three sectors by total employment are Information, Manufacturing, Real Estate and Rental and Leasing, while the unemployment rate across the state in 2022 was 4.3%.”

A growing economy usually indicates a stable, appreciating real estate market. At a local level, investors should take note of large businesses with a solid track record in the area, as well as any new businesses intending to move into the location. Both are great indicators of consistent residential needs.

Consistent population growth

Population growth is good for investors because it means the area will continue to demonstrate a strong demand for housing.

California is the most populous state in the nation, with 39.24 million residents. While California as a whole may have seen a slight decrease in population in the last few years, certain areas have continued to grow, as we’ll note below. Statewide, experts project the population to exceed 45 million by 2050.

Of course, investors will want to dial that number in closer to their intended city or county. To research historical and projected population growth in any given area, consider searching U.S. Census data as well as this county-by-county data.

Nice average rental rates

Since cash flow is directly related to rental income, investors should always look into an area’s average rental rates. Investors can expect the following rental rates, on average in California:

• Studio apartments: $1,083
• 1-bedroom units: $1,218
• 2-bedroom units: $1,538
• 3-bedroom units: $2,110
• 4-bedroom units: $2,435

However, within the state, rental rates vary significantly by location. The average rent for a 1-bedroom residence in Santa Barbara County is $2,015, while in Glenn County, it’s $703. Even within the same county, factors such as waterfront access and community amenities create variable rent prices that investors will need to look into by neighborhood, specifically.

Aligns with personal portfolio goals

In addition to data, investors should also choose an area for how it can generally help advance their personal goals. For example, some investors have no interest in management and maintenance; they may therefore want to choose an area based more on long-term appreciation than on cash flow. Other investors prefer a hands-on approach to real estate; they would thus want to choose property that’s within driving distance of their permanent residence.

Juracek personally recommends that new investors “cut their teeth” on single-family homes rather than condos or multi-family properties. “It’s easier to get out of a single-family property than it is to get out of a multi-family property. The resale pool is bigger.”

Best cities in California to invest in real estate

With those factors in mind, let’s check out some of California’s top individual markets. We’ll take a look at some desirable local factors, as well as median home prices with data from Realtor.com, average rental rates from RentData.org (2 bedroom data), and population size data from California Demographics.

Los Angeles

As the biggest city in California, Los Angeles is naturally one of the hottest real estate markets. Even though Los Angeles home prices are high, investors continue to snatch up LA properties at a rate of 20% of all purchases. The west coast’s entertainment and media hotspot, Los Angeles, continues to see marked population growth, with a .23% increase year-over-year. For those deterred by the median price of metro LA property, consider close suburban markets like Hawthorne, where 72.5% of residents rent their living arrangements.

Juracek cautions investors to research city-wide rental ordinances before jumping into rental holdings. Local landlord-tenant laws may favor a fix-and-flip strategy over a buy-and-hold strategy in Los Angeles.

Median home price: $999,000
Average rental rate: $2,222
Population size: 3,849,297

Anaheim

If you’re looking for rental flexibility and great appreciation gains, a home in Anaheim could be a great fit for your investment portfolio. Thanks to Disneyland and Knott’s Berry Farm, Anaheim investors have the ability to choose whether long-term or short-term rentals suit them best. A tourism economy keeps the demand for both sectors strong within the community. In addition, Anaheim has seen an incredible 41.4% appreciation rate over the past three years, well above the national average of 28.8%.

Median home price: $800,000
Average rental rate: $2,539
Population size: 345,940

Sacramento

California’s capital city of Sacramento has become known as a hip “farm-to-table” type of community. A median age of 34.5 shows that the city is drawing young professionals who will likely continue to drive demand for housing. Demographic experts predict that Sacramento will grow 54% by 2060. For investors who prefer a more small-town atmosphere, take a look at nearby Elk Grove, where vacation homes have the potential to bring in over $2,000 per week, and occupancy rates sit around 82%.

Median home price: $475,000
Average rental rate: $1,756
Population size: 525,041

Fresno

Check out that price point! Buying property in Fresno is a bargain when compared to some other California cities. Fresno is home to a thriving agricultural industry, an economy that relies in part on seasonal and temporary labor –– the perfect demographic for rental demand. With an average annual appreciation rate of 9% and a 26% increase in rental rates in the past year, this real estate market is a diamond deal for investors.

Median home price: $389,000
Average rental rate: $1,258
Population size: 544,510

Bakersfield

Juracek recommends her local Bakersfield market for real estate investors. “It’s pretty affordable here for a landlord to purchase. We’re starting to see investors coming back into the real estate market even more strongly than they were, and that is because they can make a better profit here than they can in the stock market right now.”

Unlike some California cities, Bakersfield has seen steady population growth over the years, and the area has been attracting new businesses, like Amazon, which provide new jobs. Both of those factors make for a great real estate investment market.

Median home price: $384,500
Average rental rate: $1,137
Population size: 407,615

San Francisco

There’s no getting around it –– home prices are high in the lovely city of San Francisco. But a greater initial investment does yield better cash flow since rental rates are above average. Plus, the San Francisco economy sits at the sixth largest in the nation, hourly wages are $10 higher than the national average, and unemployment is a full percentage point lower than the rest of the country. The city’s population has grown by .15% year-over-year, which would naturally indicate an increased demand for housing. All in all, if you can get past the sticker shock, San Francisco is a great place to invest in real estate.

Median home price: $1,300,000
Average rental rate: $3,188
Population size: 815,201

Oakland

For those who want to capitalize on the economy of San Francisco without the high price point, Oakland is a great place to consider. In Oakland, you can easily invest less than a million dollars, though, in turn, you’ll have to accept less in rent as well. Not only is Oakland a hotspot for commuters into San Francisco, it also stands on its own as a city full of culture and entertainment. With parks, museums, theaters, and even a zoo, Oakland is an ideal place for families who need to be close to the Golden Gate City.

Median home price: $795,000
Average rental rate: $2,405
Population size: 433,823

Palm Springs

The luxe desert town of Palm Springs has long been a top vacation choice for the rich and famous, hosting the likes of Frank Sinatra and Elvis Presley at times. Today, the allure of Palm Springs remains, for both vacationers and remote workers alike. Vacation rentals bring in an average of $395 per night with a 61% occupancy rate throughout the year. Palm Springs is well-suited to buy-and-hold strategies, as appreciation rates run 7.9% annually. With a high saturation of desirable mid-century modern architecture, Palm Springs is a unique place to invest for the long term.

Median home price: $850,000
Average rental rate: $1,751
Population size: 45,019

Tips for finding a great investment property in California

No matter what local market you choose, keep the following tips in mind as you pursue your California real estate investment property.

Partner with an expert real estate agent

Whether you’re investing locally or from another state, you’ll want to work with an agent who specializes in investment properties.

Juracek says, “You want to choose a professional who knows about investing in property. They’ll have a basic idea of the tax consequences and tax benefits of having a property as an investment.”

Having an investment-focused agent on your team will be a great resource in understanding the market on a micro level, including capitalization rates, cash flows, neighborhood norms, and more. HomeLight can connect you with that perfect agent partner.

Understand local landlord/tenant laws

Juracek confirms the general knowledge about California rental laws. “It’s really kind of anti-landlord. If you’ve got tenants not paying rent or not living up to their lease, it’s not easy to secure an eviction.” She also mentions statewide rent control, which caps rental increases at the rate of inflation.

Landlord laws vary on the local level, so you’ll need to research the requirements up front. Juracek notes that her local Kern County laws aren’t as stringent as a place like Los Angeles County. Your agent can be a great resource in this aspect.

Run a realistic budget

As you’re evaluating investment properties, be sure to set a budget that includes things that are not reflected in the list price. Closing costs, property repairs, tenant placement costs, and ongoing maintenance are all significant expenses.

Juracek reminds clients that it’s important for income properties to actually make income. “I never advise negative cash flow,” she says, after living through historical investment strategies which favored losses for tax write-offs. She adds, “Have enough money to purchase the property [for cash], or if you need a loan, remember most lenders require at least 20 percent down.”

Be ready to make an offer quickly

While the market in California is cooling from recent years, investment properties are still moving quickly at certain price points. Thus, you’ll need to be prepared to make an offer as soon as an eligible property comes on the market.

Keeping that in mind, have your budget ready, your financing in place, and your market research done. When other investors compete for the same property, you need to be confident in your strongest and best offer.

The California real estate market as a whole presents an incredible opportunity for investors. Juracek sums it up well, saying, “Yes, we have some hostility towards landlords through the rent control and eviction laws. However, at the same time, long-term you’re looking at great property appreciation.” With a little research and a good team in place, now could be a great time to buy in the Golden State.

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