California — home to (mostly) excellent year-round weather, a strong jobs market, and recreational opportunities also hosts a rental market characterized by high demand and limited supply.
This imbalance allows investors to hand-pick what they deem to represent the best tenants. So, while California is presently known for exorbitant property costs, we compiled a list of great markets that will appeal to investors who might have written off the state.
Before we explore the best rental markets in California, let’s examine broader trends to understand what investors can expect when purchasing rental property on the West Coast.
California Rental Trends
California’s rental market presents real estate investors with a mixed bag. Here’s a breakdown of some key trends.
Rising Rents but Slower Growth
Rents are still high across California, with the average tenant paying $2,950 per month versus the national average of $1,981. In some areas, such as Los Angeles, dips in rent have appeared year over year.
However, investors have seen rent price growth in other, less-populated areas that we explore below.
Median Home Sale Price
While national news outlets demonstrate the California median home-sale price as over $800,000, coastal properties inflate those numbers. Investors can still find great deals across the state.
Security Deposit Trends
Starting July 1, 2024, California landlords can no longer request security deposits in excess of one month’s rent.
Top 5 Rental Markets in California for 2024
For each of the five rental markets we discuss below, we explain why the area might be a good fit for real estate investors. In addition to more anecdotal evidence, we dig into the numbers to give potential buyers a clearer picture of California’s opportunities.
Aside from reporting population and employment growth numbers, we provide investors with crucial information to help them locate markets worth investing in. That information includes home value increases, median sales prices, rent-to-price ratios, etc.
For population growth figures, we consulted census.gov. Employment figures were found on bestplaces.net, and housing-related numbers were sourced from Redfin.com.
Sacramento
Investors interested in profiting from the exodus of San Francisco residents should consider investing in Sacramento. While the population growth seems modest, investors should know nearly 12,000 people relocated to the state’s capital from the city by the bay between December 2023 and February 2024.
With employment growth expected to continue climbing and median house prices costing a third of what investors find in San Francisco, Sacramento presents an attractive investment opportunity. These factors combine to make it one of the best rental markets in California.
- Population growth: -0.1%
- Employment growth: 1.4%
- Home value increase: 5.2%
- Median sale price: $463,000
- Price per square foot: $336
- Average rent: $2,072
- Rent-to-price ratio: 18.62
Bakersfield
In descending order of rent-to-price ratios on our list, you’ll find Bakersfield. Just under two hours from Los Angeles, the country music capital of the West Coast, has a little bit for everyone.
But music alone isn’t what’s attracting residents. Access to the Sierra Nevada mountains and national forests gives outdoorsy residents plenty to do. Plus, the city enjoys modest employment growth and the lowest average rent on our list, which could be a boon for LA tenants looking to save money and escape the big city.
- Population growth: 1.5%
- Employment growth: 1.2%
- Home value increase: 8.3%
- Median sale price: $390,000
- Price per square foot: $232
- Average rent: $1,748
- Rent-to-price ratio: 18.59
Santa Maria
Santa Maria’s housing market is highly competitive, and a nearly double-digit percentage increase in home values over the past year implies that investors can expect to get their money’s worth by investing in Santa Maria.
However, while housing values and pricing are increasing, median rent values indicate that the available properties present an approachable rent-to-price ratio. If you’re looking to strike quickly for long-term growth, consider Santa Maria.
- Population growth: 0.4%
- Employment growth: 0.8%
- Home value increase: 8.3%
- Median sale price: $608,500
- Price per square foot: $369
- Average rent: $2,738
- Rent-to-price ratio: 18.52
Madera
Since last year, Madera has seen the most significant increase in home values on our list, but investors shouldn’t consider the town a lost investment opportunity.
The median sale price still sits below $400,000. With the potential to charge higher rents than indicated by the recently dipping rent median, as reported by Redfin, the right property could signal a major opportunity.
- Population growth: 2.8%
- Employment growth: 1.4%
- Home value increase: 13.2%
- Median sale price: $385,000
- Price per square foot: $237
- Average rent: $1,949
- Rent-to-price ratio: 16.45
Menifee
One of the fastest-growing cities in the entire country is Menifee, CA. Centrally located in the Inland Empire, residents can access LA and San Diego within a few hours, making it an excellent hub for remote workers based in either city.
For investors, increasing home prices indicate this on-the-rise town presents a quality opportunity for growth. And with the lowest cost-to-rent ratio on the list, fix-and-flippers might strike it rich in this Golden State town. Consider Menifee if you’re interested in one of the best rental markets in California.
- Population growth: 6.7%
- Employment growth: 2.2%
- Increase in home values: 2.1%
- Median sale price: $539,000
- Price per square foot: $287
- Average rent: $2,881
- Rent-to-price ratio: 15.50
Why TurboTenant is a Must-Have for Landlords in California
California landlords and investors must navigate a lot of legal red tape to operate their businesses. Between complicated landlord-tenant laws and security deposit legislation, building a California-specific lease can present time-intensive challenges.
With TurboTenant’s lawyer-reviewed California leases, you can draw up a lease agreement in under 15 minutes that covers you while providing your tenants with the legal protections required in California.
California Rental Markets FAQs
How tight are rental housing markets in California?
California’s rental housing markets are tight due to a few factors. High demand, limited availability, and a strong job market create a competitive rental market landscape.
Is California a bad market to buy rental properties?
High property values and regulatory requirements pose challenges for landlords and real estate investors. But, when you factor in strong rental demand and the potential for property appreciation, investors who hold properties for the long term could make a hefty profit.
Are there specific tax incentives or implications for real estate investors in California?
Stemming from the Tax Cuts and Jobs Act of 2017, California instituted Opportunity Zones where investment is encouraged. Opportunity Zones are places where poverty and economic distress occur much higher than surrounding areas.
Investors who choose to invest in these areas defer capital gains taxes until December 31, 2026, or a qualifying investment is terminated.
In monetary terms, California has high income and capital gains taxes. However, property tax in California sits at .75%, which ranks 19th nationally. Given the high property costs in California, property tax bills in California can be high compared to states with higher property tax rates and lower property prices.
What investment strategies best suit the current conditions of California’s real estate market?
Investors looking to put their money in California should focus on properties in good locations that might need renovations. By adding to properties in good locations that need work, value-adds can boost rental rates and property value.
Also, be prepared for the long haul in California. Properties you can hold for several years will potentially appreciate while providing steady rental income.
