Many of my Silicon Valley Investors are finding that the price it costs to purchase an investment rental property in someplace like Palo Alto, Mountain View, or even downtown San Jose has gone up much faster that the rental market value has. It is not unusual to see CAP rates of 1 or 2 % which is the return on your investment after expenses are paid, but before any costs for a mortgage. So if your mortgage is 4.25% for an investment rental property and you only make 2% after expenses and before a mortgage you will lose 2.25% in cash flow over the year. What that means is that on a million dollar property with a $700,000 loan you will have a negative cash flow of about $17,500 every year. When the market appreciates you make up for the loss in appreciation, but when the market goes down, you lose the negative cash flow as well as the decreased value in the property.
In order to keep your cash flow, at least neutral, you need to have a CAP rate closer to your mortgage, which you can do by becoming a Santa Cruz rental property owner.
If a Santa Cruz rental property owner buys a million dollar property at a 4% CAP rate and a loan of $700,000 at 4.5% the difference between profit and loan payments will only be about $3500.
These numbers are not exact as loan rates change daily and amortization schedules are different, but the bottom line is the lower the CAP rate the worse the cash flow.
Due to the prices in Santa Cruz being so much lower than the prices in the Silicon Valley and the rents being fairly equivalent, the cash flow and CAP rate are just better for Santa Cruz rental property owners.
UC Santa Cruz posts average rental rates every year.
July 1 2016 - June 30, 2017
|Rental Type||Rent Range||Average||Number of
|Room and/or double room in Household||$500-1500||$923||500|
|1 Bedroom House/Duplex||$1200-2000||$1688||44|
|1 Bedroom Apartment/Condo||$1300-2000||$1656||61|
|2 Bedroom House/Duplex||$1900-3400||$2643||54|
|2 Bedroom Apartment/Condo||$1700-3100||$2376||81|
|3 Bedroom House/Duplex||$2400-4500||$3461||80|
|3 Bedroom Apartment/Condo||$2500-4000||$3157||21|
|4 Bedroom House/Apartment||$2900-5400||$4183||34|
|5 - 8 Bedroom House/Apartment||$4500-7000||$5474||20|
These figures include both unfurnished and furnished rentals. They can include the cost of utilities, Wi-Fi, private baths, allowing two or three people per room, special locations (e.g. oceanfront), house cleaner, and/or gardener. The locations vary from the San Lorenzo Valley to Aptos with the majority being in Santa Cruz.
We cannot confirm these listings were rented at these prices.
Students will pay $500-$850 to share a room. Some rooms have 2 and some 3 students. This puts upward pressure on all the rentals in Santa Cruz.
There is a severe housing shortage in Santa Cruz.
Santa Cruz rental property owners can get more for their dollar than they can in Silcon Valley. It is not rocket science.
If you are planning on buying an investment property think of Santa Cruz.
eXp Realty of California
Specializing in Probate, Trust, and Investment Properties