If you ever dreamed of getting rich from flipping houses in California, there are certain things about this investment strategy you need to know.
As demand for houses in California causes the price to increase further, those who are priced out of the market opt to rent instead. This presents a great alternative opportunity for California house flippers. Instead of selling, they could rent out the property first.
In this article, you will learn about flipping homes in California:
- 2021 trends in the California real estate market
- How to flip a house in California in 6 steps
- 5 best cities in California for flipping homes
2021 California Real Estate Market Analysis
Before we dive into how you can start flipping houses in California, it is important to know about the current state of the housing market. This way, you can adjust your real estate investment strategy as needed. The analysis below used data taken from Mashvisor, with supplemental information from the California Association of Realtors (CAR).
Housing Demand in California
Existing-home sales from January to November across the state increased by 10.6% compared to the same period last year. With 28 national parks, 800 miles of coastline, and diverse culture, it is not surprising that people are still flocking to the Golden State no matter how expensive it is to live there. But because of the high prices, they would rather rent instead. Those who can afford it, though, are willing to pay the premium price of homeownership.
These trends present a great opportunity for real estate investors, whether they are flipping houses in California or rehabbing then renting them out.
Housing Prices in California
As of December, the median home price in the state is $915,965. The town of Mojave in Kern County had the lowest median home price of $213,654, making it the cheapest market for flipping homes in Southern California. Meanwhile, Menlo Park in San Mateo County was the most expensive, with a median home price of $3,577,409.
It is also worth noting that the median price of condos and townhomes across the state are at an all-time high. Lastly, the median price growth for single-family homes is starting to slow down, but condos’ prices are growing even more.
Housing Supply in California
When flipping houses in California, it is important to understand the inventory levels in your chosen market so you would know how many options you have. As of December, there are 20,960 California homes for sale listed on our website, a 17% decrease from last month. Due to the high demand, inventory is now at 1.6 months, having dipped to the lowest level since May.
The number of unsold inventory is also down in all regions. However, this follows the seasonal patterns observed in the last three years, so investors do not have to worry about any declines in the statewide housing market.
Mortgage Rates in California vs. the National Average
At the time of writing, mortgage rates in California are as follows:
- 3.13% for 30-year fixed-rate (vs. 3.21% national average)
- 2.42% for 15-year fixed-rate (vs. 2.49%)
- 2.50% for 5/1 adjustable-rate mortgage or ARM (vs. 2.69%)
Many experts think that the mortgage rates will rise next year, making December your last opportunity to get a record-low mortgage rate. While rates have stayed around 3% throughout the year, economists at the National Association of Realtors think that these will rise to 3.5% by the end of 2022. Even though this is still low compared to pre-pandemic levels, it is safe to say that the record-setting days are over as trends start pointing upward.
Despite the low mortgage rates now, it is still recommended that you request quotes from at least two to three lenders before deciding on which one to borrow from. This way, you will be able to get the best deal and afford flipping houses in California.
Foreclosures in California
The foreclosure moratorium in California ended on October 1st, and since then a large number of foreclosure properties have become available. In Q3 of this year alone, the state posted 3,434 foreclosure starts, one-third of which were from the Los Angeles metropolitan area. By October, lenders have repossessed a total of 178 properties through completed foreclosures. The counties with the most foreclosures as of October were:
- Mendocino
- Calaveras
- Riverside
- Butte
How to Flip a House in California
When flipping houses in California, you need to consider certain key factors in each step to determine whether the property can generate an acceptable return on investment.
Step 1: Look for a Great Neighborhood
California is the third-largest US state, so you have a lot of ground to cover when searching for an investment property. Thus, you should narrow down your search to a maximum of five neighborhoods.
Successfully flipping houses in California is heavily dependent on the location, so make sure that you choose the right neighborhoods. They usually have a thriving economy, offer a wide array of activities, and draw in many tourists.
You could also check the appraisal value in the area to determine if you will be able to resell it at a profit. You can access this on the respective county’s appraisal district website. If you are planning to rent out the property instead of selling it, you could follow the 1% rule investment strategy. This means you should be able to rent the house out for at least 1% of the purchase price. Other factors you should look into include:
- Cash on cash returns
- Occupancy rate
- Property taxes
- Price-to-rent ratio
- Number of listings
- Days on market
Unfortunately, even narrowing down your search to a few neighborhoods can still be overwhelming. After all, California is divided into 58 counties and contains 482 municipalities. To help you get started, you can use a real estate investment tool like Mashvisor’s Property Search. It features a heatmap that displays which areas meet your criteria, whether it be the highest cash on cash returns or rental income. Sign up for Mashvisor now and get 15% off.
Step 2: Secure Your Funding
If the house is within your budget and you have enough capital for it, then invest with cash as much as possible. House flipping can be a risky investment. If anything goes wrong, then you will not have to be burdened with paying interest for the time that you spent repairing and trying to sell or rent out the property to no avail.
However, not every real estate investor has the cash to buy a house in an expensive market like California and pay for repairs and upgrades. Fortunately, there are different loan options that you can avail.
If you are renting out the property after repairing it, a rental property mortgage would suit your needs. In this case, get a letter of pre-approval from the lender to show the seller you are serious and financially ready to buy their home. But if you are planning to sell the house after fixing it, then you are better off saving up and paying for the property in cash. You will have to pay off the entire mortgage anyway when you transfer property ownership.
Don’t have enough cash yet? You can start by renting out the property and saving your rental income for future investments. Then when you are ready to move on, you could sell the house at a higher price than you bought it for.
Step 3: Search for a Property
Once you have selected up to five neighborhoods and have secured your payment source, it is time to find a property. Here are some tips to help you choose.
5 Tips on Choosing a Property to Flip
- Use the 70% rule in calculating your budget. This means that you should never pay more than 70% of the After Repair Value (ARV) of the property, minus the cost of needed repairs.
- Look out for REO properties. These are houses that have been repossessed by lenders after borrowers have defaulted on their mortgage payments. Aside from selling at a relatively lower price, these homes are usually void of title discrepancies.
- Avoid buying a home with damaged mechanicals. A house that needs a new roof or updated electrical system will require too much money, which may prevent you from turning a healthy profit. This may not apply to rental properties since you are earning from them for years.
- Inspect the property before making an offer. Do not put yourself at risk of landing a money pit by making an impulsive purchase or buying a house without checking it out. If this is not possible, make sure that you have an inspection contingency in place to protect you and your earnest money deposit.
- Know whom you will sell or rent out the place to. When you visualize who would be willing to buy or rent your flipped house, you will know their ideal price point and what they expect to pay. You can then plan renovations based on this amount and thus spend money to make the property desirable enough to someone who would be willing to pay for it.
Mashvisor’s Property Finder can help you search for lucrative houses without having to leave your desk. Just type in up to five areas of your interest and filter your search by budget, rental strategy, property type, and property features. You will then get a number of results sorted by the highest cash on cash return it could provide.
Step 4: Negotiate and Close the Sale
Just like a normal home buying process, once you find a property that you want to invest in, you have to place an offer. When the seller accepts, it is time to do your due diligence. Get inspections and an appraisal done and read the HOA documents if the house is in an HOA community. If you are satisfied with the inspection and appraisal reports and agree to the HOA’s bylaws, let the seller know so you can complete the transaction.
Step 5: Rehab Your Investment Property
The time to repair or remodel a home depends on the amount of work you need to do. If this is your first time flipping houses in California and have no experience in construction or home repairs, then it is best to hire contractors to help you. If possible, have them be ready to start renovating as soon as you close the sale. The quicker you finish remodeling, the sooner you can start earning money.
Step 6: Sell for a Profit or Rent It Out for Higher Returns
By selling the flipped house, you are earning your paycheck in one transaction. But first, you need to price it competitively to attract buyers. This involves researching comparable house sales in the area and adjusting your estimate based on how your property and its features compare against the others. Also, be aware of how long houses for sale usually stay on the market.
But if you want a stable income source that pays you once a month for many years to come, you might want to consider renting out the property instead. There are two types of rental strategy:
- Traditional: This involves renting out the house for six months or more. You may choose to furnish the property or let the tenants do it themselves.
- Short-term or Airbnb: This involves renting out the house for at least one night. Usually, the guests who stay here are travelers who would prefer this type of accommodation to a hotel.
While Airbnbs usually giver higher returns, municipalities in California started regulating these property types that hosts are starting to see smaller profits and even losses. But you may still get as much as 6% cash on cash returns with the traditional rental strategy in the Golden State.
5 Best Places to Flip Houses in California
To help you with your search, we scoured through Mashvisor’s data to find the five best cities for flipping houses in California. We decided on these locations based on different criteria and rental strategy.
Disclaimer: The Airbnb data mentioned below were based on active listings on Airbnb. These do not automatically indicate that non-owner-occupied rental homes are allowed in these cities. Please contact the appropriate local government to clarify this matter.
#1: Mojave, Kern County – Lowest Median Property Price in California
- Median Property Price: $213,654
- Average Price per Square Foot: $175
- Days on Market: 62
- Traditional Rental Income: $1,063
- Traditional Cash on Cash Return: 3.40%
- Price to Rent Ratio: 17 (medium)
- Airbnb Rental Income: N/A
- Airbnb Cash on Cash Return: N/A
- Airbnb Daily Rate: N/A
- Airbnb Occupancy Rate: N/A
- Walk Score: 40
#2: Saint Helena, Napa County – Highest Traditional Rental Income in California
- Median Property Price: $2,928,800
- Average Price per Square Foot: $2,333
- Days on Market: 169
- Traditional Rental Income: $9,238
- Traditional Cash on Cash Return: 1.39%
- Price to Rent Ratio: 26 (high)
- Airbnb Rental Income: $12,522
- Airbnb Cash on Cash Return: 2.46%
- Airbnb Daily Rate: $586
- Airbnb Occupancy Rate: 65%
- Walk Score: 80
#3: San Marino, Los Angeles County – Highest Airbnb Rental Income in California
- Median Property Price: $2,923,851
- Average Price per Square Foot: $895
- Days on Market: 88
- Traditional Rental Income: $5,079
- Traditional Cash on Cash Return: 0.20%
- Price to Rent Ratio: 48 (high)
- Airbnb Rental Income: $17,361
- Airbnb Cash on Cash Return: 3.40%
- Airbnb Daily Rate: $182
- Airbnb Occupancy Rate: 82%
- Walk Score: 42
#4: Alturas, Modoc County – Highest Traditional Cash on Cash Returns in California
- Median Property Price: $333,433
- Average Price per Square Foot: $190
- Days on Market: 167
- Traditional Rental Income: $3,152
- Traditional Cash on Cash Return: 5.81%
- Price to Rent Ratio: 9 (low)
- Airbnb Rental Income: $1,749
- Airbnb Cash on Cash Return: 2.94%
- Airbnb Daily Rate: $113
- Airbnb Occupancy Rate: 53%
- Walk Score: 53
#5: Alpine, San Diego County – Highest Airbnb Cash on Cash Returns in California
- Median Property Price: $808,320
- Average Price per Square Foot: $374
- Days on Market: 62
- Traditional Rental Income: $2,295
- Traditional Cash on Cash Return: 1.26%
- Price to Rent Ratio: 12 (medium)
- Airbnb Rental Income: $5,765
- Airbnb Cash on Cash Return: 9.74%
- Airbnb Daily Rate: $293
- Airbnb Occupancy Rate: 65%
- Walk Score: 63
Conclusion
To recap, here are the six steps to flipping houses in California:
- Look for a great neighborhood;
- Secure your funding;
- Search for a property;
- Negotiate and close the sale;
- Rehab the property; and,
- Sell for a profit or rent it out for a bigger paycheck.
Whether you are a beginner investor or have been flipping houses for years now, it pays to have a real estate investment tool that can help you analyze any market in the US. With Mashvisor, you can find lucrative properties depending on your preferred rental strategy. You can also use our platform for your comparative market analysis. To learn more about how we will help you make faster and smarter real estate investment decisions, click here.