Mistakes to Avoid When Buying Investment Homes in California

California is a popular market for residential real estate investors. The state has a strong economy, a high population growth rate, and a diverse range of markets. This makes California a great place to buy investment homes, whether it’s part of a “fix-and-flip” model or for long-term rental income.

But there are also some common mistakes that investors make when buying investment homes in California. These missteps can lead to hassles, headaches, and even financial losses. So let’s talk about how to avoid them from the get-go.

What Makes California a Popular Market for Investors

California earned its nickname as the “Golden State” during the days of westward expansion, partly driven by wealth-seeking prospectors in search of gold.

Today, California offers a “golden” opportunity for real estate investors who want to earn a strong return. It’s a good real estate market in which to buy an investment home, and for several reasons:

• Strong economy. California has one of the strongest economies in the world. This means there is strong demand for housing in the state, which can lead to higher rents and property values.
• Population growth. California has experienced steady population growth over the past 70 years, despite a COVID-related anomaly in more recent years. This long-term population growth creates a constant demand for housing in the state, which can be beneficial for investors.
• Diversity of markets. California has a diverse range of real estate markets, from urban centers to rural areas. This increases the chance for investors to find properties that fit their investment goals and risk tolerance.
• Strong rental market. The rental market in California is strong, with a low vacancy rate and high rents. Because of this, investors can generate a steady stream of income from their rental properties.
• Potential for appreciation. Home prices in the Golden State tend to rise steadily over time, despite occasional dips during economic recessions. Investors who buy investment homes in California could potentially enjoy steady appreciation over time.

Mistakes to Avoid When Buying An Investment Home

Despite the great opportunities for investment in California, there are some common mistakes and pitfalls to watch out for along the way. Here are nine of them.

1. Neglecting thorough research

Before investing in California real estate, research the local market extensively. Analyze property values in the area you’re interested in, study rental rates to understand potential income, and examine vacancy rates to gauge demand. Look into neighborhood trends, such as upcoming developments or infrastructure projects, which can impact property values and rental demand.

2. Overestimating rental income

Overestimating the rental income for an investment home can lead to disappointing returns and financial setbacks. You can avoid this common problem by thoroughly researching rental rates for similar properties in the area. Consider factors such as property size, location, amenities, and market demand. It’s important to be realistic about rental income to ensure positive cash flow and a healthy return on investment.

3. Ignoring the total cost of ownership

When evaluating an investment property, consider all costs associated with ownership. Calculate property taxes, insurance premiums, maintenance expenses, and potential homeowner association fees. Failure to account for these costs could cause financial burden and limit the profitability of your investment.

4. Underestimating renovation costs

If you plan to renovate or make improvements to the property, be diligent in estimating the costs involved. Obtain multiple quotes from contractors, factor in material costs, and consider any unforeseen expenses that may arise during renovation. Underestimating renovation costs can quickly eat into your potential profits.

5. Disregarding location

California’s real estate markets vary widely, so you’ll want to carefully consider the location of your investment property. Research the neighborhood’s desirability; proximity to amenities like schools, shopping centers, and transportation; and access to employment centers. For example, California investment properties located near universities or major employment hubs tend to attract a steady stream of potential tenants.

6. Skipping property inspections

When buying an investment home, it’s always wise to conduct a comprehensive property inspection before finalizing the purchase. Hire a qualified home inspector who can identify any underlying issues or necessary repairs. Inspections can reveal problems such as structural damage, plumbing or electrical issues, or the presence of pests. Skipping inspections, on the other hand, could lead to unforeseen expenses or even legal issues.

7. Underestimating the time and effort required

Managing an investment property takes time and effort, so be prepared for the responsibilities involved. This includes finding and screening tenants, addressing maintenance requests, and managing finances related to the property.

8. Relying solely on appreciation

While property appreciation is desirable, you probably don’t want to make it the only component of your investment strategy. Long-term home price appreciation can be uncertain, even in California’s strongest real estate markets. So you’ll need to consider cash flow from rental income (or profits from resale) when evaluating the viability of your investment.

9. Not seeking professional advice

Real estate transactions can be complex and costly. So it’s always wise to seek professional advice. Consult with an experienced real estate agent who knows the market where you’re planning to buy. You might also need to work with a real estate attorney to review contracts and ensure legal compliance. Financial advisors can help you assess the feasibility of your investments and build a sound strategy around them.

Need financing? Bridgepoint Funding is located in the Bay Area and serves the entire state of California. We have helped many investors purchase investment homes, and we offer a broad range of financing options to help make that happen. Please contact our staff with any questions you have.