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My wife and I have spent the past several months trying to find an investment residential property, but all we’ve found is broken math.
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Between soaring interest rates, rising costs and higher home values, it’s nearly impossible to buy a single-family home and make the investment pencil out.
California and Congress have increasingly made investing in single-family homes a political target, especially for institutional investors, even though corporations and individuals with hundreds of thousands of dollars in cash are the only ones who can make the math work.
For example: A typical three-bedroom home in the Sacramento area costs about $500,000. With 25% down—likely more than required—and a 7.25% investor rate on the balance, plus taxes and California insurance, you’d pay roughly $3,200 a month to collect $2,800 in rent.
And that’s without considering the other taxes and association fees you’d likely face.
Just a few years ago, it made more sense. I rented out a home I own locally that only penciled out, just barely, because I bought it when interest rates were still in the twos.
My home’s insurance premium spiked 50 percent this year, leaving me with the choice of passing the cost onto my tenant or operating at a loss. I was exempt from a statewide rent-control law, though the increase in rent came in just under the allowable amount. Of course, I’m still on the hook for maintenance, property taxes, and everything else, but I also have to consider how rent increases affect my tenant, who has his own bills to pay.
In California, the math of investing in single-family homes was first broken by the government-strained supply. Lawmakers for years have neglected meaningful reforms that could help create more housing, including changes to the California Environmental Quality Act, the law most often used to block development. Politicians have also driven up housing costs with countless mandates, like required solar panels.
Nationally, interest rates have been rising to counter a 23% loss in U.S. dollar purchasing power since 2020. This historic inflation was primarily triggered by COVID-era government spending, post-pandemic economic disruptions, aggressive monetary policy, tariffs, and global energy shocks linked to wars in Ukraine and Iran.
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In the example I cited earlier — a $125,000 down payment — ask yourself: How many mom-and-pop investors have that much cash, or more, sitting around for an illiquid, negative-cash-flow investment?
In fact, Congress just passed a housing bill with a section titled “Homes Are for People, Not Corporations” that imposes a ban on institutional investors, even though those investors own less than 1% of homes and just 3% of single-family rentals
The Legislature is also considering joining the chase for problems that don’t exist. Assembly Bill 1240 would ban large investors from buying California homes. All of this is aimed at firms that own a rounding error of the state’s housing stock. The price-to-rent ratio is why investor home purchases fell to the lowest level since the pandemic.
There are surely places where the math still works. But in California, those places are hard to find. And if you think the long-term rental market is bad, the short-term rental market is not much better. Sure, the average rental income is higher, but overhead is much higher and the widespread regulations and caps on STRs are prohibitive.
The market will survive with fewer institutional investors. But banning them won’t fix the math that was already driving them away — the same math shutting everyone else out.
Some might say: good riddance! Those homes should be housing, not investments. Fine, but just remember this conversation the next time you go on Airbnb wondering why a weekend getaway costs what it does.
Matt Fleming is an opinion writer living in Placer County. You can follow him on X @Flemingwords or connect via email: [email protected].
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