After dropping from 2006 to 2011, home prices in Santa Cruz County have jumped 17 percent in the past year as bargain-hunting investors find that rising rents and rock-bottom interest rates are again making it profitable to be a landlord.
It’s not only investors who are driving up prices; demand is also coming from buyers who want a home to live in.
But for the first time in many years, investors can buy rental properties with a 25 percent down payment and rent them out for a “positive cash flow,” where the rent is sufficient to cover the cost of the monthly mortgage payment, taxes and other expenses.
“Rents are at a premium,” said David Bergman, a Scotts Valley realtor. “Many people have lost their homes through foreclosures and short sales.”
They have become renters, he added, and these new renters are driving up rents.
In Scotts Valley, “rentals are almost impossible to find,” Bergman said.
He and other local realtors say the price increases are primarily in medium-priced neighborhoods, such as Skypark in Scotts Valley, where Bergman says home prices have risen as much as $40,000 this year.
“The market is picking up in the lower price range,” said Santa Cruz Realtor Wayne Shaffer. “But we’re not seeing a lot of buyers for million-dollar homes.”
Scotts Valley Realtor Kurt Useldinger agreed.
“It’s soft at the top,” Useldinger said. “Around $500,000 and below, it’s a really solid market.”
High rents are enticing investors to buy rental homes. In Watsonville, Useldinger said, a year ago one could buy a house for $200,000 and rent it out for $1,200 to $1,400 a month. That’s an excellent return for an investor seeking income; plus, those homes have risen in value 15 to 20 percent in the past year.
For people who lost their homes to foreclosure, the news adds insult to injury. They used to own a home — and now they have to rent, their rent is going up, and housing values are appreciating after it’s too late for them to benefit from that appreciation.
Santa Cruz Realtor Neal Langholz said not everyone who lost a home to foreclosure was financially devastated.
“Many people who lost their homes to foreclosure had made their purchase with no money down,” he said. “They were making high payments, and they went through a lot of heartache and stress, but many got to live in the house for two years after they stopped making payments."
Langholz still sees opportunities for investors buying rental properties, but that could change.
“If interest rates go up, that will make the rental properties I’m selling not affordable,” he said. “Buying rental property with a negative cash flow is punishment.”
Bergman predicts another possible danger ahead: If more houses are put up for sale, that could lead to lower selling prices.
“Down the road, there’s still a whole bunch of foreclosed properties yet to be released by the banks,” Bergman said. “More inventory may be coming.”
- Mark Rosenberg is an investment consultant for Financial West Group in Scotts Valley, a member of FINRA and SIPC. He can be reached at 439-9910 or firstname.lastname@example.org.