California has historically been a major destination for real estate investment. For example, one major investment real estate brokerage sells almost 92 percent of its California-based listings to California private investors. However, California real estate can also be expensive, and supplies can be scarce. Nevertheless, there are at least six good reasons for why California real estate investment has been such a good bet over the years:
Scarcity of land. Values in California are generally high for a simple reason -- people want to live and own property here. The high desirability of California drives real estate values up. Furthermore, because California's geography limits the amount of the best real estate, even less desirable inland properties go up in price due to their proximity to the coastal areas.
Availability of capital. By itself, California's economy would rank as the sixth or seventh largest economy in the world. Investors looking to buy real estate are able to tap into a gigantic pool of capital that includes everything from the largest global lenders to entrepreneurial private lenders that help make deals happen.
Proposition 13. For many investors, property tax increases are a significant risk. California's Proposition 13 caps annual property tax increases at no more than 2 percent per year, whether it's a residence or a real estate investment property. California's property taxes don't get reassessed until the property changes hands, protecting investors from uncontrolled increases.
High returns on improvements. In Midwestern markets where homes sell for $50 to $100 per square foot, it can be hard to make a healthy profit on improvements to a real estate investment property. When a modest home in a desirable coastal California city can easily sell for between $500 and $1,000 per square foot, small upgrades can create significant equity.
Multiple exit strategies. The combination of high rents and high property values means that many California properties offer two exit strategies. If something goes wrong and the property cannot be resold, you may be able to profitably turn a property that you bought strategically into a rental property as you wait for the resale market to grow to meet your expectations.
Counter-cyclical opportunities. Some California markets engage in boom-and-bust building cycles. Making your real estate investment on the wrong side of the cycle can be costly. However, using these cycles to buy when properties are discounted can create even more opportunity for upside.