Most of my blogs consist of analyzing sales, appreciation, and under-priced deals. Today, I want to focus on a market that is larger than the for sale market in Los Angeles County: Rentals! Rentals are an extremely important part of the real estate economy and should be considered as part of anyone’s real estate strategy.
Renting in Palos Verdes Estates
Palos Verdes Estates tends to be heavily dominated by owner-occupants, so leases in this area are harder to find than in the beach cities or surrounding South Bay communities. Even though rental supply is restricted in Palos Verdes, the demand is not as high as you might think because most people moving to The Hill prefer to own. Renters who don’t plan on living in Palos Verdes long term normally go to other areas.
Rent to Value Ratios
The rent to value ratio is just a quick and dirty calculation that I find useful. I use this calculation to weed out over-priced rentals and get to the good ones faster. The rent to value ratio in Palos Verdes Estates is lower, which means renters get a lot more bang for their buck if they can make the location work for them.
Take a look at hypothetical examples of rent to value ratios:
$5,000 per month rent ($60k annually) / $1.5 million home value = 4% rent to value ratio
$2,500 per month rent ($30k annually) / $600,000 home value = 5% rent to value ratio
$10,000 per month rent ($120k annually) / $4 million home value = 3% rent to value ratio
If rental decisions are purely made in black and white to achieve the most value for your dollar, which one should you choose above? The answer is, the home with the lowest rent ratio.
Now, normally high-priced properties have the lowest ratios and offer the best deals because most wealthy individuals choose to buy, rather than rent. As a result of the smaller renter pool, the higher part of the market cannot command as much rent as other parts of the market. The rent to value ratio should really be used when you are looking in different areas and want to find which area offers the best deal.
Let’s say you work in Torrance. Oftentimes you wouldn’t mind living in Manhattan Beach, Hermosa Beach, Redondo Beach, or the Palos Verdes Peninsula. What area would offer the most value? Given the title of this blog, you all know where I am going with this. But why Lunada Bay? Let’s breakdown a couple awesome bluff properties and find out.
Palos Verdes Bluff Property Option One
This first bluff property at 1115 Palos Verdes Drive West is asking $9,750 per month, and technically, this property is in Malaga Cove, but it is right on the border of Lunada Bay.
Bluff properties can be tough to value at times due to limited sales and varying sizes of homes and lots. That said, this home is in one of the least desirable locations on the bluffs right off P.V. Drive, so let’s give it a value between $4 million and $6 million.
$117,000 rent annually / $5 million value = 2.3 ratio
This is a super low ratio and you are on the freaking Palos Verdes Cliffs overlooking one of the South Bay’s greatest surf spots, Bluff Cove.
So how does this home compare to other properties? Let’s take 416 35th Street in Manhattan Beach that is currently for rent OR for sale as an example.
$9,500 per month rent ($114k annually) / $3.25 million asking price = 3.5 ratio
Both homes offer the same bedrooms and square footage, but the bluff property offers a better rent value compared to the actual value of the home. Now, most beach agents and beach residents will argue all the merits of why Manhattan Beach is better and more desirable than this bluff property. That is all subjective and I do not agree or disagree.
In the end, if money does the talking, a $5 million home is more desirable than a $3.25 million home. And in this instance, you can rent that home for a much better deal than in Manhattan Beach.
Now let’s look at this new construction town home currently for rent at 814 S. Catalina Avenue #A in Redondo Beach.
$9,500 per month ($114k annually) / $2.3 million value = 5.0 ratio
This is larger and new construction; however, you can see the bluff and Manhattan Beach properties offer the best deals due to their lower ratios.
(P.S. This is a very smart landlord as these town homes were developed for rental purposes to hold long term. As you can see, they get a massive rent premium relative to other rentals with their high ratio. Well done.)
A smaller, older, and much more affordable example would be 539 2nd Street in Hermosa Beach.
$5,750 per month ($69k annually) / $1.9 million value = 3.6 ratio
Although this home is not entirely comparable to any of the options above, I wanted to throw in a smaller, more affordable home. As you can see, it is on par with the Manhattan Beach home in terms of rent to value ratio…different homes, but they offer the same rental value to their actual home value. Interesting!
Palos Verdes Bluff Property Option Two
This second bluff property located at 2709 Paseo Del Mar is asking $15,000 per month. Personally, I love this rental opportunity as it is one of the best bluff spots in all of Palos Verdes set in the Lunada Bay Cove, right next to Resort Point looking across to Rocky Point.
$15,000 per month ($180k annually) / $8 million = 2.3 ratio
Another low 2.3 ratio exactly like option one!
Let’s compare this home’s actual value to some surrounding properties to give perspective.
I will start with 145 Rocky Point Road, asking $8 million. With a 50% down payment, your mortgage and property taxes will run about $28,000 per month. This rental option offers an almost 50% discount in monthly overhead, and oh yeah, you don’t have to come up with $4 million down.
2729 Via Oleadas, asking $23,888,000, is far from being comparable, but it is only two lots from this bluff rental. Isn’t the value in the views and location anyway? Property taxes alone at this price are almost $24,000 a month, and again, you do not have to come up with $24 million to purchase.
Conclusion
All of these examples are rough numbers, of course. I know there are many different factors that go into choosing a home outside of numbers and ratios. But, if one’s home decision was purely based on numbers, then this can serve as a guide. You can take your numbers (or ratios), visit properties, and constantly weigh location, views, size, and condition that will hopefully end up getting you to the best deal. And if you are considering buying but not staying in the area long term, this rental analysis is a must!