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It is an exciting time in the San Francisco Bay Area and Silicon Valley. With Lyft and Uber having already gone public (not to mention a slew of other “Unicorns” looking to go public in 2019), there is lots of discussion about how to maximize investments and make smart financial decisions. One of the hottest topics is real estate and it’s a timely conversation that we’re having with many of our clients who own a primary property and are looking to buy or sell a second home for vacation purposes or simply as an investment.

We are proud to tap in to our considerable network of community partners who are professionals in a variety of fields including real estate. I recently spoke with David Hargreaves of Modern Living Sonoma about the current situation in the area and the upswing in rental property purchases. David advises that before people start the process of real estate investments (specifically in Wine Country), it is important to be clear on the motivations for purchasing a property because it dictates not just the type of property, the price range plays but it also plays a huge part in the location and the zoning of the desired property.

Sheila: Aside from all of this IPO activity, why, in your opinion, are people investing in Wine Country rental properties this year?

David:At the end of April a property in Healdsburg sold for its $6.7m list price within days of coming on the market[i]and while it is a stunning home, the buyers were no doubt swayed by the fact that it grossed $720,000 in vacation rental revenue last year. With returns like that it is no wonder that Sonoma County is attracting a lot of attention from people in the Bay Area looking for second properties.

In Sonoma County, there are over 16,500 properties in the county that are owned by people who live elsewhere, many in the Bay Area.[ii]Are all of these people embracing the sharing economy as part of their property investment strategy? Absolutely not. There are lots of different reasons why people are investing in Sonoma County, but they typically fall in to one of four categories:

  • A second home exclusively for use by the owners
  • A second home that is used by the owners, but is partially funded by operating it as a vacation rental
  • A pure investment property rented out full time
  • A second home that is purchased in preparation for a life transition and a move up to Sonoma County full time

Sheila: Where are the “hottest” spots in the region?

David: If we look at the top three places where people from out of the county purchase properties, they arethe City of Sonoma (2214 homes),Healdsburg (2156 homes)and Guerneville (1485 homes). If we look at the top cities for generating revenue from vacation rentals, they are Sonoma with $40.8m, Healdsburg with $19.1m, Sea Ranch generating $17.5m and then Guerneville in fourth with $13.9m.With this inmind it is no coincidence that the cities of Sonoma and Healdsburg are also the two cities that have banned new vacation rentals from operating within the city limits.Even properties that have a legal permit for operating as a vacation rental are no longer able to transfer that permit with a change of ownership of the property.

Sheila: Are regulations stricter now than in the past?

David: Although regulations have definitely tightened, there are still opportunities to make smart investments.  It’s really a matter of knowing how to work within the complex and changing rules. If you purchase a property in the sought-after Dry Creek Valley, for example, this is outside the city limits, thus, as long as it has a specific rural residential zoning, it can be permitted to operate as a vacation rental. Having a good understanding of the different locations both at a macro level and even down to street level in places like Glen Ellen and Kenwood, is critical to help identify the right property – even if you are looking at only occasionally operating it as a vacation rental.

Sheila:How can you know if a property is a good investment? Can you analyze potential earnings?

David:Great question and yes!  So, lets presume we find a property, how do we know how much it can potentially earn in a year. The good news is that there is a service called AirDNA that takes all the data from Airbnb and HomeAway and helps determine what revenue you could expect to get from a given area. It can even give an estimate of what you might get at a specific target property address.

For example, 4011 Mill Creek Road, Healdsburg is a three-bedroom, two-bathroom property, currently on the market for $1,395,000 in Healdsburg in an area and zoning that allows vacation rentals. Let’s assume that we can buy it for $1.3m because on average, properties in Healdsburg are selling for 92% of list price. If we assume that we can put down 20% equating to $260,000 and we get a 30-year fix mortgage at 4% this would equate to monthly payments of $4965.  Pulling data from AirDNA indicates that if we were to rent this as a vacation rental, we would get $120,348 per year if we achieved rentals in the 75thpercentile. The forecast occupancy levels for a property of this type to generate that income are seasonal but will be approximately 60%. This is good news because it means the owner can still make use of the property themselves. So far so good.

However, we now need to take off the costs which include property tax of $10,400, annual mortgage payments of $59,580, a vacation rental management charge of $12,035 based on a rate 10% from a company such as Evolve Vacation Rental and tax of $40,918 based on an effective tax rate of 34%. This gives total costs of $122,933 against an income of $120,348. This would leave us with a loss of $2,585 per year excluding the cost of insurance and any maintenance.

So, what’s the verdict? It depends! If we go back to the start and think about our motivations, if we are looking for a pure investment property then there are definitely better options that will give both a monthly income and the opportunity for capital appreciation. However, if we are looking to purchase a second home in wine country that can occasionally be enjoyed, in a place as desirable as Healdsburg, that costs just $2,585 per year then this suddenly looks like a good option. Particularly if you consider that this property also has a guest unit that is not factored into the rental revenue calculations, so you can even stay there when the main house is rented out.

As with all decisions concerning property investments, they are incredibly personal choices. Regardless of whether you are looking to buy a dream second home that you will never rent out or buy a pure play property investment, or something in between, the most important thing is to work with a team of specialists who can help you make the right decisions based on your ultimate goal. The good thing is that if you buy a place up in wine country, you can always sit back and let the world go by with a glass of wine in your hand.

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About the Author

David is originally from the UK where he went to Oxford University but has lived in California for nearly 12 years with his wife, Nancy. Before becoming a full time real estate professional, and setting up Modern Living Sonoma, he built his own marketing business working for brands such as Google and Virgin. David is a specialist in the luxury market and in particular loves modern design and all that it can bring to creating a dream home. A self-confessed data nerd and technologist, David is a big believer in using data and technology to deliver the best possible service and value to clients.

Modern Living Sonoma aims to make navigating the complexities easy and make the buying and selling experience enjoyable, whether you are buying or selling a second home, moving to Sonoma County, looking to build your dream modern home or building an investment portfolio.

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[i] (MLS – the multiple listing service)

[ii](First American Title).

Please Note: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of Private Ocean Wealth Management. Private Ocean does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Private Ocean’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.