Last time, I talked about our wine tasting on a budget trip to Temecula. This time around, I wanted to delve into the Temecula real estate market.
Now, I’m sure some of you are thinking, “I’m nowhere near Temecula and don’t intend to buy any real estate there so why even bother reading this post?” The truth is, the steps I take below to analyze the Temecula real estate market are the same as analyzing any market. Whether Temecula, Chicago, or any other city. You can take the same steps to learn about that market.
So let’s get started.
With weather comparable to Napa Valley, Temecula is most notable for it’s wineries, making it a popular destination for Southern Californians seeking a weekend getaway. Temecula is only 85 miles southeast of Los Angeles, 60 miles north of San Diego, and 61 miles southeast of Orange County.
Temecula’s Population Growth
Temecula’s population has grown considerably in recent years, especially from 2000 to 2010 where it grew by 73.5 percent! Located within Riverside County, which also saw considerable population growth, though not as large as Temecula itself.
Here are some quick population facts based on data provided by the US Census Bureau.
|Population Estimates||Temecula||Riverside County|
|2000 to 2010 Percent Change||73.5%||41.7%|
|2010 to 2015 Percent Change||11.8%||7.8%|
The following graph shows Temecula’s population history back to 1990 along with many neighboring cities. All cities have been experiencing steady population growth. The greatest growth for Temecula, next door Murrieta, and Corona occurred during the late 90s and early 2000s.
Temecula’s Local Economy
At first sight, I would think Temecula’s economy is largely built around the strong wine industry there, but let’s do some research. Whenever I’m studying a real estate market and trying to understand the local economy, I look to answer the following questions.
- Current unemployment rate and where is it trending?
- Are jobs being added? If so, what kind of jobs?
- What types of jobs dominate this market?
- Who are the major employers?
- Any major city plans that will positively or negatively effect the job market?
As of July 2016, the California Employment Development Department (EDD) reports Temecula’s unemployment rate at 5.1%. This represents 2,700 people unemployed out of the 52,700 total labor force. By comparison, Riverside County has a unemployment rate of 7.1%. Not only does Temecula boast one of the lowest unemployment rates in the county, when compared to similar-sized cities with a labor force of at least 30,000 or more, it is in fact the lowest unemployment rate in Riverside County.
Historically, the unemployment rate of Temecula has fared much better than most cities in Riverside County for quite some time. From the graph below, notice that Temecula’s unemployment rate has trended downward since late 2010. Based on the recent data from the EDD, it seems the unemployment rate is settling around 5%.
Top 10 Employers in Temecula
With approximately 3,000 businesses in Temecula, employers come from a wide array of industries. While education and healthcare employ the greatest number of jobs in Temecula, several other industries such as retail, manufacturing, and technology are also present. No single company or industry is responsible for employing a significant portion of the labor market. In fact, the top ten employers of Temecula only account for about 11% of the labor market. This is important because a local economy with a diverse employment base can better withstand recessions. This helps to keep our renters employed, enabling them to continue making rent payments, and ultimately keeps our vacancies to a minimum. There’s no better example than Detroit and what can happen if the local economy is too dependent on one industry.
|Employer||Industry||Number of Employees||% of Total Employment|
|Temecula Valley Unified School District||Education||2,988||4.49%|
|Costco Wholesale Corporation||Retail||340||0.51%|
|Norm Reeves Auto Group||Automotive||276||0.41%|
|Channell Commercial Corp*||Telecommunication||275||0.41%|
|FFF Enterprises Inc||Healthcare||225||0.34%|
|Temecula Comprehensive Annual Financial Report, FY 2015|
Here I thought the wine industry was the biggest industry. Sure, wine tourism attracts 2.4 million people annually and there certainly is a major service sector in place that supports these wine fans, like myself. Though the reality is that the employment market in Temecula is quite diverse as you can see in the table above.
* Interestingly, Channell Commercial Corp announced plans to expand, but relocate their headquarters to Texas due to California’s unfriendly business environment. This Temecula facility would still remain open, though its employment numbers have dropped over the years. At one point they had employed over 800 people, but as of 2015 they have reduced their workforce to 275 jobs.
Temecula Future Outlook
So how does one find out what plans a city has for its future? Here are 3 options and two of them can be done online.
Talking with the Locals
If you happen to be in that market, it’s great to just talk to local residents. I did this while on my wine tour and in fact, a worker at one of the wineries shared some interesting statistics. According to them, Temecula currently has 47 wineries in existence, but has an ambitious plan to more than double this number. Specifically, our guide mentioned that the city’s goal was to have 100 wineries in Temecula over the next decade.
I don’t know how accurate these numbers are, but it’s a great starting point to conduct more research. As an investor, hearing that the number of wineries may double is huge news! The current wine industry in Temecula already brings in about 2.4 million visitors a year with economic activity of approximately $600 million annually. The surrounding businesses that support the wine industry along with the real estate market will greatly benefit from this potential growth.
Comprehensive Annual Financial Report (CAFR)
Every city puts out what is called the Comprehensive Annual Financial Report (CAFR) and is accessible on the city’s website. The CAFR is basically a report of the annual financial activities of what happened that year. Just like how companies prepare annual financial statements, governments and cities do this as well. Contained within these documents, one can see where the government spends its money.
Warning. These tend to be dense reports. Personally, I like to read Section 1 of the CAFR which gives a succinct overview of the city, the local economy, economic plans, and any major initiatives. I then flip to the back of the CAFR and read the Demographic and Economic Information found towards the very end.
Some of the highlights from Temecula’s 2015 CAFR include:
- Fletcher Jones Mercedez Benz opened a 50,000 square foot dealership with an inventory of 600 new nad pre-owned vehicles
- 459 business licenses were issued in 2015, a 6% increase over prior year
- 300 permits on new residential construction are expected to be issued this year, representing 18% increase over fiscal year 2015.
- Top 10 employers (see the table I already made above)
2030 Quality of Life Master Plan (QLMP)
When studying a market, a great resource is often the city’s own website. There you’ll find links to not only the CAFR, but often there’s information on what the city’s future plans are. For Temecula, in turns out that the city has what they call their 2030 Quality of Life Master Plan (QLMP). In this report, they lay specific goals in several areas such as in economic prosperity, safety, and transportation among others.
The goals that stood out to me include:
- To be one of the safest cities in the US — currently it’s 1 of the 25 safest cities in California.
- Become a regional center for life sciences and medical technology employment.
- Provide an entrepreneurial culture with a growing number of diverse high-paying jobs in innovative and global companies.
- Develop a technology incubator, linked with CSU San Marcos and CSU San Bernardino, to increase the number of innovative, research-driven medical technology and clean tech businesses within Temecula
- Become an internationally known tourist destination in the US for Southern California Wine Country, Old Town Temecula, as well as premiere golf and gaming facilities
- Continue its partnership with the City of Murrieta on the “Twin Cities” concept, leveraging resources and marketing for job creation, economic development and greater awareness of the region
Current Cash Flow Potential
Let’s now dig into the potential cash flow a property in Temecula can generate as a buy and hold rental. A great parameter to use in comparing potential cash flow across many markets is the rent-to-price ratio. If this a new concept, check out this detailed post I wrote previously on rent-to-price ratios.
The short story is that your monthly rent divided by the acquisition price (purchase + any rehab) is your rent-to-price ratio. For example, a $100,000 property that rents for $1000 per month has a 1% rent-to-price (aka 1% Rule). Some investors shoot for 1% in a rental property. As I cautioned in a previous post, 1% Rule doesn’t work across all price ranges. A very cheap house (i.e. < $100k) will need a higher rent-to-price to cash flow. Likewise, more expensive homes (i.e. $500k) may still cash flow even with a rent-to-price below 1%.
Below I’ve pulled data from Zillow to track rent-to-price ratios in Temecula and neighboring cities to provide some context. Zillow uses the estimated home value or Zestimate for the price term and the estimated rent to calculate this ratio at the individual home level. Then the median of all rent-to-price ratios to a given region, such as Temecula is calculated and plotted below. The time range of the rent-to-price ratios include data from October 2010 to June 2016.
As of June 2016, Temecula’s rent-to-price ratio is 0.52%. Notice that the rent-to-price ratio in Temecula has dropped by nearly 0.2 % since 2010 and reflects how home prices have been increasing during this time period. Neighboring cities also show the same trends. Next door Murrieta has a slightly higher rent-to-price ratio and Coronoa nearly matches Temecula’s rent-to-price ratio in the past 5 years. Lake Elsinore, a smaller, but slowly growing community has a higher rent-to-price ratio at 0.57%. Lastly, the city of Hemet, which previously had over a 1% rent-to-price ratio just a few years ago, has had the largest swing with a current rent-to-price of about 0.65%.
What does this all mean? Well, it would have been great to have bought between 2010 and 2012. Rent-to-price ratios were much higher at that time then they are at now. Oh well, the market is where it is so there’s no changing that. But, it’s good to see where it used to be so that we have some context into how home prices and rents are today compared to recent years.
Sample Analysis – 32157 Camino Marea
Here’s a sample listing that I viewed while in Temecula. The property is 32157 Camino Marea and as of this post, it is listed for $379,998. What’s funny is that at the time I was in Temecula, the property was listed for $379,999. Yup, a whole $1 more. That’s some price reduction! Buyers take a number…ha!
Historically speaking, this property is not quite at its 2006 high of $415,000, but it’s well above its recession low point of $240,000 just 3 years ago. Let’s not speculate as to whether the property will continue to appreciate like it has in the past few years. Instead, let’s just analyze it as a rental property in its current state.
Note the rent-to-price on this property comes out to 0.55% ($2100/380k), which is just slightly higher than the median 0.52% rent-to-price in Temecula from Zillow’s data above.
- Purchase price: $375,000
- Monthly rent: $2100
- Closing costs: $5,000
- No repairs needed. (Unrealistic I know, but let’s keep things simple for now)
Let’s say as an investor, we were to put down 20% or $75,000 and finance the remaining $300,000 on a 30 year note at a fixed 4.5% interest rate. This results in a monthly debt payment of $1520.
With only $2100 in rent and a debt payment that takes up 72% of our income, this does not look promising. This leaves only $580 to handle all the expenses that will turn up in the next section.
In calculating the potential cash flow and cash-on-cash return, let’s take into account the following monthly expenses.
- Home Owner’s Association (HOA) fee – $80
- Property taxes – $390 (based on 2015’s tax assessment)
- Insurance – $67 (estimate)
- Property Management – $105 (5% of rent)
- Maintenance – $100 (estimate)
- Leasing Fee – $58 (assuming PM charges a full month rent and turnover every 3 years)
- Vacancy loss – $105 (5% of rent. Not technically an expense, but must be included)
So here’s the summary of cash flow.
With only $2100 of rental income, once we take into account all expenses, the cash flow is negative! Every month this rental property would lose about $325 a month. Annually, that’s a loss of $3,895. In other words, this property is projected to lose nearly 5% of our $80,000 investment every year!
So do you pass? Well, for one thing it means that you shouldn’t buy it at that price. If one can snag this property for much less, then you may have yourself a deal.
Cash Flow Calculated the Wrong Way
Often times, a newbie investor will calculate cash flow based on rental income minus PITI (Principal, Interest, Taxes, and Insurance) and any HOA fee. They only look at what in their mind are monthly expenses that are sure to come up each and every month. This approach neglects so many expenses, but what the hell. Let’s see what happens when making this mistake.
Our monthly principal and interest payment is $1,520. Taxes are $390 and insurance is estimated at $67 a month. Lastly, this property comes with a mandatory HOA fee in the amount of $80 a month. So total expenses to a newbie may sum to $2057.
Therefore, cash flow equals $43 ($2100 – $2057)! We’re cash flow positive. Woohoo!
Then the investor starts to rationalize this positive cash flow as a worthy investment because they look at the appreciation potential. They think, since 2013 this property appreciated from $240,000 up to about $380,000. That’s a $140,000 gain or a average annual appreciation rate of 19%! So then they apply the 19% annual appreciation to their purchase price and start seeing dollar signs.
Don’t do this.
Don’t speculate and bet on appreciation to justify a bad deal.
Invest on cash flow instead and be sure to calculate it correctly. It’s not positive $43 a month, but actually more like negative $325 a month!
So there you have a sample analysis of the Temecula real estate market. Honestly, this is how I’d go about researching any real estate market. In no way was this a comprehensive analysis, but it touched on a lot of the main highlights.
Look for a growing population and a strong local economy that is growing. Jobs need to be diverse and no single employer should make up the majority of the employment numbers. I also touched on what the city of Temecula has planned for its future, which has major implications for the growth of Temecula’s real estate.
I lastly did a sample cash flow analysis on a current listing in Temecula. Based on its sales price and estimated rent, as a buy and hold rental the property would not cash flow. So despite the positive market signs for future growth, buying at list price will likely result in negative cash flow! I mean, the market as a whole has a median rent-t0-price ratio of only 0.52%. So unless you can acquire these properties at a discount, it’s going to be rather difficult to find cash flow here.
What do you think of the Temecula market? Would you invest in a rental property here or just visit for the wineries?