Temecula Real Estate Market – What I Learned Over Wine Tasting

Temecula Real Estate

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.

Location

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

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 EstimatesTemeculaRiverside County
200057,7161,545,387
2010100,1562,189,760
2015112,0112,361,026
2000 to 2010 Percent Change73.5%41.7%
2010 to 2015 Percent Change11.8%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?

Unemployment Rate

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.

EmployerIndustryNumber of Employees% of Total Employment
Temecula Valley Unified School DistrictEducation2,9884.49%
Abbott LaboratoriesHealthcare2,0003.01%
International RectifierSemiconductors6000.90%
Macy's Retail3800.57%
Costco Wholesale CorporationRetail3400.51%
Norm Reeves Auto GroupAutomotive2760.41%
Channell Commercial Corp*Telecommunication2750.41%
EMD MilliporeBiotech2700.41%
Milgard ManufacturingManufacturing2560.38%
FFF Enterprises IncHealthcare2250.34%
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.

Temecula

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!

Temecula

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.

Assumptions

  • 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.

Expenses

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)

Cash Flow

So here’s the summary of cash flow.

Temecula

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!

Conclusion

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? 

10 thoughts on “Temecula Real Estate Market – What I Learned Over Wine Tasting

  1. I would look at other properties ion the area, on a pre-MLS basis. There are always foreclosures, divorces, funerals in every town. There are flippers making money there. Find a pre-foreclosure. It takes more work, but that is how you need to make money.

    • Good point NNL. Looks like off-market deals are a must here to cash flow positive. Takes more time, but definitely more upside. Were all of yours found in this way?

  2. I actually live in San Diego and did some extensive looking in Temecula and the surrounding areas. I found similar data to yours, although a little bit better rent-to-price ratios back then.

    Nevertheless, it still didn’t make sense on paper, so I moved on. I would do some further digging for non-MLS deals as NNL suggested, but I simply don’t have the time currently.

    It’s fantastic that you show your analysis here for others to learn. All too often I see “investors” jumping in as speculators which typically ends up bad.

    Love the site!

    • Thanks Michael! I really appreciate your comments. This post idea literally came about out of my own curiosity while sipping a glass of Cab Franc :). Then when we were told that the number of wineries there would double, it really got me wondering. Like what are the rent-to-price ratios in this market currently? Am I too late or are the only good deals off market? I’m sure you can get lucky buying straight off the MLS, but as my post shows, the average listed property just doesn’t work. So working hard and creatively is likely the way to go here.

  3. The analysis reminds me of a real estate internship that I did while in school. Looking at demographics and employer information can be a great way to see where the city is going and how the real estate market will do. Great walkthrough of your analysis, thanks for writing it OB!

    • My pleasure FS. I can personally tell you that analyzing a market isn’t rocket science, but it does take a bit of work. Nearly all the information is publicly available and in today’s age, is freely accessible right through the internet. A professional, a student, or even a kid with some interest can do this research.

  4. I love that little wine region of Temecula. We used to live near there and I worked part-time at one of the wineries, for almost 4 years. It was probably the best job I ever had…great people, great wine, and happy tourists.

    Back in the mid 2000s, there were about 20 wineries out there, and growing. I can’t believe it’s up to 47 now…wow! And potential to double that! As long as the small guys continue to do well and aren’t squeezed out by the big guys, that area will thrive. I used to love going on a bike ride through that area…quiet roads on weekdays.

    The best attraction is that the wineries are rather close together. You can hit 4 or 5 in no time. I’m sure the side businesses are growing…bus tours, restaurants, weddings, etc.

    • That sounds like an awesome part-time job! Which one did you work at? My wife and I secretly want to retire with a winery. That’s how much we enjoy wine…drinking it, the process, and the people.

  5. Great analysis OB! Had to come check this out after you and I discussed it briefly yesterday.

    Thanks for sharing your process for reviewing properties. One of these days we will have to jump on a call. I have built a pretty comprehensive financial model with 10 year projections with a lot of different variables, so I don’t make the newbie mistake you call out above.

    But I like to run two scenarios:

    S1 – is run the financial model assuming the worst.
    S2 – is run the financial model assuming the best…i.e only including the known recurring monthly expenses…that way I get a range of expected outcomes.

    Would love to run my model by you and have you poke holes in it. Like I mentioned yesterday, we only became accidental landlords. But we are looking to add another property in 2017.

    Cheers,

    Dom

    • Hey Dom! Thanks for stopping by. It was great meeting you at FinCon. I’d be interested to see your model and would be happy to talk further anytime.

      I like your approach of bounding your investment between the best and worst case. I generally focus on my best educated guess, which tends to be conservative. Though I do run a best case scenario where I calculate my cash flow after PITI & management only. This is really just for my own interest sake and I don’t end using this number to base any decisions off of.

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