Which areas are best to invest for rental properties near Bay Area California?

Question

Hi there, I live in Bay Area, California. I plan to buy and rent it 
out a Single Family Home.  I tried exploring San Jose, Fremont, Dublin, 
San Ramon and Pleasanton and received advice that the ROI is low as the 
rent it less for the high cost of the house. I heard that the following 
surrounding areas have higher ROI. This is my first investment property,
 so I am still learning.

Questions:

I would appreciate advice on which of the areas below (or any other 
in the order of priority) for high profitability (Rent, appreciation, 
re-sale).

1. Lathrop: Glad that Tesla here may motivate tenants. But should I 
worry about the low ratings of schools and being far from Bay Area?

2. Mountain House: I heard that Mountain house has higher chance of 
severe fires, should I worry about it? Do you think the house prices 
have already saturated or do they have potential to grow further?

3. Tracy: Is Tracy already saturated and too expensive? Or is it good to still invest here?

4. Merced.: Glad that Merced university may attract tenants, but 
should I worry about the low school ratings and being far from Bay Area?

Other Questions:

a) Do you recommend 3 or 4 or 5 bed room houses for ease and best returns of renting out?

b) Should I look for new constructions only or are recent constructions ok?

Isadore Swartz · Answer

I helped move 5 bay area properties from San Jose to the Sacramento area (1031 exchanges).  We purchased 2 to 3 homes for each exchanged (12 in all). Having rented these out for years now I can say they even performed well during Covid.  All were immediately more cash positive than the old ones.

I prefer 1200 to 1800 SQFT homes (3-4 Br).  Larger and you get multiple families or a large number of kids.  Smaller and you limit your pool of applicants.  Avoid pools, and homes with large trees.  I rent these by hosting a rental open house (3 hours on a SAT/SUN).  I get 8 to 10 groups, and 4 to 5 applicants all on the same day.  This helps to avoid the one renter with questionable qualifications being the only app received.  Interestingly I feel this also avoids some of those lesser qualified applicants..  Everyone sees there are multiple apps, and those that are questionable usually dont even apply due to competition.

The area (State capital) is stable. All properties are cash positive with minimal expenses.

Lathrop and Tracy are nice areas but totally dependent on Bay Area job market (Commuters and WFH).  If you feel the job market will hold they would be good.  I still prefer the large Government workforce areas.

Full disclosure,,,, I am a realtor so am a bit biased.  I also see we have a realtor from the Columbus area.  I spent a week there last year assessing the 1031 exchange to that area.  GREAT area, even more ROI.  Be careful about what county as property taxes are all over the board in Ohio.

Rick Albert · Answer

Keep in mind single family home values are very different. There is an emotional aspect. That means a "retail" buyer is going to pay more than what you can offer. That is the issue across California.

Are you planning on renting out the house to one tenant or rent by the room?

I would actually consider Turlock, where Cal State Stanislaus is. That's where I went to college. Student population, there is tenant demand because there is no Greek housing (Fraternities and Sororities) and you can rent by the room. I would compare rents there to Merced and see which one makes more sense.

The main advantage to new construction is you can starting renting it out on day one. Many investors think that you should buy fixers. Although there is a valid argument for it, you are losing opportunity costs because the house is uninhabitable. There is also an argument that your Cap Ex and repair costs are low with new construction, so it could be easier to manage.

The main downside to new construction is slower appreciation in the beginning. You buy brand new construction and pay the premium for it, but yet every year the systems get older and you lose that premium value. Therefore you are banking on land appreciation until things settle itself out.

Eric Fernwood · Answer

Hi @Varsha Kgan,

You’re asking the right questions. Many Bay Area investors run into the same challenge: extremely high home prices compared to rents. That imbalance makes cash flow very difficult, and California has additional hurdles:

• Rent control laws limit how much you can raise rents, even when market demand justifies it.
• Tenant-friendly regulations make it slow and expensive to remove non-paying tenants.
• High property taxes and fees further reduce returns.
• Insurance and natural disaster risks (fires, earthquakes) add uncertainty and cost.

For these reasons and more, we’ve completed over ninety 1031 exchanges, most of them out of California. Investors are moving their capital into landlord-friendly states where rents and home prices consistently rise faster than inflation.

One of the strongest examples is Las Vegas:

• No rent control — landlords can adjust rents in line with market demand.
• Pro-business and landlord-friendly laws — evictions for non-payment typically take weeks, not months.
• Strong migration and job growth — people and businesses are moving here, which pushes both rents and home prices higher.
• Consistent appreciation — since 2015, the property segment we target has appreciated at about 9% per year and rents at about 7% per year, both well above inflation.
• Lower entry cost — compared to Bay Area markets, you can often acquire two or three cash-flowing properties here for the cost of one in California.

Wherever you choose to invest, partner with an experienced local investment team. They already have the services, processes, and resources in place to find, evaluate, inspect, renovate, and manage properties. There’s no need to reinvent the wheel, and it shouldn’t cost you more than working with any other realtor.

To your other questions:

• Bedrooms: The larger the house, the smaller the pool of potential renters. For example, a five-bedroom home is likely to attract only large families with multiple children, which is a much smaller group compared to the many families with one or two children who would rent a 3-bedroom, 2-bath, 2-car garage home.
• New vs. resale: Both can work. What matters most is the tenant segment you are targeting and whether the property matches their requirements.

If your goal is long-term financial independence, invest in markets where both rents and home prices consistently rise faster than inflation. That is how wealth is built. California does not offer that environment today.

Alan F. · Answer

Everyone of those tertiary markets could be a good location. Obviously Merced being the least related to the super commute over the Altamont pass. Keep in mind that the Bay Area is the largest economic engine in Nor Cal. It really boils down to the deal itself and the specific neighborhood.

California school system is somewhere around 30th in the nation, school quality is related to tax revenue, obviously more affluent areas have better schools.

Most areas have some level of fire risk, the Oakland hills have burned, loma prieta burned, pick an area and it probably burned. Lathrop is growing very quickly, Mt House just recently incorporated, Tracy has some rough areas & newer areas. The distinction between a brand new house & a " newer" is generally minimal, its more about the quality of the builder.

So what really boils down to is can you get a good deal, with prospects of a quality Tennant pool. I'd suggest you visit many homes throughout those markets, conduct lots of due diligence and trust but verify everything. Get inspections on any purchase, underwrite conservatively and verify any claims made folks that are selling something.

Scott Scoville · Answer

Hey Varsha, welcome to the BP forums. I invest in Sacramento, along with a lot of other BP members. The barrier to enter this market is a bit easier than the bay area, along with cash flow. Happy to chat more about the market if you're interested. I'll DM you.

Chad Hale · Answer

@Varsha Kgan  did you explore multi-family options in San Jose.  Same or better purchase price as SFR but with better cashflow.

Arman Ahmed · Answer

@Varsha Kgan

ROI can be tough in high-cost markets, which is why a lot of investors I work with look to the Midwest where the numbers tend to be stronger. I can’t speak to those specific Bay Area cities, but I’d say the key is to run the numbers carefully and make sure the deal fits your goals. Curious — are you mainly aiming for appreciation, or do you want strong cash flow from day one?

Varsha Kgan · Answer

Thanks @Alan F. Great suggestions!

Varsha Kgan · Answer

Thanks @Isadore Swartz! I made a note of the helpful points you shared (3-4 bed rooms , avoiding trees and pool, etc. ) and added Sacramento to my list of areas to look for investment properties.

Varsha Kgan · Answer

Thanks @Chad Hale. Good point. I tried exploring multi-family options, but I heard that multi-family homes have problems with appreciation and re-sale. They strongly discouraged me from buying those. So, I was trying to look for Single Family Home with ADU or at least enough lot size to have a ADU, so I can rent that out as well.

Which areas are best to invest for rental properties near Bay Area California?

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