In 2020, we’re seeing a mass exodus from California, especially from the upper middle class and higher, who can actually afford to leave.
Of course, people moving out of California in big numbers is nothing too new. The year 2019, was the seventh year in a row that more people left California than moved in.
However, in 2020 the coronavirus appears to be the “last straw” for many Californians.
Read on to learn more about who’s leaving The Golden State, why people are leaving California, and why California is a poor place for investing in real estate.
Notable ‘Why I Left California’ YouTube Videos
Since COVID hit, we’ve seen an influx of videos and articles titled, “Why I’m Leaving California.” Famous Youtubers, bloggers, and everyday people share the reasons they’re leaving behind the state they once called home.
Joe Rogan is Leaving California for Texas
In July 2020, Joe Rogan announced he’s leaving LA because of overcrowding. To him, it’s at the point where the population isn’t manageable, leading to problems like worsening homeless and economic despair. Not to mention that it’s easier to catch the coronavirus in crowded areas.
Ben Shapiro is Leaving California for Tennessee
On September 16, 2020, Ben Shapiro announced he’s moving his company, The Daily Wire, to Nashville. Poor governance of the state is his main reason for leaving. Although, the city’s high rent, zoning regulations, homelessness, crime, dirty and dangerous streets, and increased taxes haven’t helped either.
Graham Stephen is Leaving California for Las Vegas
On October 9, 2020, Graham Stephen announced a move to Las Vegas. For him, high income taxes, worsening crime and homelessness, a high cost of living, wildfires, air quality, and business tax and regulation are all reason to leave. However, COVID-19 and its shift to remote working was the breaking point that made moving an easier decision.
Why Are People Leaving California in 2020?
Taxes Are Too High
California has the highest state income tax scale in the United States with rates as high as 13.3% for the wealthiest residents. That top tax rate may soon jump to 16.8%, retroactive to the start of 2020.
Tax-free states like Alaska, Florida, Nevada, South Dakota, Texas, Washington, or Wyoming are very appealing to upper-class Californians. In Graham Stephen’s case, he’ll save hundreds of thousands per year by moving to Las Vegas.
Proposed Wealth Tax
AB 2088, the proposed wealth tax, would charge 0.4% on net worth exceeding $30 million. It’s the first of its kind in the United States and would affect the top 0.1% of Californians—about 30,400 residents. Leaving the state offers a potential way to avoid the tax. Although, if approved, it may still apply to former residents for 10 years, but you would owe less if you moved out than if you remained a resident.
Skyrocketing Cost of Living
People can’t afford to keep living in the state. California has the third highest cost of living in the U.S. only after Hawaii and Washington, D.C. Housing costs are 127.3% higher than the U.S. average. Those in LA and San Francisco face even steeper costs. According to the Homeless Policy Research Institute, relative to the demand, the state is facing a 1.4 million affordable home shortage.
Due to a lack of affordable housing and adequate social services, homelessness is a real problem in California. From 2018 to 2019, homelessness in California increased by more than 16%.
Stephens and Shapiro both touch on the homeless problem in Los Angeles. Stephen says, “It’s been nearly impossible to walk down the street without stepping past drug usage, tents, trash, and people who are not being treated appropriately.”
Shapiro echoes the sentiment saying, “If I let my kids walk around the neighborhood, they will stumble across two open needles…because the city has told law enforcement specifically that they can’t do anything about the rampant homelessness problem that has plagued Los Angeles.”
More than two dozen fires are currently blazing through California. It’s arguably the worst batch of wildfires in the state’s history. This year, more than 8,600 have been reported in the state, damaging or destroying more than 9,000 structures. Not only do wildfires pose a threat to those living in risky areas, but they worsen the air quality in California and nearby states.
A 2019 poll from the University of California, Berkeley found that 52% of registered voters had recently considered leaving the state. One reason being political culture. Three times as many more Republicans and conservatives list political culture as a reason to move versus Democrats and liberals.
Aggressive COVID-19 Measures
For many, the coronavirus and its stay-at-home measures have been the final push to leave the state.
Some want out of the state because they want more freedom and a less restrictive approach to stopping the spread of the virus.
Others used to feel tied to the state because of their job, but with remote working, that’s no longer a factor. A survey in July 2020 conducted by Hired found that more than 40% of tech workers in the Bay Area would leave for somewhere cheaper if they could work from home forever. More and more companies, especially tech companies, are giving workers the option to work remotely on a permanent basis.
We’re seeing the effects already. In May, a report from Redfin showed that 72% of its San Francisco-based users were searching for homes outside of the city.
Why California is a Poor Choice for Real Estate Investing
Now is not the time to invest in California real estate. The California real estate boom is over, and the issues outlined above certainly add to the risks of investing in the state. Others include:
Buying real estate in California is just too expensive right now, especially if you’re looking to invest in one of the state’s large cities. According to Zillow, the median home value in the Los Angeles metro area is $711,361. In San Diego, it’s $675,496. Recouping the cost of an initial steep investment will prove difficult in a state with an affordable housing crisis.
Poor Rent-to-Value Ratio
A rent-to-value ratio (or rental yield) is the value of a home divided by 12 months of expected rent. You can use rental yield to evaluate whether it’s worth investing in a certain property or geographical area. Generally, the higher the rent-to-value ratio, the better investment opportunity it is. In California, properties have poor rent-to-value ratios.
Not Landlord Friendly
Due to rent control policies and restrictions on serving evictions and notices, California is one the country’s least landlord-friendly states. Tenants here have extra rights that aren’t available in other states. Consider a more landlord-friendly linear market like Indianapolis, Indiana.
Choose Linear Markets over California
If you’re looking to invest in real estate, look to linear markets instead of a market like California. Linear markets offer steady appreciation over time and are more manageable for investors. Instead of California, prioritize cities within states that have landlord-friendly policies, a lower cost of living, lower than average property prices, and high property appreciation like centrally located Memphis or Kansas City.