I often get asked where is the best place to purchase a vacation rental in Sonoma County. While there are restrictions on the locations where it is possible to obtain a vacation rental permit, there are still a lot of different places where you can find a great vacation rental. There are so many different answers to that question because it depends on how much you have to spend? What style of property you have in mind? Your focus on income versus personal use and whether you place a strong preference for maximizing capital appreciation?
One of the tools I rely on for giving an estimate for the likely vacation rental income for properties in different areas is Airdna.co. This is a great service that requires a subscription for all the different areas so I thought it would be helpful to summarize some of the data for different locations showing the number of vacation rentals currently operating in an area, the average occupancy levels, the average daily rate, the median income levels for properties of different sizes as well as some of the best performing properties in different market.
Here is a link to a summary of the vacation rental income data from AirDNA for different areas:
While the core income data is important, with financing costs on the rise it is equally important to look at the likely cost of purchasing a home in different areas. For example, it might look tempting to purchase a home in Healdsburg because a four bedroom home in Healdsburg can gross $390,000 but then the median price of a four bed home is $2.5m!
For this reason, I have created the Modern Living Sonoma Vacation Rental Index which is the ratio of the Median Purchase Price for a home in a given area against the Gross Median Income. (I should say this is different from the cap rate of a real estate investment property which is calculated by dividing the property's net operating income by the current market value). It isn’t intended to be a definitive, standalone tool to make vacation rental purchase decisions but I do think it helps give an indication of how good a particular vacation rental market is likely to be from an investment perspective.
What is interesting looking at the ranking of the different markets is that Guerneville is the strongest market driven in large part by the median home purchase price of $575,000, which makes it one of the most affordable places to purchase a property in Sonoma County. At the same time, it attracts a large volume of visitors to its 286 active vacation rental properties.
The second and third best markets when evaluated by the Sonoma County Vacation Rental Index are Sonoma in second place and Healdsburg in third place. Part of the reason these two markets are so high up the list, despite median home prices in these markets being among the highest at over $1m is because of the popularity of these towns. They both combine being quintessential wine country coupled with the fact these are among the harder areas to find vacation rentals, so there is an incredibly high demand from visitors and a relative scarcity given the large geographic area covered by both of these zipcodes.
One of the areas that performs less well, given its popularity as a destination among Bay Area visitors, is Sebastopol. This is perhaps in part because it doesn’t have the cache of a Healdsburg or Sonoma and yet because of the recent popularity as a destination for second home purchases, median house prices are now the highest of all markets. I can’t help but feel that that the vacation rental incomes will begin to increase as Sebastopol continues to rise in popularity.
If we drill down a level further and look at the median income across different markets by size of home, it is interesting to see that the highest median income for a one bedroom home is in Guerneville with an annual income of $83,000. I am sure that is because of the allure of a romantic cabin in the Redwoods. There just isn’t an equivalent romantic getaway destination in wine country. For example this is the best performing one bedroom vacation rental in the Guerneville area. Located a mile west of Guerneville this has the Redwood vibe, lightning fast internet so you can carry on working, a great outdoor space to soak in the forest and a hot tub for those relaxing evenings. With an average daily rate of $432 per night it brings in $116,000 for the owners in gross income.
When it comes to three bedroom vacation rentals the leading market is Healdsburg with median annual income of $222,000. However the best performing ones earn a lot more. For example, this is one of the leading three bedroom vacation rentals and it earns $366,000 per year with an average daily rate of $1,722. It is located on Alexander Valley Road which is one of the best places to look for a vacation rentable property around Healdsburg. The other two area where a lot of the properties have the correct zoning to be able to get a permit are to the west of the freeway in the roads just off Westside road (by the freeway) or else Chiquita Road which runs north out of town.
The final piece of the puzzle is to take into account house price appreciation. If we look at the percentage increase in median home prices from 2020 to 2021, there is a big difference. For example Cloverdale increased by just 7% while Occidental increased by 32%. Other strong markets for price appreciation were Healdsburg at 26% and Sonoma at 25%. I must confess I was pretty surprised by Occidental but then again the prices started at a lower level and I know that, last year, Occidental was among the highest in the county for people purchasing a secondary home. To demonstrate the impact that Bay Area buyers have on a market we just need to look at what happened to the Sea Ranch market last year. House prices increased by 60% from a median price of $737,000 to $1.49m! This is probably a one off driven by Covid, the need to escape to the coast, away from fires and with high speed internet!
So Where Is the Best Place To Purchase A Vacation Rental?
There are no right and wrong answers to the question of where to purchase a vacation rental because there are so many different factors to take into account. If you are on a budget of less than $1m then it is hard to beat Russian River but if you have a higher budget on the over $1.5m segment and crave more of a wine country vibe then if you are patient you could potentially find something in and around the higher end markets such as Healdsburg or Sonoma. It might not be the finished article from day one but then over time you can use the profits to continually invest in the property by putting in a pool or upgrading the bathrooms and get a property that will be a great performer and will also significantly increase in value over time.