There was an investor managing multiple properties who brought a Monterey listing for review. This case required careful examination of the numbers due to the mix of tourist rental demand and residential rental demand.

The average rent for apartments in Monterey is $2,795 per month as of May 2026 (RentCafe). This is a slight increase of 0.34% from the previous year's $2,785, indicating minimal fluctuation. One-bedroom units average $2,544, while two-bedroom units are around $3,126, with 64% of all households being renters. Looking at the rent range, the $2,501 to $3,000 bracket accounts for 44% of the total. Applying the 1% rule, which checks if the rent exceeds 1% of the purchase price, can be challenging in high-cost areas like Monterey. It's better to confirm profitability using the cap rate.

Start by reviewing the loan conditions. For investment properties, the down payment is typically between 15% and 25%. A credit score of 620 is the minimum, but a score above 740 is needed for favorable interest rates. Interest rates are also 0.5 to 0.75 percentage points higher than for owner-occupied properties (Fannie Mae, Freddie Mac guidelines). Rental income is considered only up to 75% of the expected amount for loan assessment. A lease agreement or rental schedule from an appraisal is required.

The cap rate is calculated by dividing the net operating income by the purchase price. Do not simply multiply the advertised rent; instead, calculate using figures after deducting vacancy periods, management fees, property taxes, and insurance. Given the seasonal rental demand in Monterey, it's advisable to conservatively estimate the annual vacancy rate. If acquiring a property with tenants, confirm the lease transfer conditions and security deposit transfer procedures before closing. If it's a condo, also check the HOA's rental restrictions.

The tenant laws are governed by California's Tenant Protection Act. In Monterey, there are no specific local rent control ordinances, so the statewide cap of 5% plus the consumer price index applies, with a maximum increase of 10%. As of 2026, the increase limit for the region Monterey belongs to is 8.6%. It's also important to note that if a tenant has lived there for over a year, they cannot be evicted without just cause.

Property taxes, according to Prop 13, start at 1% plus local bonds, resulting in an effective tax rate generally between 1.1% and 1.25%. Landlord insurance premiums are typically higher than standard homeowners insurance. When managed by a property management company, 8% to 12% of the monthly rent goes to management fees, and it's common to set aside about 1% of the property value annually for maintenance. Only after accounting for all these costs can the true cap rate be determined.

Management methods should also be decided in advance. For owners who do not reside on-site, it's common to pay 8% to 12% of the rent to a management company. Landlord insurance includes coverage for rental loss and tenant liability, making it more expensive than standard homeowners insurance. Maintenance typically requires setting aside about 1% of the property value annually, but in Monterey, due to coastal conditions, damage from moisture and salt can often exceed this rate.

California requires sellers to submit disclosure documents such as the Transfer Disclosure Statement and Natural Hazard Disclosure. In coastal areas like Monterey, the documents will indicate whether the property is in a wildfire or flood risk zone, so it's essential to check these details carefully before signing a contract. If the property is in a risk zone, it's also important to inquire about additional coverage options beyond landlord insurance. When utilizing a 1031 exchange, remember to designate a replacement asset within 45 days of the sale and complete the purchase within 180 days (IRS).

Ultimately, that investor sold the Monterey property and moved to another area. Later, when selling existing assets, they deferred capital gains tax through a 1031 exchange. This case reaffirmed the importance of following the numbers to make informed decisions. This article does not constitute investment or legal advice, and it is recommended to consult with professionals before entering into any contracts.