2 Year Plan Sacramento

[Charles Velasco]

Hello everyone I am a 22 year old college graduate from Sacramento, Ca. Currently I am working full-time and I make great income for my age. As of right now I am renting in the East Sacramento area for 800 a month. I am planning on saving 3.5 % down for a house or duplex in the Sacramento area in the price range of 500,000-550,000 so I can purchase in 2017. I will be having a roommate with me in my first home purchase. In 2018, I plan to save 20% down for my first investment property. Does anyone have any recommendations for me on my 2 year plan?...

[Wes Blackwell]

Hi @Charles Velasco! Great question!

I deal extensively with 2-4 unit multifamily properties in the Sacramento area, and look at this list every single day and so I can offer you some insight for your plan...

First and foremost, my opinion is that $550k is way too expensive. Of the 9 available properties between $485-550k, on average they will LOSE you $1,489 per year based off of PITI, before you add in vacancy, capital expenditures, and utilities. And that's putting 25% down and fully renting out the property, not living in one of the units and house-hacking like you plan to.

$250-350k is going to be your sweet spot for multifamily, as the rents vs. mortgage payment will be favorable enough to provide some minor cash flow for you or at least be living there for next to nothing. Plus, the problem with the $500-550k price range is that you're stepping outside of the FHA conforming loan limits, which in Sacramento County is $474,950 for SFR and $608k for 2 units.

That means you can probably kiss the 3.5% down goodbye and be expecting somewhere between 5-15% down for owner occupied, depending on the property and lender. I would highly advise speaking with your lender about your plans so you have a rough estimation of what your numbers will be going in. If you need some help finding someone I work with a guy who's been in the industry over 30 years and is in the top 1% of loan officers in the nation.

@Kenneth Reimer hit the nail on the head when he said you'll want to understand what point of the real estate cycle we're in before investing. You don't want to purchase at the top of the market and basically overpay for a property you could get a few years later for tens of thousands of dollars cheaper. Here's a graph to illustrate this point:

Think of Stage 1 being 2004-2006 at the previous peak. Stage 3 at the bottom was 2009-2010 where you could pick up properties for pennies on the dollar. I'd estimate we're somewhere currently between Stage 5-6, and probably have 12-36 months before we're near the peak of the real estate cycle. Buy now, and you've got 2-3 years of appreciation. Buy 2-3 years from now, and you'll shortly be upside down on your property and wish you could've waited.

The climb to the top won't be as steep as it was last time because we don't have all the crazy loan shenanigans going on, and the fall won't be as bad because we should have far less foreclosures than before. But one thing is for sure: Prices will continue to go up and interest rates will rise, reaching the point where supply meets demand and new construction cost the same as existing housing, and then we'll see a shift into the favor of buyers and a downturn in the real estate cycle that's been cycling along forever and ever.

I could go on, but to sum up: Buy a duplex in 2017 as soon as possible so you get the lowest price and most appreciation, get a roommate in your half and rent out the other so you can live there for as close to free as possible, speak with a tax advisor to maximize your deductions, and then wait at least 2 years before selling so you'll be exempt from capital gains, and then sit on your money or put it in another investment for a couple years and wait for the market to bottom out, and then purchase as much property as you can. Rinse and repeat alongside the real estate cycle, and by the time you retire you'll be a wealthy man.

If you want to know more about the real estate market here in Sacramento, let's connect and I can show you what sort of returns are possible. Best of luck!