An Investment Property to Start RE Journey?

Question

Hi Everyone - I would love to get some advice and insight from the community with regard to my RE strategy below:

The General Plan:

It is my plan to look for small, multi-family properties in the Northern California/Sacramento area, with the intent to either:

a) Renovate/Rehab the units in order to add value to the property and be able to rent it out for a higher monthly income (kind of like a BRRR?)

or

b) Buy & Hold a multi-family property that already cash flows with existing long-term tenants and use the cashflow to save for future rehab/renovation projects on the property.

Financing Strategy:

I would fund this, by doing a 5% down conventional loan (is this possible in current conditions?) I do have a high credit score above 790, and my Debt-to-Income ratio is also considerably low (6%), but I have heard that Banks nowadays are asking for at least 15-20% of a downpayment on properties. Can anyone substantiate this for me, especially in the CA/Sacramento market?

Other Things/Reasoning for this Strategy:

Initially, it was my thought to purchase a multifamily, and house-hack by living in one unit while renting out the other - but I realized that I could make so much more in cash flow if I had just rented out both units, and continued renting out of the place I live in now - where I effectively pay less than $200 a month for my own room.

Final Questions:
Do you guys think this is a good blueprint for how I should begin my Real Estate journey? ASSUMING I can get the 5% down on a conventional loan, and ASSUMING I can get at least $200-$300 of cash flow per month on a small multi-family? Is this strategy viable, or am I missing some key metrics / making some very bad assumptions?

I would love everyone's thoughts. Thank you so much for the existence of this community and for BiggerPockets at large!!

Joe Bertolino · Answer

My 02 cents if I were you... Looking for a muli unit to house hack with a lot that can be split.  Many duplex and four plex on deep lots in Downtown/Midtown.  BRRR the front house,   get it rented at market rate (you can still cash flow in Sac) and then throw up a ADU in the back lot.   I am doing exactly that with a project on E street right now if you want to check it out.

Dan H. · Answer

>Do you have any advice for how I could scope out how much landlords are charging for rent in certain areas of Sacramento?

The best single site is Rentometer.  They have a free and paid access.   The free is better than Zillow or Redfin.  The paid is better than the free.  about once a year I do a more intensive rent survey by analyzing the rents on Craigslist, Zillow, hotpads, FB marketplace, etc but these surveys typically show that Rentometer’s estimate is pretty accurate.

When you list a property for rent, Zillow marketplace posts to all the top places except Craigslist and FB Marketplace.

Good luck

Dan H. · Answer

>I was considering looking at Single-Family homes with a specific goal to look at garages that could best be renovated/transformed into ADUs and house-hack living in the garage while renting out the main property.

It is typically cheaper to purchase a property with an existing ADU than to build your onw ADU.  This is because appraisals of ADUs are coming in below the cost of a hands off construction.  So rather than looking for an RE with a garage to convert, you likely would be better off looking for an RE with an existing ADU.

>Buy & Hold a multi-family property that already cash flows with existing long-term tenants and use the cashflow to save for future rehab/renovation projects on the property.

In my market, very few retail conventional residential properties (1 to 4 units) have positive initial cash flow.  In my market, the initial return is often via a value add.  Other options are to attempt to purchase far below retail.  However, the cash flow situation improves quickly in my market.  Average rent increases have been over $100/month annually for 7 years. Not sure if Sacramento has same challenges on the initial cash flow front.  If it does, you may be very challenged to find an RE that has positive cash flow at purchase and may want to take a long term view.

>Renovate/Rehab the units in order to add value to the property and be able to rent it out for a higher monthly income (kind of like a BRRR?)

My experience with BRRRR is that the cash flow is little change after the refinance.  Another way to look at it is the percentage increase in loan amount is approximately the same as the percent rent increase.  I have been fine with this because I strive for a 2X return on value add money.  If I spend $50K on a value add, I expect $100K of value.  Finding good BRRRR candidates is challenging in my market.  If you can find a good candidate RE, then BRRRR is a way to achieve an early initial return that helps get you to the point that rent appreciation results in good cash flow.  What I would tell you is 1) do not expect to extract all of your initial investment via a BRRRR.  A combination of competition for properties, low refi appraisals, and fairly low refi LTV make extract of full investment very challenging (Most of our properties have all the investment extracted, but they got assists from market appreciation). 2) do not expect the BRRRR to help the cash flow significantly.  Our experience is fairly small change to cash flow and most of the time the cash flow projection has worsened slightly (basically unchanged).

Good luck

Jaysen Medhurst · Answer

@Emil Pinlac:

Yes, a low-down payment owner-occupied mortgage is still on the table. Don't do FHA unless you have to.

$300/month cash flow on a property with a FMV of $250k where you only have ~$15-20k in would be pretty solid. That's a CoC ROI of ~20%.

Jaysen Medhurst · Answer

Unless you plan to owner occupy, @Emil Pinlac, most lenders will require 20-25% down. Especially now. 5% down on a traditional buy-and-hold investment property will be a non-starter.

If you BRRRR, you may be able to finance with ~15% of purchase price from a HML. Those lenders are starting to loosen up. Of course that financing is a lot more expensive and you may have difficulties since you haven't done any deals yet. Perhaps partner up on a few deals. Leverage their experience until you have a bit of a track record.

$200-300/month cash flow might be great...or it may stink. It all depends on the property cost/value and how much equity you leave in the deal. $200/month on a $100k property where you have no cash left in would be amazing. $200 on a $1MM property where you have $250k of cash in the deal would be horrific.

Emil Pinlac · Answer

@Joe BertolinoHey Joe! I would honestly love to come or drive over and check it out if you have some time to spare, and are willing to meet amidst the current pandemic. I feel like being able to see it in action could help solidify some of these ideas in my head with how I should proceed with my own investment strategy here in the Sacramento market. Thank you for your advice!

Logan Vierstra · Answer

@Joe Bertolino I'd love to come check that out! I'm working on a proposal right now for a guy with two duplexes next door to each other, each on a half acre, that we are exploring the option of building ADU's on.

Emil Pinlac · Answer

@Dan HeuscheleHmm. That is good to know. My first few preliminary analyses of potential small, multi-family rental property buys here in the Sacramento market have been abysmal as far as CoCR and rules of thumb, like the 2% or the 50% rules are concerned. Do you have any advice for how I could scope out how much landlords are charging for rent in certain areas of Sacramento? Are there any one-stop, generalized websites for these types of things? I've kind of just been looking through Craigslist when I run the analysis on rental properties, but was wondering if there were alternative ways. Finally - thank you so much for that BRRR insight. Seems like there are definitely a lot more nuances with BRRR and relying on a combination of factors (like you said - appreciation, value-add, competition, etc) that will lead to eventually making a return. I'm still a few years away from pulling the trigger on a property, but. .. ahh, to take on that much risk on a large sum of money is daunting. Ideally, I'd really love to build a strong team and a wealth of knowledge before then - so that I can control my risks as much as possible.

Emil Pinlac · Answer

@Jaysen MedhurstYeah, I was hoping I could do a lot of the leg work up front - specifically by doing my due diligence in preliminary research, but also in finding the right team of contractors, real estate agents, and network of people that could definitely give me great insight and advice on properties where this could be pulled off. Best case scenario, is that I get lucky and my Real Estate agent specifically finds me a multi or a SFH that already has an ADU, in a great area, with the numbers all making sense. One can dream. haha.

Jaysen Medhurst · Answer

I don't know too much about ADUs, @Emil Pinlac. I think the real challenge is getting them built at a price that makes sense. This is especially true in VHCOL area like CA, or CT for that matter. You may see a "perfect" garage for an ADU, but if it's detached or not ideally situated it will cost a fortune to run utilities. Plus, if you make it livable space, you need to bring it all up to code. That can be super expensive because a garage is made house cars...not people. Lots to think through here.

An Investment Property to Start RE Journey?

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