Invest in Tracy vs Rancho Cordova vs Folsom

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Invest in Tracy vs Rancho Cordova vs Folsom

Priyanka B.
Homeowner · Member since 2021 · 5 posts · 0 votes

Hi ,

We have a single family home in Bay area and are planning to invest in Sacremento area. I am inclined towards new construction homes(SFR) in Rancho Cordova or in Folsom.

My husband is more leaning towards Tracy. His reasons are for Tracy you have more access from bay area and given how Mountain House has developed in last few years he expects to see something similar happening in Tracy. 

I incline towards Sacramento particularly Folsom may be Rancho Cordova too . Good schools and growing city with lot of potential. You get a brand new homes with lesser price range(600K) where as in Tracy it might be more expensive(700K). Also I think if we go with Rancho Cordova we might find something around 550K with good schools.So we have low risk and might be able to hold even if things go bad.

What do you guys think. Chime in your opinions. Our goal is to maximize cash flow with decent appreciation over 10 years. Is it better to wait and watch for prices to drop?

Our goal neutral or positive cash flow both ok but should have some decent appreciation in 10 years. 

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Greg Lieberman
Real Estate Agent · Roseville, CA · Member since 2018 · 21 posts · 14 votes
4y

@Priyanka B.

Hi there! I’m an agent here in Sacramento, and know the area pretty well. This a market that generally won’t have cash flow (on year one) unless you are putting a lot more than 20% down. But it is definitely a market that has had lot of appreciation historically.

When we look at numbers, we look at how the property performs over its first three to five years. For those putting 20% down, it's pretty common to see negative monthly cash flow of about 150-200 on year one. That's with 5% vacancy, 5% for CapEx and about 6% for property management.

Right now the max rent increase is 6%. So if your property is charging market rents, it’s usually negative 150-200 the first year and then neutral to low cash flow in year two or three. If it’s already tenant occupied, they are rarely charging market rate, so the figures will be worse.

You still get all the tax benefits of depreciation, interest write offs, etc. and the value of the home likely increasing.

Usually when you see areas that have higher cash flow than that, they are the areas that tend to have more headaches or require more attention. So generally, we look at it like a spectrum: one side is more passive and less headaches, but has less cash flow. The other side requires more attention, but the ROI and cash flow are better.

If you want the less work and less cash flow option, I would look at areas like Folsom, Roseville, Rocklin and some neighborhoods in Sacramento.

The areas that are likely more work, but higher cash flow would be most of Citrus Heights, Antelope and some parts of Rancho Cordova and Sacramento.

Sorry this was long winded, but hopefully it helps. Good luck!

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  • Greg Lieberman
    Real Estate Agent · Roseville, CA · Member since 2018 · 21 posts · 14 votes
    4y

    @Priyanka B.

    Hi there! I’m an agent here in Sacramento, and know the area pretty well. This a market that generally won’t have cash flow (on year one) unless you are putting a lot more than 20% down. But it is definitely a market that has had lot of appreciation historically.

    When we look at numbers, we look at how the property performs over its first three to five years. For those putting 20% down, it's pretty common to see negative monthly cash flow of about 150-200 on year one. That's with 5% vacancy, 5% for CapEx and about 6% for property management.

    Right now the max rent increase is 6%. So if your property is charging market rents, it’s usually negative 150-200 the first year and then neutral to low cash flow in year two or three. If it’s already tenant occupied, they are rarely charging market rate, so the figures will be worse.

    You still get all the tax benefits of depreciation, interest write offs, etc. and the value of the home likely increasing.

    Usually when you see areas that have higher cash flow than that, they are the areas that tend to have more headaches or require more attention. So generally, we look at it like a spectrum: one side is more passive and less headaches, but has less cash flow. The other side requires more attention, but the ROI and cash flow are better.

    If you want the less work and less cash flow option, I would look at areas like Folsom, Roseville, Rocklin and some neighborhoods in Sacramento.

    The areas that are likely more work, but higher cash flow would be most of Citrus Heights, Antelope and some parts of Rancho Cordova and Sacramento.

    Sorry this was long winded, but hopefully it helps. Good luck!

    4Reply
  • Priyanka B.
    OP
    Homeowner · Member since 2021 · 5 posts · 0 votes
    4y
    Thank you Greg. What are some of the issues in Rancho Cordova. I am referring to homes under construction from companies like Lenar, KB homes etc. Are these in good pockets?

    For Folsom, Rocklin and Roseville is this good time to buy or would you recommend to wait?

    Originally posted by @Greg Lieberman:

    @Priyanka B.

    Hi there! I’m an agent here in Sacramento, and know the area pretty well. This a market that generally won’t have cash flow (on year one) unless you are putting a lot more than 20% down. But it is definitely a market that has had lot of appreciation historically.

    When we look at numbers, we look at how the property performs over its first three to five years. For those putting 20% down, it's pretty common to see negative monthly cash flow of about 150-200 on year one. That's with 5% vacancy, 5% for CapEx and about 6% for property management.

    Right now the max rent increase is 6%. So if your property is charging market rents, it’s usually negative 150-200 the first year and then neutral to low cash flow in year two or three. If it’s already tenant occupied, they are rarely charging market rate, so the figures will be worse.

    You still get all the tax benefits of depreciation, interest write offs, etc. and the value of the home likely increasing.

    Usually when you see areas that have higher cash flow than that, they are the areas that tend to have more headaches or require more attention. So generally, we look at it like a spectrum: one side is more passive and less headaches, but has less cash flow. The other side requires more attention, but the ROI and cash flow are better.

    If you want the less work and less cash flow option, I would look at areas like Folsom, Roseville, Rocklin and some neighborhoods in Sacramento.

    The areas that are likely more work, but higher cash flow would be most of Citrus Heights, Antelope and some parts of Rancho Cordova and Sacramento.

    Sorry this was long winded, but hopefully it helps. Good luck!

    0Reply
  • Greg Lieberman
    Real Estate Agent · Roseville, CA · Member since 2018 · 21 posts · 14 votes
    4y

    I don’t think there anything wrong with Rancho Cordova. It’s just not one of those places that comes up too often as a place on the top of a buyer’s list. Just the check the schools, crime stats and all that usual stuff to make sure you’re in a good area. 

    Wherever you plan to buy, I wouldn’t wait to try and time the market. I have had a couple clients wait and then they couldn’t afford the same house they wanted. Last year I had a client that was trying to buy in October 2020 and didn’t actually buy until late summer of 2021. He probably lost tens of thousands of dollars worth of value.

    I think if you plan on having the house for a while, don’t wait. Make sure it’s the right area and meets your criteria, but I would not suggest you wait and try and time it.

    0Reply
  • Ben HowardPro Member
    Real Estate Agent · El Dorado Hills, CA · Member since 2017 · 160 posts · 67 votes
    4y

    @Priyanka B. @Greg Lieberman said: “max rent increase is 6%”

    However the question is about a single family home, not multi family. If it was for multi family then statewide rent control would be a factor via The Tenant Protection Act of 2019 (Protection Act). Civil Code Section 1947.12 adds rent control to the mix, and prohibits increasing the annual rent more than the cost of living for that locality plus five percent, up to a maximum increase of ten percent of the prior rent.

    There are some other factors you should consider so I will provide a quote from Nolo at the bottom of this reply and as it’s CA the rules seem to be subject to change in the future. CA has definitely moved toward a more tenant friendly environment and a very knowledgeable property manager is a an absolute necessity.

    The concerns which I see with new construction is that in addition to the initial costs for backyard landscaping, window treatments, etc it is not known how many other neighborhood rental units will compete for tenants. With an existing, established neighborhood data is available that shows where other nearby rental homes are located. Also with a home that was recently constructed owners generally have less equity. Less equity may result in a less stable neighborhood during future economic cycles. In an established neighborhood data is available that shows estimated owner equity by parcel.

    As schools are mentioned, in a new home community there is usually other undeveloped land nearby feeding into the same school(s). This inventory creates less stability in the Great Schools numbers vs an established neighborhood with limited growth nearby. Finally, nearby undeveloped land more new homes may be built creating more competing units which brings me back to my first point. More competition is less than desirable for a long term investment.

    As a licensed real estate agent I would refer you to the many sources available for third party data on crime, schools, potential rent, etc and refrain from stating one area is “good” and another is not. With data from third party sources you may form your own opinions and I can avoid any issues related to steering which is not ethical and not allowed.

    Before such an investment in California you should definitely speak with a real estate attorney and also ask them for a referral to a property manager. California is a very challenging environment and a mistake by a landlord can have severe financial consequences. Real estate agents are definitely not the best source of information on The Tenant Protection Act of 2019.

    From Nolo:

    Exempt From Rent Control But Not Just Cause

    In some situations, the property is free of rent control but subject to just cause eviction controls. Landlords need to give notice to their tenants of the exemption.

    Properties in this situation include non-owner occupied condominiums, single family homes, and other properties that are "separately alienable from title" (that's a standalone property that can be sold on its own). In order to take advantage of the exemption, the title must be held by a natural person, a partnership or limited liability company owned by natural persons, or another form of natural person, such as a revocable trust for individuals. The exemption does not apply to corporately held property, such as a real estate investment trust ("REIT"), a corporation, or a limited liability company with corporation members. In order to claim the exemption, landlords must include a specific notice to the tenants in the lease of the exemption.

    [email protected]916-390-7060
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  • Anurag D.
    Santa Clara, CA · Member since 2018 · 44 posts · 7 votes
    4y

    I went through similar exercise last year, sharing my experience.

    Below criteria may assist in narrowing down options further:

    -> Assumptions:

    > Duration of ownership:

    - short-term: is more appreciation a priority.

    - long-term: is passive-income a priority.

    > How easy/difficult it is to find tenants in growing, normal, and challenging economy.

    > Mello-Roos, Supplemental-tax etc..

    > Purpose: only investment Or, semi-investment (retirement)?

    > places that would appreciate more.

    - are there cities where property-values could double in next 10-15 years.

    > places that would have more cash-flow.

    > cities that did not go bankrupt during economic downturn.

    > school-districts: are they a few miles away, or ~10+ miles away.

    > which are the top-most neighborhoods in the nation to raise family.

    > which cities have less probability of natural-calamities (wildfire/dam/flood/quake et..)

    • Elevation from sea-level etc..

    > would I be able to stay for 5 years in same property without change in current life-style. (movies, restaurant, medical facilities, malls..)

    > public-commute, disturbance and other common criteria.

    > Visit short-listed cities in person, at least twice.

    > city population growth, future job growth.

    > (if available) city's average salary, average house price, average rent (for 3/4 bedroom SFH..)

    > is the city a prominent hub (tech/finance/ govt ..etc..), college-town, state-capital..

    > Past data does not (always) translate to Future failure/success.

    -> Accessibility:

    Tracy is (relatively) closer to Bay Area, international airports, Fresno/Yosemite, LA

    Sacramento is (relatively) closer to Oregon, Crater Lake, Reno/Tahoe, Death Valley, Fresno/Yosemite, LA, Bay Area.

    -> Action:

    I immediately changed my plan last year (2020), and switched to Sacramento, as previous city raised property tax (unjustified 1+ %) drastically.
    BP forum valuable suggestions and above assumptions helped to narrow-down places-of-interest.

    Decent population growth is also a positive signal.

    I am slightly negatively cash-flow, but expect to be break-even (/+ve) next summer.

    Appreciation: about 23%

    > Disclaimer: 2022 cannot be compared to 2020.

    ———————————————————————————————————————————————————————————————————————

    Applying above based on prevailing & year 2022 perspective may provide answer on cities that you are looking for.

    Good Luck with your search.

    0Reply
  • Kishore Babu
    Member since 2021 · 7 posts · 2 votes
    4y

    @Priyanka B., you can even try exploring Manteca area if you'd like to. There's a lot of new constructions near Hwy 120 south side. We bought a rental propery house in Manteca recently with 20% down and able to break even without accounting vacancy n prop. mgmt fees. I self manage and the house got rented within 3 days of placing the listing. 

    0Reply
  • Priyanka B.
    OP
    Homeowner · Member since 2021 · 5 posts · 0 votes
    4y
    @Kishore Babu thanks for th pointer will look into Manteca.


    Originally posted by @Kishore Babu:

    @Priyanka B., you can even try exploring Manteca area if you'd like to. There's a lot of new constructions near Hwy 120 south side. We bought a rental propery house in Manteca recently with 20% down and able to break even without accounting vacancy n prop. mgmt fees. I self manage and the house got rented within 3 days of placing the listing. 

    0Reply
  • Priyanka B.
    OP
    Homeowner · Member since 2021 · 5 posts · 0 votes
    4y
    This was really helpful thanks. We did tour Folsom and Rancho Cordava last weekend. I was very impressed with Folsom but it looks like we are little behind in timing. When we ran initial numbers we could not break even with the price the new homes are. So I am exploring Elk Grove and Rose Ville
    Originally posted by @Anurag D.:

    I went through similar exercise last year, sharing my experience.

    Below criteria may assist in narrowing down options further:

    -> Assumptions:

    > Duration of ownership:

    - short-term: is more appreciation a priority.

    - long-term: is passive-income a priority.

    > How easy/difficult it is to find tenants in growing, normal, and challenging economy.

    > Mello-Roos, Supplemental-tax etc..

    > Purpose: only investment Or, semi-investment (retirement)?

    > places that would appreciate more.

    - are there cities where property-values could double in next 10-15 years.

    > places that would have more cash-flow.

    > cities that did not go bankrupt during economic downturn.

    > school-districts: are they a few miles away, or ~10+ miles away.

    > which are the top-most neighborhoods in the nation to raise family.

    > which cities have less probability of natural-calamities (wildfire/dam/flood/quake et..)

    • Elevation from sea-level etc..

    > would I be able to stay for 5 years in same property without change in current life-style. (movies, restaurant, medical facilities, malls..)

    > public-commute, disturbance and other common criteria.

    > Visit short-listed cities in person, at least twice.

    > city population growth, future job growth.

    > (if available) city's average salary, average house price, average rent (for 3/4 bedroom SFH..)

    > is the city a prominent hub (tech/finance/ govt ..etc..), college-town, state-capital..

    > Past data does not (always) translate to Future failure/success.

    -> Accessibility:

    Tracy is (relatively) closer to Bay Area, international airports, Fresno/Yosemite, LA

    Sacramento is (relatively) closer to Oregon, Crater Lake, Reno/Tahoe, Death Valley, Fresno/Yosemite, LA, Bay Area.

    -> Action:

    I immediately changed my plan last year (2020), and switched to Sacramento, as previous city raised property tax (unjustified 1+ %) drastically.
    BP forum valuable suggestions and above assumptions helped to narrow-down places-of-interest.

    Decent population growth is also a positive signal.

    I am slightly negatively cash-flow, but expect to be break-even (/+ve) next summer.

    Appreciation: about 23%

    > Disclaimer: 2022 cannot be compared to 2020.

    ———————————————————————————————————————————————————————————————————————

    Applying above based on prevailing & year 2022 perspective may provide answer on cities that you are looking for.

    Good Luck with your search.

    0Reply
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