Does New Inventory Cause Market Prices to Go Down?

Question

I have a condo in downtown Sacramento a few blocks from the new arena. It appraised at 300k with 150k in equity. I am debating on doing a 1031 with the property for 3 out of state rentals that cashflow 250-400/month each vs keeping the property as a rental. With current financing, the condo would cashflow 300/month. We are also considering refinancing, purchasing a couple of the out of state rentals, and renting out the downtown property.

Sacramento is pouring tons of money into it's downtown including a brand new basketball arena and surrounding complex. There are also plans to build around 600 new residential units of various types throughout downtown.

How will the new inventory affect prices and does anybody have advice on what the best choice would be?

Derek Daun · Answer

The rent increases in downtown/midtown, and even the stadium itself, is symptomatic of the overall increase in the number of people desiring to live in the area. When evaluating the new housing units being added, the question is whether the new inventory is going to be more or less than the number of new people wanting to live there at the current prices. Obviously the reason the developers are interested is because of the high rents. It doesn't do them any good to add more housing just to cause rents to lower. I suspect the developers will be a little smarter about it this time, adjusting the throttle as needed. (I hope)

Also keep in mind, the inventory around the area is very striated in quality. Lots of old, and growing amounts of new, and not as much in between. All the new units will be relatively high quality. From a percentage standpoint, the rent increases have hit the lower quality units more. Many of the new transplants are younger with lower wages. The government is still the major employer, and Sacramento still hasn't caught on a destination for employers.

Overall, I'm betting on prices plateauing more or at least growth noticeably slowing as more housing comes online. I expect it to hit high end fist. Lower end, especially in adjacent transitioning neighborhoods might stay stronger longer.

I'm not banking on that much super appreciation on my East Sac house hack, but still have high hopes for my Oak Park properties.

This could change the longer the Bay Area housing market stays hotter. Sacramento has become a legitimate transplant location due to pricing. If current conditions continue, I could foresee the job market finally start to take notice as well.

As far as the local vs. Midwest question, I ask myself that a lot as well, and every time I come to the conclusion I'm better off here. Even modest appreciation of 3%, which isn't much more than inflation, makes a 150k property approach the cashflow seen by three 50k properties in the Midwest. Plus, that's only managing one property, instead of three. And for the time being, we might still have another year or two of much better appreciation. My goal is overall portfolio value, and I'm sticking local for now.

Account Closed · Answer

What a great position to be in. So congrats @Chris Wilson on having options!

To answer your question though, we really need to know what your goals are. Do you want to scale up and own a lot of income properties? Do you want to stay local re: peace of mind? Are you able to hold on to the condo for another 10 years? Do you even want to?

I think over the long term, Sacramento will see great appreciation as it relates to the price point where you purchased your condo. As someone who owns in Sacramento and in the Midwest (for cash flow), I would keep the Sacramento place and save up to buy in the Midwest because of its low dollar entry point. However, if you're trying to scale, I think @Derek Jones is correct, sell and multiply! Either way, you can't lose.

Kenneth Reimer · Answer

@Chris Wilson Regarding your last question about price changes due to negative absorption rates, I don't think there is a simple answer. Just like a stock, part of the value is based off of current earnings, along with expected future earnings. While real estate is a little different, the principles are the same. If I look at an area where there is strong population/wage growth (and subsequent building developments) I view this as a plus. I want an area that will see appreciation over the life of my holdings, even though I don't bank on it or factor it into my financial projections. In the short term, you will most likely see downward pressures on rental rates, but this might be a good sign. Even though other factors could make new development a harsh negative, it's important to look at the macro environment so that you can answer the question, "why are builders developing more units here?" When you're able to answer that question and have a clearer picture of where the market is headed, you'll be more confident in your decisions.

Hope this helps!

Kenneth R. Reimer

Deonta Dorrough · Answer

Chris

First off all options you have on the table favor you at this point. If you are comfortable with the out of state dealings it's a simple choice to take the 3 cash influxes over the one here. Even though downtown is a very hot market right now adding additional inventory will give consumers  more options and in turn devalue your property! I hope this helps you my man. Good luck

Derek Jones · Answer

Looking at your number you have 1 property that could cashflow for $300/month or you can sell and get 3 that each cashflow ~$325/m aka $1000/m total. 3 for the price of 1 with better cashflow sounds like a winner to me.

As far as the new arena; some are banking on appreciation and prices are already increasing for homes and rentals. Just how much more will it appreciate is anyones guess.  Inventory does have a lot to do with supply and demand and right now demand is pretty high within the grid.

If I were in your shoes I'd sell and buy the 3 units out of state.

Pratik P. · Answer

My guess is that as more residential units are added, the rent prices are going to go down since people have a lot more choices on where they can live in that area.

Do you have experience with out of state rentals? 250-400 cash flow is awesome but I wonder how difficult it would be to manage something that far.

On a side note! I'm looking for a place to rent out myself in the downtown area. If you're looking for a renter, PM me with some info!

Does New Inventory Cause Market Prices to Go Down?

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