Best markets for in the Sacramento CA multi-units

[Scott Raley]

I'm an investor looking to expand my investment portfolio in the Greater Sacramento multi-unit  market. (  2-4 units) What areas have you found to have the best combination of generating income , safe neighborhoods and prospective upside.  B class property or better. Looking to buy and hold that generate very positive cash flow with 25% down.  

[Wes Blackwell]

@Scott Raley

Every week I analyze every single 2-4 unit property on the market from Placer County all the way down to Merced, and run all the numbers like 1% Test, CoC Return, Gross Annual Yield, etc. So I can tell you that Sacramento and Stockton will be your two best opportunities for a rentals.

The main benefit of Sacramento is the big-city feel without the big-city price tag. We are projected to be the #4 hottest metro market in the nation this year with an increase in appreciation of 7.2%, and are also projected to be the #1 rental growth market in the nation this year with an increase of 10% for 2017 and 8.5% next year. Yippee!!!

The reason for these increases in both appreciation and rents is a massive migration of the middle and lower class from the Bay Area. We have more people coming to Sacramento than we have housing, and so naturally demand will outpace the supply. 

Mostly consists of Millennials entering their prime "settle-down" years who are realizing they'll never afford a home for their family in the Bay Area, and Boomers and Gen X'ers who just sold Grandpa's house in San Jose for over a million and can come out here and buy something all-cash and still have plenty of money left over to retire with.

I have written more about this migration pattern here if you want to know more:

https://www.biggerpockets.com/forums/621/topics/396725-millennial-migration-to-sacramento-2017---here-comes-the-rush

For some B class neighborhoods, I would recommend that you try looking in North Oak Park, Arden-Arcade, Carmichael, and the area South of 50, East of 99, and North of Fruitridge Rd. But, it's very much street-by-street, not zip code by zip code, and that goes for every city. Ultimately you're going to need an local expert who knows the area and knows investment properties.

Stockton will get you much higher returns on average, and that's because the average property is $40-50k less but the rents are still fairly comparable. The downside to Stockton is that it's not as desirable area as Sacramento (obviously), so the people migrating from the Bay Area who can't afford Sacramento will be forced to pick Stockton instead. It will be the #28 hottest metro market in the nation next year, and will still see rental growth as well, just not to the same degree that Sacramento will grow.

For B class areas in Stockton, I would try looking near the 95207 zip code which is essentially the city center, or anywhere near University of the Pacific (UOP). I would try getting a duplex with 3 bedrooms on each side and rent each room for $500 per month to rich college kids getting their rent paid by their parents.

As for the $1,000 per month for every $100,000 in purchase price, that's going to be extremely rare. Especially in B class areas. That would be a 1% score on the 1% Test (gross rents / purchase price), but the average for ALL of Sacramento County 2-4 unit properties is 0.58%. The average of ALL of San Joaquin county properties is 0.74%. The better performing properties for Sacramento will approach 0.7-0.8%, and for San Joaquin they will be 0.8-0.9%. Every now and then a 1%+ property comes along, but it's extremely rare.

And the reason for that is because the whole 1% Test, 2% Test / Score / Rule or whatever you want to call it is designed as a metric for the rest of the county where the median home value is half of what it is in California. If you can find a $50,000 property that rents for $1,000 a month, that'd be a helluva deal somewhere in the flyover states. But in California you'd need to find a $400,000 property that rents for $8,000 per month, and as soon as you find a market with some of those let me know because I'll be the first to buy one!

California is more-so a market of appreciation, not necessarily cash-flow. Cash flow is simply the icing on the cake. And that's because when you buy a $300k property that's appreciating at 7% per year, 3 years from now it will be worth $67k more and that makes $100-200 per month cash flow look like mince-meat.

My best advice would be to find a property where the numbers work for you first, and then decide if the neighborhood meets your criteria, not vice versa. Otherwise you'll be stuck looking at a really nice B class area and be expecting true C class area numbers and that's never going to happen. Find the numbers first, then analyze the area, because you can find diamonds in any coal mine :-)