Trying to buy multi-fam in Norcal. Yolo , Sacto, Eld..Placer.etc.

[Daniel Arose]

Trying to buy multi-fam in Northern California. Yolo , Sacramento , El dorado, Placer County and/or other surrounding areas. 

-About my current situation.  I own two rental properties that I bought based solely on positive cash flow. Both were purchased before I leaned about the Bigger Pockets community, the wealth of knowledge that is available, and all the different analysis required to make a smart purchase.  

-Here's my question: Does the 2% rule apply in this area? So far in this area we have not found any properties that will meet the 2% rule. Even 1% of purchase price seems hard to get with comparable Craigslist rental rates without raising the rent a couple hundred dollars. Where else can you check rental rate comparisons? What are the things I should be looking for in this area when purchasing a multi-family unit property? We want a 3 or 4 unit in the next 6-12 months that we can occupy for the minimum contract requirement based on a the FHA " 1 year "or Conventional with 5% down standards. I don't imagine I will be able to buy much under appraisal value do to the tough FHA requirements so we will probably end up with a close to turn key property that might allow for a little added value with minor updates. What do ya'll think? What do you know about this market ? What should I be focusing in on? I am open to all suggestions. Are you guys and gals getting that 2% rate in this area? what else should I be calculating? I've researched BRRRR but I do not believe any of those principle would apply for the strategy listed above.

[Wes Blackwell]

@Daniel Arose

Every week I analyze every single 2-4 unit property in the area that hits the market, so I know my numbers well... and 2% is EXTREMELY unlikely. Like, you got the screamin' deal of the century kind of unlikely.

General REI metrics like the 2% rule or 50% expenses DO NOT apply to California, and that is because California is more expensive than 90% of the country, and those metrics simply do not scale with higher home values.

Look at this map:

https://www.trulia.com/home_prices/

A majority of the US is priced $150k and below. Sacramento County has a median home price of $300-325k which is twice as much.

That means to achieve the 2% rule you'd have to find a $300k property that rents for $6,000 per month, and as soon as you find one of those let me know because I'll be the first to buy it!

The 1% rule is also a challenge here, because why pay $3,000 in rent for a $300k house when you could buy it with 5% down and pay $900 per month less? Obviously, it's a different scenario when it comes to 2-4 unit multifamily, but you get my point.

Same thing goes with the 50% expenses "rule"... A home in the Bay Area that rents for $4,000 per month does not have $2,000 in expenses every month... not even close.

So, throw out those old metrics and get in touch with what the local ones are. That way when you see something that stands out among the crowd, you can jump on it. 

For example, that average score on the 2% rule / test / whatever you wanna call it for Sacramento County is currently 0.60% for 2-4 units priced below $850k and listed on the MLS. If you take the 12-15 better-performing properties from that list, their average jumps to 0.83%.

San Joaquin County will get you better yields, because the median home price is $40-50k less but rents are still comparable (for now). That's where you'll see most of the properties getting over 1%. Here's a few examples for those of you who wish to know:

319 E Flora St, Stockton, CA 95202 - 1.03%

729 N Sutter St Stockton, CA 95202 - 1.01%

As mentioned above, where you land on the % test scale will largely determine your neighborhood. And 95202 is an area in Stockton where there is a lot more risk (downtown took quite the beating during the recession and still hasn't recovered). Same sort of general thing goes for Sacramento and the other areas you mentioned above.

I would probably avoid Placer and El Dorado County, since they're essentially suburbs of Sacramento and there is little multifamily to be found, and what is found is quite expensive. You'll get much better returns on your money somewhere in Sacramento county.

I would highly suggest going with conventional as opposed to FHA, simply because of the nature of this super competitive market. Most properties that need work or have upside potential will skip right over your offer because they don't want to deal with all the additional hassle that FHA requirements bring. Hell, I'm working on an FHA deal right now and the appraiser pointed out an exposed piece of wood with dry-rot on the tiny little tool shed in the back that's not even attached to the house! Ridiculous!

Also, be prepared to compete... I'm talking 5+ offers on a regular basis... I've been involved in bidding wars with 18+ offers before, so don't think you can lowball and have a chance on anything new that hits the market. Basically expect to pay more than asking price. On older listings that have been on the market a long time you will be the only offer on the table, and will have a much stronger position. On new stuff, ain't gonna happen. I just tried submitting an offer earlier today for a hot listing in Folsom and the listing agent told me he already had 8 offers and didn't need another one unless I was all cash bahahahaha but I don't blame him for saying that. 

What you're going to want to look for is an area with low violent crime... home burglaries, stolen license plates and stolen cars happen in every neighborhood, and aren't that much of a problem. But when you get domestic violence, assault with a deadly weapon, and negligent discharge of a firearm that's a major red flag. You will have a very hard time attracting quality renters to the neighborhood, and have a hard time keeping them as well with all the violence going on. As soon as they can move out and avoid the violence with somebody else's rental, they will.

Also, you'll want to find something that will provide some positive cash-flow AFTER you move out. Living in one of the units is obviously really going to put a hamper on things in the beginning, so don't worry about it up front. But if over that year period you're able to update all the units and bring the rents to market rate, you should be getting some positive cash-flow every month, especially on 3-4 unit properties.

Hopefully this information helps, and feel free to ask any follow-up questions you may have. Best of luck!