Help analyzing in Sacramento.

[Keith Torsen]

Hey, BP peeps.

So for practice, I've been attempting to analyzing one deal per day. I'm still a few months away financially from pulling the trigger.

It's been three days, and three deals analyzed. So far so good, right? Trust the process and all that.

My issue is: in Sacramento, the three properties I've run the numbers through are all cash flowing negative at conventional 20% down loans. It's not in the negative too much, but three properties and three negative cash flows, therefore three negative ROI. Today's property, for example, only lost about $18 per month for two separate buildings, and the lot is zoned for 5 more units. Could be a good deal for someone.

My question therefore is: going forward, can anyone give me a rule of thumb for quickly vetting potential deals? Like the "X% rule" for Sacramento and surrounding areas.

Specifically I'm looking for small multi-family in the $350,000 to $400,000 range.

With these within three, I'm thinking the 1% rule will suffice from now on, but I would love the input of other local investors.

Thanks!

[Wes Blackwell]

@Keith Torsen

Part of the problem with your approach is that your criteria for a "deal" requires the bare minimum down payment.

Yes, leverage is great, and wouldn't it be nice if all properties cash-flowed with 20-25% down... but some will require more. And if the property is in a great area, in great condition, that must be taken into consideration as well. So what if the property cash-flows if it's in a bad area and the tenants beat it to crap. CapEx and Maintenance will eat you alive.

Perhaps we can help you further if you gave us an example of your process on one of those analyzed properties, and we might find a deal where vacancy, property management, maintenance, etc. is too high.

I suggest this because the 1% rule metric you're using is not applicable to Sacramento, and most other markets for that matter. That's like saying you'll buy a $400k house and rent it for $4,000/mo when it costs only $2,850/mo to buy it with 5% down. Not going to happen. The closest you can get is usually either a duplex in a crappy area and super low price, or a fourplex in a crappy area you'd probably rather not own. 

All numbers are relative, and dependent upon location. What you have to do is decide which primary metric you want to analyze properties with, and then calculate the average for recent past sales AND what's currently available on the market to determine an average. Then compare prospective properties against that.

For example, let's say you're using the 1% rule metric, and the average for the area and property type you're considering is 0.6%. If you come across a property that is 0.85%, then you know it performs far better than average and could thereby be considered a "deal" -- if it fits your other criteria.

And perhaps that's what's most important. Instead of using some golden metric (everybody has their favorite), determine what you really want to get out of the deal. Cashflow? Appreciation? Something to secure your retirement? Then use that as a guideline instead.

All too often beginning investors try to impose an unrealistic criteria for a given market, when achieving that criteria is impossible for that area because it doesn't exist.

I get investors who say "I want $1,000/mo cashflow with minimal down in a B class area" -- and for the most part that doesn't exist. They're looking for a unicorn and potentially missing many other deals that would work for their needs, but because they're imposing some external criteria it must meet beforehand they don't even see them or skip right over them.

Make sense?

And as for expected rents, are you currently working with an agent? We can get you the rents right off the MLS so you can see what the property is currently renting for. And you can't just assume a specific rent will apply to all of Sacramento. You must take it on a case-by-case basis as it will depend on location, size of units (not just bedrooms, sq ft) and condition/upgrades of the unit. A 2/1 of the same size might get $1,400 in Tahoe Park but $900 in Oak Park. Once again, it's all relative.

Also, perhaps try looking in a lower price range. 

3747 9th Ave, Sacramento, CA 95817 - $315k

"SELLER IS LOOKING TO SELL FAST. MOVE OUT OF STATE FOR JOB. Duplex with GREAT income. All rents where just increased an are at market. Front unit has new flooring, painted through out. Studio in back has long term tenant."

Gross rents are $2,225. PITI with 25% down and a 5% interest rate at the asking price is $1688. Leaving you a $527 spread for other expenses, management, etc. I'd suggest self-managing it, passing as many utility expenses as possible onto the tenants to keep as much as that money as possible.

Property has been on the market 93 days without a single price drop, seller is in a motivated situation, so here's your chance to get a discount. I bet the seller will have a hard time mentally selling for less than $300k though (big price point), but even just that $15k off would free up another $81/mo.

BUT WAIT -- THERE'S MORE! Because I'm an agent I can see that the seller was asking $289k in December of last year, so it seems like you definitely could get less than $300k. At $289k that would free up another $59/mo. So we're up to $677 net considering gross rent and PITI.

Putting 25% down on $289k instead of $400k saves you $27,750 in cash to keep in reserves for repairs & maintenance, etc. And I'd suggest on the first turnover of each unit you spend that money to spruce it up and charge even more rent.

Or, put the full $100k down on the loan and free up another $149 in monthly cash-flow. That's $826 a month before other expenses, and there's no way you won't be positive on a duplex even if you overpay or overestimate for everything else.

Violent crime isn't bad at all for the last six months. Perhaps being two doors down from a church on one side and 8 doors down from a church on the other side is keeping the sinners away.

As you can see, opportunities exist. Only a .77% on the 1% rule @289k and 25% down. But if it put $200-300 in your pocket every month while continuing to go up in value as someone else paid your mortgage, with rent going up from inflation if nothing else, would that be worth it to you?

As for lowballing in general, you can basically forget it on any new properties. Way too much demand. Maybe if it's been on the market 60-90 days, but not new stuff. Just sold a home and got 3 offers in 3 days on the first weekend. 

Also, for a residential multifamily investment property, if you're not planning on house-hacking typically it's 25% down, not 20% like with a SFR. But I could be mistaken and that may vary from lender to lender. Check with your lender first before deciding a deal is a deal.