Is Sacramento Oversaturated?

Question

I am new to real estate and am midway between San Francisco Bay Area and the Sacramento area. I have been analyzing deals in Sacramento and Davis but I have been told that it is difficult to get tenants in Sacramento so I thought I would check out the Davis area because of the college. Any investors in the area have an opinion?

I plan on growing my knowledge about surrounding areas but I figured it wouldn't hurt to ask too.

Thank you

I plan on growing my knowledge about surrounding areas but I figured it wouldn't hurt to ask too.

Thank you

Account Closed · Answer

@Adam Engle-Sorrell

If you go to Davis you'll get higher rents and disproportionately higher price, and likely lower returns unless you take the "rent to 8 students for a 4 bedroom house" approach. A higher revenue method, but a logistical nightmare, with very very seasonal leasing periods.

Sacramento has crazy rental demand, you'll fill units no problem. You probably won't cash flow a whole lot. I'm not quite sure why one would pursue long term rentals in Sac today- it's expensive, and a volatile market with a history of heavy depreciation during recessions. It's also appreciated immensely over the last market cycle, which doesn't mean it'll crash hard.. but I still believe in gravity.

I WISH I had the wherewithall to invest heavily in this city from 2010-2012. Unfortunately I was 20 and kid-minded, and I only managed to get into a single SFR in 12 and another in 14. Both appreciated a LOT. Esp the former. Now, I wouldn't touch buy and hold here. I'd sure as hell sell out of an equity position if I had such an opportunity present itself! For rentals in '19, there are other markets out there that are less volatile, with higher cap rates, better laws, and adequate rental demand.

If it all goes down the drain again.. heck yeah I would buy again here! But I'd sell again at the next peak b/c screw rent control.

Adam E. · Answer

Account Closed

Thanks so much for the insight!

Jean Marx · Answer

Hi Adam -

I’ll add my experience. (Fair warning: I’m not sure how relevant this is for you since the original post was 4 months ago and my experience in the Davis market is somewhat dated.)

We moved to CA in February of 2015. Initially, we rented in Davis for about 8 months (Primary reason: excellent schools Secondary: splitting the commute difference between Sac and Travis AFB). The rental market was interesting. Most landlords wanted to be in sync with the school schedule having the leases from summer to summer. Almost all the rental availability posts were for vacancies that were five/six months out. The properties that were available immediately would sometimes have an hour or two timeframe to accept applications and cut them off so they didn’t have to deal with lines out the door/floods of responses. Basically it seemed like a game of high credit scores and speedy responses. The place we rented was only available outside of the school cycle because the owner had passed away. Their goal was also to end the lease in the summer and follow the same path as other landlords. We applied on-site with three completed applications in front of us. The place still had lots of cleanup to do and a bathroom that was completely ripped apart with a toilet to replace (ie they didn’t have a problem renting it out even before it was ready for market). Our neighbors actually did long term AirBnB in their primary residence for students/faculty etc that couldn’t find immediate local housing. They did really well with it. I know there were some potential AirBNB regulation changes they weren’t excited about but I didn’t keep tabs on how that impacted them. We ended our Davis lease early to buy a house and helped find a replacement tenant. We were specifically asked only to post on Craigslist vs all the major sites to limit the number of applicants.

For our primary residence purchase, we weren’t where we are now in regards to the investment mindset, however; my husband and I both moved frequently for our jobs and liked the flexibility of multiple exit strategies (ie sell or rent). Davis had a history of more price stability during market shifts and great schools/low crime rates for resale considerations but we ultimately chose not to buy there for 2 reasons.

1.) We wanted the option to keep the property as a rental. For the most part, the purchase price vs rental rates in Davis didn’t line up in way that was profitable without doing the rent by the room gig. Rent at the time was similar to what we’d pay in Sac at a much cheaper purchase price.

2.) The town has a low growth type approach. Good from a landlord supply vs demand perspective. However; I’ve also received feedback that their permit process is challenging (slow, lots of restrictions on what you can and can’t do etc) partly because they want to keep the smaller town community feel it has now. We were planning to buy a value add property and didn’t what the headache especially if it prevented us from making major changes we were interested in. Note: We didn’t confirm or investigate further with the permit office.

We ultimately purchased in Elk Grove near a great high school for 100-200k less and almost twice the square footage of the higher price point in Davis. Additionally, with updates and appreciation, we can easily rent it out over the mortgage payment plus property management. This isn’t necessarily the area where I’d jump to for Sacramento metro investment but it worked for our primary residence needs at the time.

As for Sacramento itself, our software project started at the end of 2015. We had a lot of people moving in from out of state that had trouble finding rentals. They had a lower scale experience of what we ran into in Davis. We started telling people to show up with a print out of their credit score and deposit in hand to increase their chances. The new people that come on today don’t seem to have as many issues finding a place but the landlords we know also haven’t had a problem finding tenants that meet their criteria. I work downtown near Golden One, which they’ve built up like crazy and there are future plans that include a soccer stadium and medical facility. On the West Sacramento side, there have been a lot of updates near the river just over the bridge from downtown. We have a lot of employees buy/rent there and commute by bike over the yellow bridge. One thing with Sac metro is that I would do more due diligence in regards to the location. There are higher crime areas, larger discrepancies between schools etc. Personally, we’ve been considering a house hack multi-family closer to the office but we keep shying away with rent control and out of state opportunities.

Hopefully this helps give you a little better idea of the areas!

-Jean

Wes Blackwell · Answer

@Adam Engle-Sorrell

No, it is not difficult to get tenants in Sacramento. There is a flood of people moving there from the Bay Area who are used to paying twice as much for a property half as nice. You'll have no problem getting the unit rented.

(thanks for the mention!)

Adam E. · Answer

Literally as I posted this, Wes Blackwell posted a detailed article about investing in Sacramento. Whoops.

Wes Blackwell · Answer

@Mike Franco

From: https://www.kcra.com/article/3-takeaways-from-sacramentos-population-jump/27338192"3. Is Sacramento a hot market for new jobs?

Yes, without a doubt.“Sacramento is the No. 1 location for people leaving the Bay Area," said Barry Broome, president and CEO of the Greater Sacramento Economic Council.Centene, a health care company, has already announced a move to Sacramento and is building a new facility in North Natomas for an expected 5,000 new jobs.Broome told KCRA 3 that Penumbra, another health care company, has also announced plans to build a facility in Roseville.In addition, “EA Sports has brought a division to Sacramento over at the Ice Blocks,” Broome said.“We’ve had a lot of growth in the small tech sector, and we are now about 22nd in the country in business growth, and small tech is healthy,” Broome added.He predicted that “if the market continues in the next two years, we’re probably looking at (15,000) to 18,000 jobs.”Those new jobs, he noted, “are higher paying jobs. So the jobs that are coming in here are paying in the 90, 91, 92 or 93-thousand dollar range.”

Nicholas Lohr · Answer

I bought a 6 unit in West Sacramento  (West of Jefferson Blvd) which is one of the least desirable areas in the Sacramento area and I had each unit listed for only about 3-4 days before I found qualified tenants no problem.  My qualifications are 650 min credit score, a clean record, and income of at least 3 times the rent.

I did renovate each unit to make them look nice though.

Account Closed · Answer

I haven't experienced a tenant shortage in my 7 years here in Sacramento. If you're having any trouble with finding tenants, please reach out!

Adam E. · Answer

@Jean Marx

Thanks Jean! Always glad to hear about some local experiences, even if it’s been a few years. The price to rent in Sac is SO much better than in a lot of California. Definitely something I’ll be considering when I look for a place to live more long term.

Travis Gibson · Answer

@Adam Engle-Sorrell.

Do you have a link to the article for. @Wes Blackwell??

I am just getting started with Multi-family in the greater Sacramento area.

Is Sacramento Oversaturated?

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