New discouraged investor in Sacramento

[Wesley Duvall]

Hello to all and a big thank you to BP. I've been a member here for over 2 years and never posted but I've done a ton of reading. A little about me and my situation. I'm mid 40's, work a pretty time consuming job, and I'm looking to pull some cash out of my home to begin investing. I will have 30-40k to begin with. 

My discouragement comes from listening to podcasts where Joe Investor buys a duplex for $80k and his net cash flow is $600 a month or the famed 2%. The market in the Sacramento area is very competitive. Duplexes in far less than desirable neighborhoods are 150k+ and I dont see rents that support most properties i would be willing to buy as a new investor. I'm not stuck on multi family properties but this is just an example as many of you know who are from this area that unless you're a cash buyer or a retail/primary residence buyer it's a difficult market. BRRR seems almost out of the question unless I come across something that's off-market.

I've looked into out of state turn-key opportunities that would bring in cash flow but then all my capital is tied up in those properties at least in the near future and would prevent any resemblance of an aggressive investment strategy that I need to have to build wealth before retirement. 

Maybe find a wholesaler? Or? I would like find something that would allow me to perpetuate investing. I would really like to attend some local meetings but they usually occur on days that I work but I hold out hope to attend someday. 

Thanks for reading my rant and again thanks for any help. Happy investing.

Regards,

Wes 

[Derek Daun]

Listening to podcasts of how people do it in the midwest and trying to apply those numbers in California is like trying to open a fine dining restaurant based on watching the guys behind the counter at McDonalds. You'll definitely get frustrated trying to make those numbers work. Here's my opinion of how the Sacramento market currently looks:

• Most neighborhoods in Sacramento are not investment grade. The prices are too high, and you'll be much better off in the handful of lower grade neighborhoods that have bad reputations but are improving. Granted, these neighborhoods probably aren't any worse that what you'll get with out of state turn keys, you just have the benefit of ignorance there. Learning these neighborhoods around here, and being comfortable in them, is crucial.
• Multi families are generally over priced, especially on the MLS. This is due to lots of out of city money pouring in, especially from the Bay Area. Like you mentioned, you can find duplexes in worse parts of town that might appear to cash flow, but likely don't in the long run due to the issues that go along with the type of tenant you get there. Some people are successful with this strategy, but you really have to make that your thing. Personally, I'd prefer a Single Family in those neighborhoods in order to get higher quality tenants.
• The 2% rule doesn't apply. It has no meaning here. I suspect the really good investors buying off market with cash are probably hitting about 1% when considering rehab costs. (Someone with more experience please correct me if I'm off). Personally, I think .8% is an attainable target that still works.
• Properties with opportunity to add value is key. You're not going to be able to even hit .8% without adding value by rehab. Turn key properties go for a premium here because in addition to people not wanting to, or not having the skill to make improvements themselves, they just don't have the money. Salaries are still low in the area, and most buyers are doing FHA @3.5%, and stretch all of their finances to do it. Buying a turnkey house for $40k more only costs them 1.4k now, compared to needing the 10k to do the improvements themselves. That 30k gap is where we make money.
• .8% is barely going to cash flow, especially after refinancing for BRRR. At the end of the day, you're going to want to consider your total equity in determining if it's a good deal or not. This means looking at your principal payments and conservative appreciation estimates. Granted, appreciation is NOT guaranteed; however, you can increase the likely hood by buying strategically. Plus that value added from rehab goes to your equity profit.
• You can find deals on the MLS, they are just becoming more rare. Diligence is key. Properties not conforming to FHA will be significantly less competitive. Properties going on and off the MLS are good targets.
• Like Jd Martin said, having 40k to invest is probably the absolute minimum for here in the current market. You'll need 30k for 20% down on a 150k property, and 10k for rehab. That doesn't leave any reserves. So you'll want to at least have access to some extra cash that you know you can support with your day job going in. Cash constraints will loosen up once you complete your first BRRR.