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Millennial Migration to Sacramento 2017 - Here Comes the Rush!
So, this morning I log into Facebook and see that several people have shared a video that I can only describe as an action movie trailer for the city of Sacramento... check it out below:
WOWZA... I gotta admit, they make the city look pretty dang good! Better than I would've been able to describe, but then again I worked 16 hours yesterday and never get to experience half this stuff!
If you haven't heard the news already, there's currently a mass exodus from the Bay Area to surrounding counties that are more affordable. And a big part of the migration is the younger generation of working professionals who are quickly realizing their money goes twice as far in Sacramento as it does in the Bay Area. We're projected to have 18,000 - 20,000 people moving to Sacramento this year from the Bay Area alone.
- http://sacramento.cbslocal.com/2015/10/21/report-bay-area-millennials-eyeing-sacramento-as-future-home/
- http://news.theregistrysf.com/urban-land-institutes-report-warns-of-millennial-mass-migration-out-of-bay-area/
- http://www.bizjournals.com/sacramento/news/2015/03/30/heres-what-millennials-like-most-and-least-about.html
- http://www.sfchronicle.com/business/networth/article/Bay-Area-rents-plateauing-studies-confirm-9193894.php
"If you are under 40, use hashtags and enjoy networking over craft beer, what do you like best about Sacramento? The cost, the weather and the options for fun."
For even more evidence of this mass migration, just look at all the recent headlines about rents in the Bay Area plateauing or even falling in some areas. That's because tons of people tired of living in a cardboard box for $2,000 a month and are quickly getting the hell out of dodge:
- http://www.mercurynews.com/2017/01/03/its-a-fact-the-bay-area-rental-market-has-softened/
- http://www.mercurynews.com/2016/10/24/bay-area-rents-are-falling-new-survey-shows/
- http://www.siliconbeat.com/2016/10/24/bay-area-rents-falling-falling-falling/?doing_wp_cron=1483629657.1876399517059326171875
This "mass migration" is a large part of the reason that Sacramento rents are continuing to rise, and we're projected to be the #1 rental growth area in the nation this year, with a 10% year-on-year growth for rents.
- http://www.kcra.com/article/why-apartment-rents-are-surging-in-sacramento/6502472
- http://www.bizjournals.com/sacramento/news/2016/09/21/yardi-matrix-just-512-new-apartments-this-year-in.html
This increase in rents is driving millennials to get off their butts and become homeowners, because why deal with regular rent increases when you can buy a home and pay basically the same amount?
This huge surge in demand will be met with low inventory, as we simply do no have the housing to satisfy it. New construction easily costs $40-100k per lot BEFORE breaking ground, and most of California would've needed to build 10,000+ housing unit per year FOR THE PAST THREE DECADES to keep our housing prices on par with the rest of the country.
So if you hear people talking about the "bubble bursting soon" or anything like that, they're tripping. Hold onto your butts, because we've probably got 12-36 months of continued appreciation. Short of Donald Trump starting World War III on Twitter, there won't be much to slow it down. This is part of the reason why Sacramento will be the #4 Hottest Metro Market in the Nation this year with an estimated 7.2% appreciation and 4.9% increase in sales growth:
All these things are evidence that we're about halfway up the mountain before the next peak, and we're probably somewhere in between an Early & Late Stable Market. We're climbing the ramp to the top again, much in the same way we did in the early 2000's:
So... what does this mean for you? If you can, buy now. Yes, the best time to buy would've been 2009-2010, but you've still got some solid appreciation coming your way and if you're living in the property you can probably hit the 2 year residency mark and be capital gains exempt if you sell at the peak. "The best time to plant a tree was 20 years ago, the second best time is now."
If you're looking for investment property, the mass migration to the area should be welcomed by your lovely 2-4 unit multifamily property. I'd shoot for 6 month leases so you can have more regular rent increases :-) And if you think that hipster millennial won't pay good money to live in your C class neighborhood because it's all that's available, think again:
- http://www.sfgate.com/realestate/article/Box-man-living-San-Francisco-400-rent-Berkowitz-7215269.php
Remember this is the same generation that thinks it's cool to pay $60,000 for a cramped 200 sq ft tiny house that they can park on their great uncle's lot and gladly post pictures on instagram about it all day long... until reality hits them:
Tim explains how the reality hit him suddenly as well. “I didn’t really foresee having to choose between owning a fridge or getting rid of all of my shirts.” <-- lolz
- https://en.wikipedia.org/wiki/Tiny_house_movement
- https://reductress.com/post/this-couple-built-a-tiny-house-but-now-they-have-to-live-in-it/
But if you've got a property in the Midtown-Downtown or East Sac area, hold onto it and watch the rents surge like crazy so all the young singles can be close to the night life. I know a young couple that pays $1,800 a month to rent a small house near downtown and think I'm crazy for moving out to the burbs and owning a home twice the size for the same cost. They're having a hard time justifying making the move... which is quite silly indeed:
In sum, my opinion is that it's a great time to invest in real estate, and the high housing cost in the Bay Area is driving literally tens of thousands of people to our city of Sacramento, and if you get in front of the demand you'll experience some awesome appreciation and some massive rent increases, and laugh out loud all the way to the bank :-)
Thanks for sharing Wes Blackwell , always quality material from you and adding value to the community. Anyway, my sis and I just bought a $330K property in Elk Grove as her first home, this is managed by a PM and looking at the math after all expenses & mortgage, we have a small gap but between me and her It's not too bad ($400) as the primary goal is for her is to own a property and start investing (she's considered a high income earner) between this change in mindset win, tax benefit and the joy of owning a piece of the American dream having a nice 3 BR 2.5 bath in Elk Grove were happy, this is our first investment property, we own a house in San Leandro. The Elk Grove house is built in 1998 and well maintained by previous owner, it was move in ready. In the future, we plan to make improvements on the home to force increase in value, hopefully we can decrease the mortgage through refinance, hold for a few years and sell for profit. At least that's the game plan in my Simple REI mind :)
Wanted to get your input on the approach If it makes sense to you as the SAC Subject Matter export (SME)
Also, my goal is to get another property maybe in the Bay Area this time (but the price as we know is just crazy high with no sight of appreciation if we buy at current market so the feasibly of that is low) but also considering another Elk Grove property although my risk profile goes high as I'm putting my eggs in 1 basket. But maybe the risk is mitigate by the bullish market in SAC. This time we will have to shell out 20% down payment for investment property so I have to be very careful. I plan to get this before November of This year as we close the property in Elk Grove last month.
Any ideas on the type of property to buy? We still want a nice place, i believe you have to be proud of what you own so even if there's problems it makes it easier to handle them compared to a property I hate.
Overall our strategy is to buy and hold good properties in good areas with potential to appreciate in value, were not planning to quit our careers but wanted to have investments that grow with us in the next 2-3 years.
BP family, will appreciate your input here. Thanks and may we all continue to hustle and achieve success!
I just sent off a couple thousand mailers to the Sacramento area.. I think the city definitely has some good appreciation left..
@Fernando E. I like your caution. However I think it's risky to spread out and have no economy of scale. As @Matthew Mcdonald mentioned, Sac still has upside left.
Especially if you position yourself in an emerging sections of Sacramento and help the area improve.
Sidebar... Search my name. See how people snickered as I bought into North Oak Park. Then read the rest of this.
We're diving deep into 12 such areas at next Saturday's Summit at the Guild. We're also featuring a City Planner who will share her thoughts on what a savvy investor might do if they want to draft behind Sacramento's efforts to stimulate local neighborhoods.
We'll be breaking off lots of insider information that you won't find here on BP or anywhere else. Hope you can make it.
@Al Williamson, thank you for the reply and invite to the event. Unfortunately I'll be out of town however I visited your site and signed up for mail distribution, looking forward to learning more REI strategies and investing in the SAC area. Cheers!
Agreed. It has been quite the challenge to get millennials on board with home ownership, and for a number of reasons:
- Student Loan Debt: with an average student loan debt of $22,191 and 54% of graduates carrying loan debt, it creates quite the challenge. Not only does this affect their ability to qualify for a loan, it saps their motivation to even try. This is especially true if they took out private loans with higher interest rates. I know plenty of people in their twenties saddled with a boatload of debt and are making payments of $750+ per month! No wonder so many millennials are living with their parents, they can't afford not to.
- They Want It All: Pinterest and Instagram have totally ruined this generation of home buyers. Long gone are the days of the "starter home," as I find buyers today have completely warped expectations of what a home should look like. They've been hearting, liking, pinning and sharing beautiful homes since their teenage years, so they think every single home is supposed to look like that!
I was showing a home recently that had some wear and tear from the 4 rambunctious young boys living there, and was merely in need of a little elbow grease and some TLC to really make it shine, but was otherwise quite nice. But my client called it a fixer! Tile countertops or faux granite simply won't cut it with this crowd. - They're Unrealistic: Furthermore, they won't get the hell out of Midtown! Look, I get it that you like to be close to K St. so you can walk down to the bars and flirt with some young single hotties, and that the burritos at Tres Hermanas are so dang good you can't stand the thought of going without them for longer than a week, but you'll never be able to afford a home there, so GET OUT!!!
I have some friends that are a married couple in their early 30's who are currently renting a 2/1 near midtown for $1,800 per month. That's more than my mortgage and I own a 3/2 on a quarter acre with a pool in a nice neighborhood near a park with great schools. BUT -- I'm 15 minutes away from Midtown! GASP!!! UNTHINKABLE!!!
I'm telling you, any millennials that don't buy a home within the next 2 years are going to be kicking themselves HARD when rents go up another 18.5%, home values go up 7-14%, and interest rates go up 1-2%. Then they will qualify for a whole lot less of home than now, and their rents will be so high they won't be able to save the money needed for a down payment. They'll be forced to keep renting until the next downturn, or move out of California which people are doing in droves.
If I was an investor from the Bay Area looking to buy rental property in Sacramento, I would be looking at 2-4 unit properties in B/C class neighborhoods.
The days on cash-flowing on SFR are long gone, as prices are simply too high for the rents. But ultimately it's really going to come down to your investment goals and expected returns.
If you're comfortable taking the $400 loss every month (and don't forget about vacancy, utilities, repairs, CapEx in the future) and this is a longer-term investment, go for it. If it's a nice part of Elk Grove it should hold up over the next down-turn as the school districts there are really good.
The Elk Grove area is INSANE right now if you live in one of the areas that has higher rated schools. I've been trying to help a client of mine who buy in that area for awhile and we keep running into 10+ offer scenarios, so the demand is definitely there.
So if you don't mind losing money in the short term knowing that the property will appreciate in the long term and you'll have the opportunity to exit the market later near the peak, or are planning to hold this 30 years and have your tenant mostly pay it off (since you're still coming out of pocket every month) then it could be considered a good buy to some investors.
But my experience with most investors is that they'd like to make a little money every month, or at least have the property pay for itself. Even if you make $1,000 per month cash flow it's not like you can quit your day job, so that's really all just gravy. Especially when you bring appreciation into the mix, as that's the true cake. But coming out of pocket for a property every month sucks even if you love it.
I'll take ugly properties that make me money all day over beautiful ones that cost me an arm and a leg.
Hi guys remember the 2000/2001 tech bubble. Sacremento has always been the area that most buyers will flock too when the bay area gets too insane. The market we are now in is so different from 2 cycles ago. We have really no new building to speak of but we have more student debt then before and more stringent lending guildlines and most importantly in the next 2 to 3 years many blue collar jobs that will vanish. We are likely going into a market where less people will be able to afford to own. The fortunate investors must come in from the mind set of holding and making that purchase in a market they perceive to be stable. School district and jobs are key to that purchase.
@Wes Blackwell, Thanks for your post, I swell with pride at hearing such good things about my old home. I would consider myself to be one of the ones that ran away that is now looking at coming back. I've only recently started down the path of real estate investment and ideally I would like to look in my native Sacramento before looking elsewhere. I'm looking into using an FHA loan and home hacking a multi family unit then moving out after a year to really boost the cash flow. Obviously the market in Sacramento is not the most affordable ( but not the least either) and rent to price ratios are above both the national and historical average, so large cash flow potential is harder to find (I'll avoid entering the appreciation talk because my investment plan is to take appreciation as a bonus rather than a deciding factor of a deal). That being said, as you've shown, there are still deals to be had in certain hiatorically less desirable neighborhoods. I'm curious as to other neighborhoods you see potential in in the area? Also as @Embert Madison Jr pointed out, there are some very important expenses that a potential investor will have to factor into the cash flow examples you gave, how do these less desirable neighborhoods affect things like vacancy, maintenance, rent delinquency, etc?
Well you are confirming what I am experiencing in my duplex in north Sac. Up, up, and away. My 2010 purchase is really paying dividends now. Thanks for all the info and the background.
I agree with you Wes. If you are losing $4800 a year minimum because NOI doesn't cover the debt payments then you are not investing. You are banking (hoping) for appreciation. For a 350 k house appreciation has to be greater than 3% per year to cover those losses. Oh and if you have 1-2 months of vacancy then you need about 5 % appreciation. It's not fun. I was there in 2005. Glad I got out and was much better positioned for cash flow success in 2010.
It's going to be big!
@Wes Blackwell Do you see any deals in Folsom area? SFR
For Folsom, it really depends on what you consider a deal, and what your goals are.
SFR is more challenging of an investment, especially at the higher price points. And the reason for that is that because of the higher purchase price you'll get a higher mortgage payment and a higher cost to carry. And you won't always be able to rent the property out for enough to cover the mortgage payment if you put a smaller amount down.
The median purchase price in Folsom last month was roughly $515k, so with 20% down your PITI would be about $2,900/mo with a 5% interest rate. By the time you throw in utilities, repairs, cap-ex, etc. you'll probably lose a little money every month.
BUT -- the property can still appreciate, and just 5% annual appreciation on $500k is $25k per year. So if your plan is to sell in 2-3 years you may lose some money while you hold it but then realize a large gain in a few years.
You can always put more money down as well, and that would increase the cash-flow significantly. At 50% down your payment drops under $2,100 so you could definitely see a little money every month.
Ultimately, it's going to depend on your finances, your metric goals, and your exit strategy. Kinda hard to answer the question without a personal consultation of your exact scenario. But I hope that helps :-)
I grew up in Folsom/Roseville and am one of these millennials you're talking about and can attest to young people skipping their 1st home. Most people I went to High School and college with have elected to rent till they were late 20's, making 80k, then bought something in the 400k range. By that time, they LOVE the area and couldn't imagine raising a family somewhere else. Close to Tahoe, close to the bay... your appreciation and demand numbers don't surprise me at all.
Great post! Curious to your thoughts now, 2 years later and where you think the market is now and where its headed.
Thanks
I would also like an update as well regarding where the market is heading and how the push of rent control will affect investments in this market.
Do you think the Sac market still has room to grow? It seems the different areas of Sac are on different tracks. Folsom and Roseville might be at their peak, but I still see some room to grow in the Elk Grove/South Sac areas.
10k new homes going in south of the 50 just between Folsom and El Dorado Hills and they seem to be selling. Someone is buying them. New Safeway going in just off of Bass Lake Rd and I am finishing up a lease in there and have had several inquiries from the Bay Area to open up shop in that center. Seems the big money is still very active all over Sacramento area. Phase 1 retail new center almost complete in a Curtis Park infill development with 500 new homes soon to follow. The tariffs are starting to affect the cost of building materials so that would be a bigger worry than any misguided ideas our C- one party students under the dome come up with. I would expect anything they end up doing will result in more homeless.
Well, you nailed it on the head as a reformed San Francisco broker who just bought an expensive home in Midtown so I can replicate the urban feel of the City for half the price :) You're welcome ;)
@Gene Mattos Yes, I have a rental near oak park and the area has changed a lot! More businesses, and home prices have increased significantly in the last 5 years. It’s harder to find affordable houses in Sacramento, even in the less desirable areas.