Buy and Hold Cash Flow in Sacramento

[Alex Graebe]

I currently live in the Bay Area and am looking to invest in a "buy and hold" rental property.  Since home values have skyrocketed and properties don't cash flow in the Bay Area, I have looked to surrounding areas in California that I can drive to.  

My question is, from the research that other people have done in the area, is Sacramento a good "buy and hold" market to obtain a rental property?  My analysis indicates that a property here would only have a rent-to-home value ratio of 0.5-0.6% and be either break-even on cash flow or slightly negative.  This is of course not as ideal as other areas such as the midwest where home values are much lower and rent-to-home value ratios are considerably higher (1.5-2%).  However, being that it's my first property, I'm very hesitant about buying a property in an area I don't know across the country, sight unseen.  I envision a much greater growth and future appreciation in the Sacramento area, but am fearful of buying a property that is borderline cash flow negative.

[Wes Blackwell]

@Alex Graebe

I've written about Sacramento so much, let's start by getting you up-to-speed on the local market here and what's going on:

https://www.biggerpockets.com/forums/621/topics/396725-millennial-migration-to-sacramento-2017---here-comes-the-rush

Go read that first, and then come back so the rest of this post makes more sense...

.....

Annnnnnnnd we're back!

Ok, so what it really comes down to is analyzing your goals for real estate investing. Here are some questions you should ask yourself:

1. What's most important to me about this investment decision?
2. Do I want appreciation more? Or cash-flow? What is more important to me about this property?
3. What is the minimum monthly / annual return I'm looking to get on my investment in terms of cash-flow?
4. Would I be willing to sacrifice cash flow every month for 5-7% appreciation per year? Am I willing to put off making money now for bigger returns later when I sell or cash out refinance?
5. How comfortable do I feel about investing out of state? If worse came to worst, would I be able to take the time off needed to fly out to the property and set things straight?

Once you have the answers to those five-ish questions, you should know whether or not Sacramento / California is a good investment opportunity for you.

California is 2-4 times expensive as most of the rest of the country, so while you can get better ROI for rents in those other states, if you buy at the right time here in CA you will mop up cash-flow investors in the long run.

And that's because 5% appreciation on a $300k property here in Sacramento is 3 times as much as some $100k property in the midwest. You'd be making $15k per year off of appreciation alone. 

The whole 1-2% rule / test / metric is the bane of my existence on this damn site because people think that the metrics you use to analyze that $100k property should apply out here in California where the median home price is $500k.

If you find me some $500k property that rents for $7,500 to $10,000 per month sign me up because I'll be the first in line to buy it. Why would anyone rent a home for that price when they could buy it and putting 5% down on a 4.5% loan and own it for less than $3,500 per month?

Sorry if I sound all crunchy and salty hahaha, I've just had to explain this a million times on this site because the whole 1% thing is the metric most BiggerPockets members are using even though there are at least 10 other ways to analyze and investment property.

When it comes down to it, here in California cash-flow is merely the icing on the cake. I'm not saying you should settle for negative cash-flow, because that's just stupid and not necessary. Just make sure you're seeing the larger picture on the real estate investment.

For example, if this investment property is really about securing your retirement, who gives a crap what the cash-flow is now? 30 years from I'd rather have a $300k+ property paid for by my tenants than some much cheaper property elsewhere. Plus the gross rents will be much higher as well so you'll win in the end on that metric as well.

So, if you'd prefer to keep your money close to home, I'd highly suggest at looking here in Sacramento or in the Stockton/Lodi metro area, as we're both the #4 and #28 hottest metro markets in the nation this year. Which means lots of growth in values and rents.

Also, I would probably advise against single family rentals, and instead look at 2-4 unit properties instead. You'll get a much better return for cash-flow purposes.

Hope this helps. Let me know if you've got any follow-up questions. Best of luck!