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.

[Stephen Haynes]

you can purchase a fourplex in Sacramento for around 350K and rent each unit for $750-$850 bring the total rents $3000-$3400. these units are not in the nicest areas but they do cash flow the key is all in the screening of potential tenants which is always key but with these you cannot overlook anything or cut corners to put a warm body in. They also seem to rent relatively fast. I like Ashcroft Ave there is a pre-foreclosure there right now at 4556 Ashcroft Ave 95841. To invest in units like this you need to have some thick skin. each unit is approximately 800 sqft and so that helps keep turnover cost lower. 

Best Of luck 

Stephen Haynes 

[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!

[Alex Graebe]

@Wes Blackwell

Yes!  I read your post on the Sacramento growth and influx a few days ago before posting my thread.  When I first moved to the Bay Area 4 years ago, I could already see the trend starting in first first year of living here...a massive influx of people, jobs continuing to devlop, etc.  I knew eventually it would start spilling over and people would move inland toward a nice area like Sacramento to find a great place to live at a much cheaper standard of living.  I only wish I had the down payment saved up to get involved earlier, but better now than never.

Glad to hear you say that on the 2% rule.  I'm new to BiggerPockets, but on their first podcast I listened to, I heard them mention the 2% rule and it shocked me as I thought "You guys are dreaming. Elsewhere in the US maybe, but what's realistic for the market being what it is in CA?"

In response to some of your questions, I'm definitely in it for the long term and looking at it as building long term wealth for 15, 20, 30 years down the road.  That being said I'm looking more for appreciation, especially since that's what I think CA's market is made for, right?  Looking at how the Bay Area, central coast and Los Angeles areas have boomed over the past 20-30 years, I think Sacramento is at a discount right now compared to it's future potential.  I'm ok to sacrifice cash-flow and lower liquid annual return as long as it means long-term appreciation growth.  Also I am not extremely comfortable with out of state.  The month-to-month cash flow numbers crunch a little better, but I like the comfort of being close to the property and being able to drive by it or meet the tenants I'll be entrusting it to.

One follow-up question, why do you discourage against single-family or what else do you recommend I evaluate or consider when weighing a multi-family vs single-family purchase?  Since I started researching I have been primarily looking at single-family, mostly because I see them as being more "steady" as a long-term buy and hold.  Of course the multi-family units cash flow much better, but it seems like they are much harder to come by, and the ones that are out there are not in as great of areas, or are more high-maintenance with lots of tenant turnover, repairs/improvements, evictions, etc.  A more higher quality single-family home in a neighborhood with quality schools and low crime seems like it'll appreciate a lot better and cause a lot less headaches over the long run.  Maybe I'm just not as risk-averse or am worried I won't have the thick skin needed for the ups and downs of a multi-family.

Appreciate your thoughts and input.

[Leslie Pappas]

Hi @Alex Graebe I live in Silicon Valley, and I'm an investment advisor who specializes in real estate. I can tell you what people here have done to set themselves up for retirement. There are two types of investors here:

1. Buy or inherit and hold for a long time, then cash out and redeploy equity into potentially higher cash flowing properties or other investments.

2. Buy or inherit and hold all their lives while working the properties for income.

I've seen teachers, firemen, software engineers and all sorts of people utilize both strategies successfully. One way or another, however, the investors must work to pay down loans, increase rents and decrease expenses wherever possible. One way or another, they are building their net worth.

Building net worth is how you may possibly retire with fewer worries. If your retirement utterly depends on having adequate cash flow from your properties, any downturns will cripple you. AND you must maintain adequate reserves to take care of the disasters that may happen.

[Tony H.]

@Alex Graebe I am on the same boat as you. I have all similar questions like yours! haha.

I live in the Bay Area and is looking to invest in Sac area. I have done a lot of calculations for like 100+ properties with a mix of SFRs, MFRs, and Condos. I agree with Wes, that MFRs yield better cash flow.

After learning so much on BP, I think I have my answer on the whole purpose of my investing pursuit. I have to accept the fact that hoping on a good cash flow is going to be hard. I dont want to get properties in a class B areas unless it yields a VERY good cash flow. So far, I dont see any.

With that in mind, I think I will settle with a class A with a "A" Tenants who won't give me much headache and stress. I live 2-2.5 hours drive away. I certainly not want to deal with problem tenants that I have keep going back and forth.

In the back of my mind, as long as net cash flow is not negative, I should be fine. I'll just wait for appreciation and the house pays for itself.

I maybe wrong in all these, so, I am waiting for others to chime in as well.

I am going to Sac area tomorrow to see my agent and have a tour of the areas.

Good luck!

[Aries Li]

@Tony H.

I live in Bay area too. I thought of the same buy and hold strategy. To satisfy the 1% rule, in my humble opinion, it's key to find a property that is cheap enough. However, it's very hard to find such property on MLS. My current strategy is to find them off market, through direct mail, drive for dollars and online marketing.

[Tony H.]

Aries Li have you found success with your strategy?

If so, can you give me an example.

[Aries Li]

@Tony H.

I have just started. The good news is that I started to receive phone calls.

[Par Attaran]

I am finding it impossible to find anything on MLS that will cash flow with 20%-30% down.

lets looks at a random MLS listing today-

$250k-

(this is in a C/D neighborhood, and probably a 90k house in 2010/11) 

7521 Lemarsh Way, Sacramento, 95822

now lets plug in some numbers (using Rentometer's average rent of $1300) 

Ive ran numbers like this for tons of different properties in Sac for about 8 months now, and nothing exists in Sac for "buy & hold" off MLS.

I guess its back to FL for me..

[Pratik P.]

You simply can't cash flow on SRFs from the MLS anymore. The properties I've seen to be cash flowing are 3-4+ units.

[Tony H.]

I went to Sac area over the weekend. Looked at several properties. None of them would yield positive cash flow. The house rents were so low that it does not make any sense to me.

I decided to settle with a zero cash flow property in Rancho Cordova and hope for appreciation.
I saw the area is having a lot of growth! We'll see what happens.

[Wes Blackwell]

@Alex Graebe

See the posts above why I recommend against most single family residential. Much harder to get the properties to cash-flow, although it is achievable. 2-4 unit just seems to be a better option since you can still get the appreciation but enjoy greater returns on cash-flow as well.

You'll get the best quality tenants in single family homes, then duplexes, and then 3-4 units, and then apartment complexes. If this is more of an appreciation game or a reallllly long term investment, perhaps the SFR route is a better option. It's really going to differ for each investor, and either way you can't go wrong.

[Brandon Kluzniak]

I hope it's okay to revive this old post...

@Wes Blackwell

I am a newbie investor looking to enter the Sacramento market and was hoping for some feedback on a prospective cash buy and hold duplex in North Oak Park:

List price: $349k

Purchase cap rate: ~3.5%

NOI: ~$12,000 in yr 1

COC ROI: ~3.4% in yr 1

I've been fairly conservative with my expense calculations, but the unit does appear to be move-in ready. From what I've seen on Craigslist, 1BR/1BA rentals are going for $1000-1300/mo right now.

Thanks in advance,

Brandon

[Antoine Martel]

Alex.

I would recommend not investing in Sacramento for a buy and hold property. Having a rent to home value ratio of .5% is a very small return. I invest out of state and can get 1-1.5%. The markets that I have chosen are solid markets just like Sacramento but the rent to value ratios are in favor of the landlord. The laws surrounding being a landlord are also in favor of the landlord and not the tenant. In CA if you want to have a buy and hold property, the tenant has the power. 

[Tobias Falzone]

@Brandon Kluzniak it is a very small return, but that is pretty typical of Sacramento right now.  Are you buying off market?  Rents are rising in that area and over the long term might make more sense but I would have a couple of exit strategies because I'm not seeing a lot of cash flow, especially if you end up financing at some point.  Right now I am doing a hybrid flip strategy in the area where I buy under market value, bring up the value through renovation and then plan to hold for a few years to take advantage of rent and value appreciation (after pulling most of my money out in refinancing).  At the end when I feel the market cooling off I will do a 1031 exchange into one of the markets out of state that cash flows really well.  At least that is the plan!

[Nicholas Lohr]

Just to share my experience so far, I'm 1 BRRRR deal deep in Sacramento right now with the 2nd one in progress and what's been working for me is the value add multi family deals. Here's where I'm at so far....

Deal 1 Results

2016
Purchase Price $205,000
Rehab Cost $52,936
After Repair Value $350,000
Year 1 CCR Return 23.85%

Deal 2 (In progress)

2017
Purchase Price: 875,000
Rehab: In progress

And absolutely these deals would NOT have worked at the rents that I purchased them at.  You have to look for value add deals and analyze what the rents WILL be at once you improve the property.  With the skyrocketing Sac rents it's like the wind is at your back though, at least for the time being.  The rents are still about half of what they are in San Francisco so I think there is some more room for them to rise.

You have to really be choosy about the neighborhood out there too. I'd suggest Wes' map. It's so helpful!  Stick to the A's and B's and maybe some parts of the C's (i can tell you which ones) and look for the value add deals so you can do a cash out refi to get your money back, raise they rents, and still cash flow....

https://www.biggerpockets.com/forums/621/topics/44...

If you're looking for something more turnkey in Sacramento right now that will cash flow that may be a challenge. 

[Joe Bertolino]

Agree with @Nicholas Lohr that you need to add value in Sacramento.  There are deals with significant upside to be had but it requires some vision and effort.   With the new laws in town favoring density I see a lot of opportunity turning the smaller rentals in the city core into multi units with granny flats.  Prefab or otherwise.  You see a bunch of small houses on large, deep lots in Downtown/Midtown, East Sac, Land Park,  Curtis Park,  Tahoe Park,  Colonial Heights, Medcenter/North Oak Park, West Sacramento, etc.   A little farther down the road after the railyard and River District crank up I see that expanding to Woodlake/South Natomas.   Being able to add a nice prefab unit for $50-60K and not having to pay additional hookup fees for water and power is big in my opinion.   There is a lot of opportunity there in my opinion.  

[Nav Madhwan]

I have properties (Multi-Family) and the value has appreciated as well as + cash flow.

[Brandon Kluzniak]

@Tobias Falzone thanks for the reply! I did not find the unit off market.

@Nav Madhwan can you elaborate on the the multifamily properties? What size, when did you purchase, in which neighborhoods and how much do you get in rent per unit?

[Nav Madhwan]

@Brandon: To your answer your questions:

can you elaborate on the the multifamily properties? What size, when did you purchase, in which neighborhoods and how much do you get in rent per unit?

The 2 4-plexes I bought with partnership with my dad about 9 years ago, Another 2 4-plexes I bought on my own about 2 years ago. You have to some skin in the game...The recent purchase that I did, I had to show about $180k since it was 2 4-plex as a package deal. The owner wanted $335k for each. My offer was $325k for each for a total of $650k with $180k down. I rent all the units out for $900, as soon as a tenant moves out I renovate the units (ie. paint, floors in the living room, carpets in the bedrooms and hallway). I also have a full time job and this is just my side gig. I want to expand and buy a few more but I am so new to this I need more guidance and training. I want to learn how to take out money from your previous property and put that as a down payment on the next and so on... That will require some advice from an expert. My next goal is to buy another 4-plex and have it "owner occupied". Hope this has answered your question in a nut shell. Please let me know if I can help out in any way possible. 

Nav

[Account Closed]

@Brandon Kluzniak I would caution you on rental values. Oak Park is experiencing a lot of violence this summer. While I love the area, that's the reality right now. So I do not think $1300 for a 1 bedroom in North Oak Park is realistic. My business partner and I are renting furnished 1 bedroom apartments for around $1,500-$1,600 in North Oak Park (W Street). Right now, we're seeing $1,100 as the top of the unfurnished rental market there with some really nice places going for $900. PM me and I can give you the addresses and prices we've been seeing.

[Wes Blackwell]

@Brandon Kluzniak

I know exactly what property you are talking about... and I knew it was overpriced the day it came on the market.

What we're seeing in Sacramento right now is a little bit of a slowdown (typically for this time of year) but also in part because agents hear all the buzz about Sacramento being a hot market and so they start overpricing properties. This one being a prime example.

How do I know that it's overpriced? Because it's 1/1 each side priced at $349k, and there's a duplex with 3/2 each side on 2nd that sold for $325k a few months ago:

http://www.realtor.com/realestateandhomes-detail/3736-2nd-Ave_Sacramento_CA_95817_M17797-24431

I know that property well because I wrote 3 offers on it. It wasn't all remodeled and updated, but they built it back up from the studs in 2009 when they purchased it. The one you're looking at still has the older piping, electrical, etc. Plus it'll never rent for as much as the 3/2 duplex will. 

So, that's why this property is still on the market after 17 days, and the one on 2nd sold for $26k over ask in 3.

This thing would sell like hotcakes at $300k, but it will probably take another month or two before the seller starts to get realistic, but look for a price drop soon. 

Even if you offered $325k and got it accepted, I still think you're going to run into appraisal troubles with the property on 2nd Ave. That one was a much better buy than this one currently is at the $349k price.

I have investor clients that are constantly on the lookout for North Oak Park multifamily, but I didn't even send them this one when it hit the market because it's way overpriced.

Just my 2 cents :-)

[Brandon Kluzniak]

@Wes Blackwell Very insightful. I really appreciate your feedback. Without giving away your secrets, how would you suggest I go about finding MFRs in Sacramento before they hit the market?

[Wes Blackwell]

@Brandon Kluzniak

Short of sending them mailers directly I don't think it's possible.

For commercial multifamily (5+ units), you'd probably want to network with a few of the top agents in town and hope they give you a crack it before throwing it on the market.

But with 2-4 units, you're essentially asking how to get any property before it comes on the market. And unless they're a distressed seller, there's no incentive to sell to you when they could list it on the open market and get 5-15 offers at amounts higher than you're likely to pay. 

[Edmondo Morgan Jr]

Such great information 👍🏾. Stockton investor looking to learn all I can!