Running the numbers on Sacramento properties, nothing makes sense

[Anthony Giardina]

Hi. I've been lurking for a while, educating myself on real estate investing, and just want to get a little confirmation that the numbers I'm seeing make sense. My goal is to invest in cash-flowing properties in the Sacramento area, to provide a hedge against my W2 income. I'm mostly interested in the area east of Sacramento, since that's where I live (Roseville, Orangevale, Citrus Heights, etc...). I can spruce up a properly myself, but I don't have the time to do a BRRR-style renovation.

Using current MLS listings, and also properties sold in the last 12 months, I've been compiling endless spreadsheets to evaluate properties. It seems like the market here is split into a couple categories:

<$150K low end apartments/condos: Some of these are turn-key, some need work. Rents are around $1300/month. Every property that I've inquired about requires either cash, private financing, or hard money because the HOAs or neighborhoods do not qualify for conventional mortgage underwriting (too high percentage of renters, non-warrantable, etc...). Accounting for vacancy, repairs, HOA fees, taxes, insurance, and non-ideal financing, these look like they typically have $100/month positive cash-flow. Considering that these properties also come with higher effort tenants and wont appreciate much, these don't seem worth the time and effort.

$150K-$250K condos and SFH: Very few properties in this price range, and the rents are very low ($1200-$1500) and most come with a $250+ HOA that wipes out any hope of cash flow. I have found some that come out cash flow neutral (accounting for maintenance, vacancy, etc). With appreciation, these properties outperform the long term stock market returns by a factor of ~2x. Decent long term investment, but doesn't provide the cash flow income I want.

$250K-350K SFH: This seems to be the bulk of the market. But I don't think these make any sense at all. I haven't seen any rents for these types of properties above $2000/month, and they all seem a couple hundred dollars in the red for monthly cash flow. Anything above this price point just becomes ridiculous ($500K purchase price, $2K rent...)

Here's a sample calculation that seems pretty typical. I have dozens of these examples: 

Purchase price: $285,000, 30% down @ 4% 30 year

Income (monthly): $1600

Expenses (monthly): 10% vacancy, $237 property tax, $102 insurance, $83 maintenance. 

This property would cash flow $80/month, and leaves no margin for outsourcing the property management or anything else really. This is one of the "better" examples that I've found. It's just really hard to get excited about making $80 a month. 

Is there something fundamental that I'm missing? Do I need to find a new source for deals locally, before they hit the MLS? If so, where would I find such deals? Or maybe I need to look out of state?

[Dan H.]

I question how many of the people who posted in this thread have owned RE in CA for at least 5 years.  

CA RE has historically achieved outstanding cash flow.

Actual cash flow is the cash flow over the hold period.  This is not the cash flow at purchase nor is it the projected cash flow.   Ca RE historically has poor initial cash flow, moderate projected cash flow (due to conservative projections - projections should be conservative), and outstanding actual cash flow due to rent appreciation.

In my market, SFH average rent has gone up over $500/month in the last 4 years. This implies that a purchase of a cash neutral home in my market 4 years ago would have ~$400/month positive cash flow today. In addition, they would have outstanding market appreciation of the SFH.

The higher rent appreciation market will always eventually have better cash flow than a lower appreciating market as long as the higher appreciation market Rent appreciation is greater than the expense increase which is virtually certain in Ca with property tax being basically a fixed price and most mortgages being fixed rate. 

Good luck