Greater Sacramento ROI?

Question

Hello,

I am new to real estate investing. I live in Sacramento. I am curious what kind of Cash-on-Cash ROI and Cap Rate is typical for different parts of the Greater Sacramento (e.g. Elk Grove, Roseville, Folsom) area? And if you have thoughts even down to the neighborhood that would be appreciated....

Joe Bertolino · Answer

The numbers I quoted are from a duplex with three studio units.   Main house is a 3/2,  second a 2/1 and three studios.  Rents are $1800, $1400 and $500 each.   $4700 Gross

$450K purchase

$360K loanTotal expenses$2,958 Mo

Mortgage$1,567

Taxes$468

Insurance$150

Variable expenses$564 (5% vacancy, 1% maint, 1% Capex, 4% management)

Fixed expenses$210 (power and water on the three studios)

$39,696 NOI

16.77 % COC

8.82 cap

$1741 Cash flow.

When I mean dumps in the mid west I mean that the vast majority of your cash flow is really just unspent capex.  It isn't like Sacramento where the weather is mild.  Its cold, its windy, its harsh.  Your roof doesn't last 30 years.  Paint, flooring, AC units, pipes, etc.  Everything gets taxed harder.  The houses that investors are scooping up for under $100K and making a few hundred dollars per door are one repair or one midnight move out away from wiping out their yearly cash flow.  The type of tenant that paying $950/mo for a $80K house is not the same type of tenant you get in Sacramento in B- area.  The vacancy rate in Indy is 6.11,  Memphis is 9.33. Downtown KC is 11.6%  The vacancy rate in Sacramento is 2.76.  The vacancy rate in the A/B areas in Sacramento is under 0.50%.   The biggest problem I see in Sacramento 2-4 units is that the tenants stay too long and the owners don't have built in rental increases so they fall way behind the market.

This isn't just an opinion I have.   Before getting into real estate I owned an insurance agency that wrote property insurance all over the country.  19,000+ units.   I dealt with claims from all over including the best turnkey cashflow markets.  My clients that owned 90 units in San Francisco netted more money than my clients that owned 700+ units in Indy or Memphis.  I totally understand the desire to go there because the barrier to entry to lower but over the long run it is fools gold in my opinion.  I think the turnkey providers and wholesalers are the big winners.

Joe Bertolino · Answer

I come across deals every week that are 8-11% COC in good locations and often with equity on Day 1.  Rents have increased dramatically in the past 5 years and many landlord are way, way under market.

I drop 2000 mailers,  send 13k texts and 15k ringless voicemails and a few thousand phone calls to make that happen but deals do exists.

Saw one yesterday with $4700/mo in market rate rents and a $450k asking price.   It was choppy but the numbers are there.

Joe Bertolino · Answer

Of course that is not a daily thing but I frequently find 10% COC deals.  There is still a lot of juice left in Sacramento.  There is a major shortage in 1-4 unit rentals and a lot of older long term landlords that are collecting the same rents from 2009.  I went to see a duplex in Fair Oaks last week and one of the tenants was paying $825 for a pretty nice 2/1.   Market value was $1650+.   I see stuff like that all the time.

Jeremy Brown · Answer

Over the last several years, it seems a good return for something listed on MLS has been around 5.5%. That assumes you pay cash and get market rents and includes PM fee and set-asides for capex.

Needless to say, that’s pretty bad cash-on-cash. The ways to make money are improvements to raise rent, leverage, appreciation, and longer-term increases in rental rates.

With a combination of leverage and appreciation, we’ve made a killing the last few years. Way more than what we make in rent, though rent rates have done well, too.

All said, it’s a tough place to generate cashflow, if you want to live off that. I anticipate reallocating at some point in the future to shift into something that provides more cash. Deleveraging locally will not be the answer.

Marc Rice · Answer

@Matthew Swearingen

The Midwest will offer lower barriers to entry and good returns beyond 1% rules and 10% CoC. There are markets here that are up and coming such as Columbus and then others that are not seeing increases in growth such as Dayton.

Derek Jones · Answer

Are you looking for a better return in Sacramento or asking if Sacramento has a better return that another city?

Jason Rhodewalt · Answer

@Joe Bertolino Can I ask what area this property was in? $450k for all that house seems like a great deal in the SAC area... I'd jump at that too

Matthew Swearingen · Answer

So you've mentioned this before Joe Bertolino, give us some actual numbers with vacancy rates, repairs, down payment all the costs and what's left over.. Also you mentioned "dumps: in Midwest. Not sure what that means but not every investor can afford to purchase a $450K. The cost in the Midwest is all relative. You can find the same COC return in other places. Im getting 30% or more when I work numbers with 20% down and rents at $900 on average. So its all relative.

Brian G. · Answer

@Phil Lee those fleeing the Bay Area are pushing up prices and rents. When analyzing a market make sure you are taking the whole picture into consideration. If I was investing in Sac (I’m not) it would be due to expected price and rent appreciation over time.

Jason Rhodewalt · Answer

@Joe Bertolino well if you find an opportunity like that and are looking for a buy let me know

Greater Sacramento ROI?

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