Rental Market in Stockton and Modesto

[Ritesh Dalal]

Hi All.. I am looking to invest in multi-family properties in Stockton CA and would like to get your opinion in the rental market and would ideally love to connect with some fellow investors in the area. Am also looking at Modesto as another options. Please share your thoughts.

[Wes Blackwell]

@Ritesh Dalal

I work with a lot of Bay Area investors looking to buy multifamily property in the Greater Central Valley, and regularly analyze every single 2-4 unit multifamily property from Placer county all the way down to Merced county. 

The best thing about Stockton and Modesto is the low prices, which makes it really easy to get in and buy since 25% down will be much lower than it would be in the Bay Area, MUCH lower lol.

San Joaquin county (Stockton) will have about 3 times as many properties that are deals than Stanislaus county (Modesto) will, but the numbers are roughly the same.

Here are the numbers you can expect from the average property that I consider a deal:

List Price: $261k
Cost Per Unit: $89k
25% Down: $65k
Gross Monthly Rents: ~$2,100
Gross Annual Rents: ~$26,000
PITI Mortgage @ 5% Interest: $1,400
GRM: 10.13
1% Test: 0.84%
Gross Annual Yield: 10.03%

The thing that you're missing in Stockton and Modesto is desirability. Right now there is a huge surge of Millennials moving from the Bay Area to Sacramento, which is driving up prices and rents like you wouldn't believe. You can read more about it in my post here:

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

Sacramento is simply WAY more desirable a place to live than Stockton or Modesto. We've got an international airport, several major sports teams, a local CSU, tons of night life, cool restaurant scene, and offer enough of the "big city" feel that the younger generations (your tenants) crave. Something as simple as wanting to see regular live music is nearly impossible in Stockton and Modesto. Sacramento has regular live music in Spades.

So if you buy a property in Sacramento now, in 2 years it will be worth 11-14% more and the rents will 18.5% higher. Stockton and Modesto simply cannot offer that kind of appreciation and rent growth. You can still make money there for sure, but there are better options available.

So if you're strapped for cash, Stockton and Modesto are good options for you. But if you're thinking long term you might as well go another 30 minutes north to Sacramento and invest there.