@Mike David -- Here's how I would break down the possible rental scenarios and overall market:
- Single Family Home -- Probably going to be your best quality tenants, much more likely to be a family with kids instead of a single individual or a couple. Much more likely to treat the home like it's their own, probably saving to buy a home someday. You will get the most rent per unit for a single family home, because you can offer a yard, garage, maybe a pool, and more privacy. Cash flow wise, it's probably gonna be tough unless you have a large down payment. But seeing as it's an investment property your lender is probably going to require 25% down anyway, although you can get better returns with more units.
- Duplex -- a great option for someone looking to live in one side and rent out the other, because it can cut your mortgage payment in more than half in some scenarios and make for a significant monthly savings. But, if you're going to fully rent it you have a chance to possibly see a little cash flow every month. The way to compare these to fourplexes is to take into consideration that duplex that costs $400k will be in better shape and in a better neighborhood than a fourplex that costs $400k. Now onto...
- Fourplexes -- if you're comparing this to a duplex that costs exactly the same, you'll have a lower quality building in a lower quality neighborhood, but I guarantee the property will perform better financially. More units = more cash flow. But under a certain budget, these properties are going to be in more challenging neighborhoods. That doesn't mean you can't still find great renters and have a nice property, just know that it will be more challenging than having a fourplex in the hot part of town that costs twice as much.
VALUING 2-4 UNIT PROPERTIES
Appreciation is hard to project for single family homes, let alone 2-4 units. Appraisers take a combined approach to appraising 2-4 units, and it's sort of a blend between single family homes, and commercial buildings.
On one hand, these properties are still purchased with conventional financing, just like a single family home. So the appraisal value can be determined by what similar properties nearby are selling for, not matter how much or how little a property generates in income. Some properties will lose you a ridiculous amount of money, but still sell for a ton of cash. These are best suited to people who plan to live in one of the units and significantly reduce their monthly obligation to the mortgage by the supplemental rental income.
On the other hand, metrics like the cap rate, GRM, etc. are taken into consideration as well, much like commercial multifamily properties (5+ units). But, it's not so cut and dry as commercial properties where it's really all about the numbers. So, you really have to take both into consideration when making an investment decision.
For example, I know of a duplex for sale in East Sacramento (nice A/B neighborhood) that's $800,000 and will lose you $15k per year in rents if you even pay 25% down and rent both sides. But, it's in East Sac, and will appreciate along with East Sac, and you'll have little trouble with crime rates, tenants or vacancies.
But, I also know of several fourplexes for sale in the 95815 and 95838 zip codes, which is Del Paso Heights and North Sacramento (NOT so nice neighborhoods, C/D at best) that cost less than $300k and will cash flow at $1,000+ per month with 25% down and fully rented. Yet, you'll have more problems with crime, tenants, and vacancies.
So, the question you gotta ask yourself is what's the better investment? Is your goal cash flow and return on investment? Then look at a fourplex in not-so-nice a neighborhood (there are plenty of options in between the best and worst neighborhoods, by the way). If your goal is a larger appreciation amount in a great neighborhood, purchase the duplex...
REAL ESTATE CYCLES
Just don't purchase it now. The time to buy that duplex was in 2009-2010 when it would have cost you $250-350k. Not the ridiculous $800k they're asking (probably overpriced by $200k, but I digress). California, more than almost any other state, is really all about buy low and sell high. Cash flow is just the icing on the cake. What's a measly $100 a door per month in cash flow when you can get $100k+ appreciation in 5 years?
This is why it's important to understand Real Estate Cycles when investing here. Here's a graph to help you grasp the concept and understand where we are currently at:
Currently, Sacramento and most of California is somewhere between an early and late stable market. Money was cheap for a real long time after the recession, but is now starting to creep up and is projected to go up several times next year. Plus, California is super low inventory. It's all about supply and demand. Most counties would've needed to build 10,000 new housing units per month for the past three decades to keep prices on par with the rest of the country.
So, you have lots of people who want to buy because money is cheap to borrow, and few homes for sale. Supply and demand. Housing prices keep climbing because almost every sale is a multiple offer scenario, which means buyers have to keep bidding above asking price if they want the home. This is part of the reason why the Sacramento-Roseville metro area was projected by Realtor.com to be the #4 hottest metro market in the nation next year.
If you're going to buy now, my advice is to plan on 12-36 months of solid appreciation and then plan to make your exit. There will be a rush near the peak of the market, and that's when property values will be the highest they will be for the next 10 years. Here's a graph of San Francisco's historical high-tier home values to show you the roller coaster ride we're on:
We go up, and then we go down, and then we go up even higher, and come back down again. And the cycle repeats over and over and over again.
Granted, we don't have all the crazy loan shenanigans going on this time, and people are still licking their wounds from the Big Bubble, so the climb to the top won't be so steep, and the fall to the bottom won't be so dramatic.
But, home prices and interest rates can only go so high before they push too many people out of the market, and then all the new inventory hits the scene and existing houses can't compete (why buy a 50 year old house when you can have a brand new one for the same price?), and then suddenly favor shifts into the direction of buyers, and sellers start making concessions just to get their home sold (like lowering their price).
HOW TO GET RICH
My advice, buy something that cash flows now and that you're comfortable with (neighborhood, crime rates, etc.) Do what you can to maximize the rents and hold onto that puppy for a couple years. We're set to 7.2% appreciation here in Sacramento next year (probably a little too aggressive of an estimate though, 5% is more reasonable) and in a year from now that same $400k property could be worth $428k or more. You might even get an additional 5% the year after that and now we're really talking.
Then, sell at the peak of the market -- that's where I come in ;-) -- and hold onto your profits until we hit the bottom a couple years later. That's when you come in and buy as many properties as you can, hold onto them for 7-12 years and repeat the process all over again. And before you know it you're wealthy. I know of an investor who bought 100 homes in Sacramento in 2010, and he just sold them all for $100-150k profit EACH. Granted, he had to have the money to buy 100 homes in the first place, but still. Read here to see how the Blackstone private equity fund spent $196 million dollars and bought 1,100 homes in Sacramento in 2011-2012. They're still sitting on most of them, and best believe they are gonna sell at the peak and repeat this strategy ten-fold at the next bottom of the market. You should join them!
If you want to know more about the Sacramento market, or even just the central valley in general and what kind of properties and returns are possible here, just reach out and message me. I'd be more than happy to share my knowledge and information with you to help you make the best possible investment decision. Best of luck!
