Thoughts on buy & hold in Sacramento?

[Raymond C.]

Hi everyone,

I've got about 100K to invest in a downpayment and am looking for long term buy and hold opportunities in Northern California. The Bay Area is expensive, and although you might have a better chance finding renters there due to the population and employment opportunities, it doesn't seem like there is much potential anymore in finding a reasonably priced "up and coming" area where long term you can might get lucky.

I've heard on the news that downtown Sacramento, midtown Sacramento, and East Sacramento may have some construction projects in the near future to revitalize some of the areas. It's a sort of a gamble still because the economy is mostly bolstered by State employees, and prices are relatively high still for decent properties. However, the potential for long term growth and the rents to purchase price ratio seems much better than the Bay Area (and much less risky than being a economically depressed place like Stockton where prices are much cheaper).

Anyone have any experience or thoughts about these areas of Sacramento?

Thanks in advance!

[Peter Myers]

Hi, Raymond. I've been in SacTown since 1989 doing real estate.

Happy to give you my 2cents worth. PM me. Thx

[Joe Bertolino]

I have a 4 plex in midtown. I have owned it for 6 years and have never had a vacant month. The rental demand in the grid is as high as anywhere. A craigslist ad will net you a dozen qualified tenants within 24 hours.

[Account Closed]

Hi Raymond,

Like everything in life, it's expensive for a reason, and the same is true for why something is cheap. I want to buy a brand new Tesla for the price of a Leaf or a Prius, but the dealer said no. So I took my business elsewhere and went to a Lexus dealership. I asked them nicely to sell me their LS460 for the price of a Corrolla and they laughed me out of the dealership.

Kidding aside, we've been analyzing why we couldn't find a 5% cap rate in Palo Alto so we started looking in Mountain View hoping to find a diamond in the rough. Unfortunately, we still couldn't find anything so we started looking in Sunnyvale. Guess what? Still couldn't find anything for a 5% cap rate so we moved our search to San Jose, and BAMMMM..... I guess we can go to Gilroy to get a slightly higher cap rate. No doubt we should be able to find higher cap rate if we go to Fresno, Visalia and Bakersfield. You get the picture. Everything in life has a price. When you put a lot of well compensated employees in a desirable living area, they drive real estate prices to max pain.

Who would have thought that people are willing to pay $2k/month to rent a 2/1 condo in Evergreen, and $3k/month for a 3/2.5 bath townhouse also in Evergreen. Both were rented out to qualified tenants on the first weekend of open house. Apparently, plenty of people can afford these ridiculous rent prices. Interestingly, these condos were selling for $150k-$175k and these townhouses were selling for $260k - $300k between 2009-2012. They don't meet the 2% rule my a mile, but it's somewhat bearable when you can finance them between 4% - 4.5% fixed for 30 years. Some people could believe real estate prices crashed that hard in the Bay Area during the mortgage meltdown. You can say that opportunity typically doesn't exist for people that are not looking. At thus point, the window of opportunity is apparently way behind us.

If I have to place a bet now, it would be Oakland, wouldn't you agree @J. Martin

Happy hunting!!!

[Jerry Zhou]

Minh L.
Are there properties in Oakland that can still generate positive cash flow?

[J. Martin]

Hi @Raymond C. ,
and welcome! I own and manage in Richmond, and am in contract on a 4plex in Oakland right now 50/50 with a partner. You might want to talk to @Al Williamson or another Sac investor about that area.. I've always found his landlording and other advice useful.

Here's the rough numbers on my current deal I should close in about 2 weeks in E Oakland:

$390K Purchase price.
$100K Downpayment
$30-40K in rehab
$420-$430K total cost
$130-140K total investment
~ 7GRM & 8-9% cap rate on out-of-pocket investment
10-12% CF return on investment before principal paydown, appreciation, and laundry income.
~$60-100K projected built-in equity if all goes well.

Not too bad for a super-competitive market that's "too expensive!"

Send me a colleague request with your email so I can keep you up to date on my monthly Bay Area meetups (next one will be planned at my rehab 4plex!), and my big Summit later this year! And thanks for the shout-out @Account Closed !

[J. Martin]

@Jerry Zhou ,

I hear there are not any properties in the Bay area generating positive cash flow.. but the Bay only consists of the Peninsula, SF, the Oakland/Berkeley Hills, and beyond..

..but check my post above..

[Account Closed]

Originally posted by @Jerry Zhou:
Minh L. Are there properties in Oakland that can still generate positive cash flow?

J Martin is closing on a 4plex in Oakland on 5/21. It should have a GRM of 7.5 after stabilizing the building. I'd take that any day than going to Sac. Oakland is not as bad as people make it out to be. Where do you think people will go when they can't afford SF prices? For this reason, I like the Oakland bet.

[J. Martin]

@Joe Bertolino ,

I'm with you. My areas are super-high demand too. Last time I had 1 new tenant and 2 others switching units for various reasons. I had leases signed ahead of time, and only had 3 hours vacancy while things shuffled from unit to unit.. I'll keep it to 2-3 days next time so I don't have the concurrent move-outs, but a great example of the rental demand.

I may suggest bumping up the rent a little bit if you have more than a dozen qualified tenants willing and ready immediately. It's nice to have the pick of the litter too, but picking amongst the top 3-4 at an increased rental rate may have similar performance, while adding a nice buffer to your bottom line... Just IMHO, a little tip I received from property manager @Andrew Fingado I believe..

@Account Closed Priced out of SF, Hayward, Berkeley, Peninsula, etc, they'll be at my rentals in Oakland. When they get priced out of there, they'll be at my rentals in Richmond. When they get priced out of there, they will be out in Antioch, then eventually renting out in Stockton at @Erin A. 's rentals!

[Jerry Zhou]

J Mar tin
I would say that is not a bad deal! Not bad at all.

Minh L.
Agree. Gentrification is the buzz word these days, and will only create upward pressure on home prices near and around SF.

[J. Martin]

Originally posted by @Jerry Zhou:
J Mar tin I would say that is not a bad deal! Not bad at all.
Minh L. Agree. Gentrification is the buzz word these days, and will only create upward pressure on home prices near and around SF.

***prices and RENTS!

[Andrew Fingado]

@Raymond C. I was looking up there a while back and it seemed pretty dry to me. I am looking for lots and lots of cash flow. So I can pretty much scratch off the entire state of California right now.

Others who live and invest in the bay are more creative (such as J Martin). They buy a distressed property, rehab it, and get a higher return. If that's something you want to do i'd look into that. There are other Northern California investors who are OK with the current climate and search hard for the best cap rate possible and look more long term. Nothing wrong with that either. It depends what you value more: A better chance at long term appreciation and increased rents, or immediate high cash flow.

@J. Martin Yes, I have always lived by the rule that if you have a ton of qualified and willing applicants your rental is probably priced too low. Granted the bay area is a high demand/low supply rental market so you will generally see a lot more interest in general. You just have to know what's relative and adjust accordingly.

[Raymond C.]

@J. Martin -- thanks for the great insight... that Oakland deal sounds exciting, and will definitely colleague request you to see how things progress. Also, thanks to @Account Closed for the good information about the South Bay.. totally agree with everything you say.

I guess in CA, immediate good positive cash flow is very difficult to come by nowadays. I've heard a lot of people on this forum generate their own demand and higher returns through finding a distressed lower priced property and rehabbing it for the long term. This makes sense, but I haven't really explored this route since the thought of it scares me as a newbie. Lots of questions come to mind including how to find a contractor that is does decent work and won't rip you off. But that's a question for another time and forum section where it's probably been asked many times already :-).

Thanks again everyone!

[Jordan Thibodeau]

@Raymond C. I bought my first property in Sacramento last December. Being that I didn't know that many contractors in the area and I didn't have the time to get involved in a rehab. I found a duplex that required minimal work that allowed me to rent the property quickly.

Depending on your experiences with rehabs, it might be better to start with something that doesn't require a ton of work so you can focus on learning the landlording business, developing relationships with contractors, so when you're ready to do a full rehab you have the pieces in place. Best of luck!

[J. Martin]

Originally posted by @Raymond C.:
@J. Martin -- thanks for the great insight... that Oakland deal sounds exciting, and will definitely colleague request you to see how things progress. Also, thanks to @Account Closed for the good information about the South Bay.. totally agree with everything you say.

I guess in CA, immediate good positive cash flow is very difficult to come by nowadays. I've heard a lot of people on this forum generate their own demand and higher returns through finding a distressed lower priced property and rehabbing it for the long term. This makes sense, but I haven't really explored this route since the thought of it scares me as a newbie. Lots of questions come to mind including how to find a contractor that is does decent work and won't rip you off. But that's a question for another time and forum section where it's probably been asked many times already :-).

Thanks again everyone!

Raymond, I think you hit the nail on the head when you said "immediate good positive cash flow is very difficult to come by nowadays." Nearly all the CF and value I have created has come buying vacant, beat-up units to get in cheap, understanding the rental market and rental comps well - and what people want, then charging a fair market price on the high side of market to produce great CF and built-in equity.

That's my niche. There's a thousand others on here. Find yours, and you'll be able to do it too. But I appreciate your caution on your first deal, without understanding rehab costs. It's prudent. Balance that with the fact that the lower the risk, the lower the likely reward..

[Account Closed]

Raymond - There are properties all over the Bay Area that cash flow, but as you point out they take more $$$ to get into. I'm looking for an investor who would like to star with me in a TV show called "Million Dollar Flips." I just made that up, but I'm making the point that there are deals in every value range market, you just have to have the resources to operate at that level. It seems that 99% of Bay Area flippers who contact me asking for help finding properties operate in the $100k to $300k purchase range, but the good flip deals that I come across in mid-peninsula (Palto Alto, Mountain View, Los Altos, etc.) are in the $700k to $1.3M range. The same margins and cap rates are there, investors just have to have BiggerPockets.

Back to reality - I found about a dozen East Bay properties under $400k in the MLS today (Martinez, Pleasant Hill, Alameda).

[Jeff Weissman]

Oakland is HOT and about to bust wide open. I believe critical mass has been achieved, finally, and Oakland will be where everyone wishes they were a month ago.

It is critical to be working with an investor-friendly, hyper-local, Top Producing Realtor who knows the neighborhoods and the trends.

I invite anyone interested in buy/hold or fix/flip in Oakland to sit down with me for a chat. Coffee's on me!