Are My Expectations Realistic? (Central Valley California)

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Are My Expectations Realistic? (Central Valley California)

Roderick Brenes
Modesto · Member since 2013 · 21 posts · 0 votes

I'm looking to buy a single family home around Spring 2015 in the Central Valley area of California, namely Turlock, Modesto, Patterson, or Salida. My goal is to buy a home in the $180-$215k range, with no major updates needed. I would like to have a property management company manage it for me, and make $100 positive cash flow per month.

I'm pretty new to real estate, though I do have one rental that pretty much fits this bill. I bought it in 2013.

Is this still a realistic goal for this area in 2015? Sometimes I feel like it's a bit of a whirlwind of price increases and fast buying/selling. I'm not sure if I need to temper my expectations or stick to my guns.

Thanks for any insight!

(first post on forum)

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Ron Drake
Investor · San Diego, CA · Member since 2014 · 180 posts · 72 votes
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@Roderick Brenes  The question is...Why would you do it?

Approx $40,000 down payment, plus closing costs, to generate $100/ month?

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
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    With my usual assumptions, including using a PM, a 20% down loan for 30 years at 4.5% you would need $1825 a month in rent for a $200K house to produce a true $100 per month in cash flow.  So, can you find a deal like that?

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  • Jeff Zimmerman
    Real Estate Agent · Fresno, CA · Member since 2014 · 368 posts · 174 votes
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    hey @Roderick Brenes I think that's realistic. I'm more of a multi family investor but some friends Of mine who invest in SFH's tell me they can get $100/month without much trouble. They tell me they usually spend 35% on upkeep here which is what contributes to their success. I know that my home is worth about 230k and would rent for $1300 or $1400/month. Good luck.

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  • Roderick Brenes
    OP
    Modesto · Member since 2013 · 21 posts · 0 votes
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    I think for these areas I could get max 1300 for rent. Normally 1100-1200 would be reasonable. What calculator are you using @Jon Holdman ? I'm kind of a dummy when to comes to the numbers  I was just using $100 as an arbitrary number so I know that I'm making something more than my mortgage so I can approximately account for vacancies and upkeep and break even for the year  

    What did you mean they account 35% for upkeep @Jeff Zimmerman ?

    Basically, I've just been looking and surprised how hard it is to find something with good rent/mortgage ratio. Homes selling for 215k are barely renting for 1200. I'm doing 20% down and when I account for property management it always turns out to cost me more than I make!

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  • Jeff Zimmerman
    Real Estate Agent · Fresno, CA · Member since 2014 · 368 posts · 174 votes
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    on my multi families I account for 50% of rent for upkeep, usually SFH's in Fresno need 35% set aside for Maintenence, repairs, etc...

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  • James Syed
    Real Estate Broker · Mount Olive, IL · Member since 2013 · 1k+ posts · 310 votes
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    Welcome to BP. 

    Average expense ratio for a multifamily property (5 units or larger) is 40% - 60%. Don't ever fall for those 35% expense ratio, they are on papers only and non existent in the real world. 

    Of course, I am talking about majority of cases here. 

    Hope it helps.

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  • Roderick Brenes
    OP
    Modesto · Member since 2013 · 21 posts · 0 votes
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    so on a home that rents for 1200 per month you would account for 420 per month or year for upkeep?

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  • Roderick Brenes
    OP
    Modesto · Member since 2013 · 21 posts · 0 votes
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    I'm only looking at single family homes right now @James Syed thanks!

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  • Roderick Brenes
    OP
    Modesto · Member since 2013 · 21 posts · 0 votes
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    I'm trying to figure out this 35% rule as I saw it mentioned a few time I the forum. Does it mean that for a place that rents at $1100, the ideal mortgage payment you should shoot for is $715?

    1100 - .35(1100) = 715

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  • Alec Cruz
    Investor · San Jose, CA · Member since 2014 · 3 posts · 0 votes
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    Since you stated that you're new to the investment side, I would scrap the idea of using a property management company, they're going to charge you anywhere between 5%-10% of the gross collected income and that's going to start taking the bite out of your cash flow alone. This is also not to mention your maintenance costs on the home. My advice to you would be to have a solid lease agreement along with the necessary disclosures, market it and rent it out, and maintain it yourself. Any property management company is just going to sit back and collect for stuff that you can and SHOULD learn and know.

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  • Ron Drake
    Investor · San Diego, CA · Member since 2014 · 180 posts · 72 votes
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    @Roderick Brenes  The question is...Why would you do it?

    Approx $40,000 down payment, plus closing costs, to generate $100/ month?

    1Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
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    @Jon Holdman is not using a calculator.  He can do this math in his sleep, with 75% of his brain tied behind his back...lol

    The bigger question is this - why buy a $200,000+ worth of liability, go into debt $150,000+ over $100/month?  Even if it's possible, which it is not likely?!  Unless you expect it to inflate in price indefinitely, in which case I can tell you some stories of some people who thought that in 2007 and then went bankrupt...:)

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
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    If you're using a PM, I account for 50% of rents as going to vacancy, expenses, and capital.  So, with $1100 a month in rent, vacancy, expense and capital gets $550, leaving $550 for your debt service (P&I only, taxes and insurance are in the first 50%).  

    A $160K loan ($200K house with 20% down) has a P&I payment with my terms above of $810 a month.  So, no you're not going to make any money on that.

    If you were self managing, 35% would be an acceptable ratio because you will be earning the PM's cut.  This property would still be cash flow negative, to the tune of $106 a month.

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  • Lee S.
    Northern, CA · Member since 2014 · 674 posts · 444 votes
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    seems I'm running into similar numbers where I'm at in the foothills just east of the Central Valley.  Looking to buy first rental, I have funds and income to cover no problem but seems numbers don't work.  My house is worth ~500k and maybe I could get $2500 rent.  Any whole sellers in this area?

    Seems a large number of people are against looking out of state for cash flow, but in would rather my first few houses cash flow before risking a pure appreciation play in California.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @Lee S.   the out of state risks can  be mitigated by looking at areas that are closest to you first.. IE vegas Phx... Idaho,, Wa Or... these areas are most like your area only with better rent to price ratios. 

    If you go east of the rockies your getting into the mid west upper mid west rental market which accounts for probably 50 to 70% of all SFR rentals in the country.. So no shortage of properties.. this is why they never really go up in value and the prices are based on cash flow values only.... with a local looking at 2% and out of state 1% ( bp rules of thumb)...

    maybe in Rentals are not the play maybe there is some other form of investing that would be better.... IE hooking up with a good partner to do flips, or crowdfunding for short term plays,, or a very good HML in your immediate area that could make you 10 to 12% cash on cash... There is more to RE investing life than buying rentals...

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  • Lee S.
    Northern, CA · Member since 2014 · 674 posts · 444 votes
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    Originally posted by @Jay Hinrichs:

    @Lee S.   the out of state risks can  be mitigated by looking at areas that are closest to you first.. IE vegas Phx... Idaho,, Wa Or... these areas are most like your area only with better rent to price ratios. 

    If you go east of the rockies your getting into the mid west upper mid west rental market which accounts for probably 50 to 70% of all SFR rentals in the country.. So no shortage of properties.. this is why they never really go up in value and the prices are based on cash flow values only.... with a local looking at 2% and out of state 1% ( bp rules of thumb)...

    maybe in Rentals are not the play maybe there is some other form of investing that would be better.... IE hooking up with a good partner to do flips, or crowdfunding for short term plays,, or a very good HML in your immediate area that could make you 10 to 12% cash on cash... There is more to RE investing life than buying rentals...

    Thanks Jay, I requested your Ebook in the past couple of days, just getting started on it.  I do realize there is more to RE investing than just rentals and I'm open to most things.  Rentals is more my idea of the slow long term cash flow/wealth tool I would like to use since I don't "need" income at the moment but I'll gladly take it.  I'll look in the areas you mentioned, I'm definitely more comfortable west of the Rockies, almost bought an investment condo in Vegas about 13 years ago.

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  • Roderick Brenes
    OP
    Modesto · Member since 2013 · 21 posts · 0 votes
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    @Alec Cruz I'm living out of town. Managing myself isn't an option

    @Ben Leybovich @Ron Drake Just looking to buy and hold, not depending on it for income

    I can see that the answer to my question is basically, NO, my expectations are not realistic for true positive cash flow.

    My strategy is just buy and hold, so I guess if everything I'm looking at is cash flow negative, then I will just focus on the areas I want rather than the exact numbers. I'm not looking to buy distressed properties or whole sale or any of that other stuff to get deep enough discounts.

    @Jon Holdman Thanks for your calculations! Does BP have a calculator I can refer to?

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  • Franklin Spees
    Property Manager · CA · Member since 2012 · 76 posts · 54 votes
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    I agree with many of these posts. As a Central Valley investor, real estate attorney, and owner of a management company myself, I think your $1100-$1200 average rental target for a 3/2+ built in 1990+ is generally accurate. Although, if you are going to just own one SFR, I would highly recommend you attempt to manage yourself or follow closely with your management company as you need to learn the details of the business, actual income v. expenses, etc. to protect yourself as you scale up. There were some awesome deals here in the Central Valley in 2011 and even into 2012, but those seem to be long gone. Now we seem to just be back to average returns, especially now that another small wave of new fringe low density single family homes are coming online. PM me if you're interested in brainstorming more as I always enjoy to lean about other's experience and observations. Good luck!

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  • Roderick Brenes
    OP
    Modesto · Member since 2013 · 21 posts · 0 votes
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    Thank you for the insight @Franklin S. !

    If I'm looking just to break even on a place that rents for 1200, what would be my target purchase price (20% down)?

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  • James Syed
    Real Estate Broker · Mount Olive, IL · Member since 2013 · 1k+ posts · 310 votes
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    @Roderick Brenes 

    Welcome to BP. 

    Sorry for a late response. 

    35% expense ratio was mentioned here for analysis purpose. It is usually the lowest expense ratio that one could go for (usually in an ideal situation), therefore we all are trying to accomplish that if your rental income is $1100 and at least 35% goes out towards all the expenses except for mortgage, you will have $715 left for mortgage. 

    Based upon your purchase price (as stated by you, $180,000, 20% down, assuming 5.50% amortized over 25 years), your mortgage payment will be $884, that is still more than $715 therefore, it is NOT a good deal.

    I think @Jon Holdman really nailed it in his post. 

    Hope it helps. 

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  • James Syed
    Real Estate Broker · Mount Olive, IL · Member since 2013 · 1k+ posts · 310 votes
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    Originally posted by @Roderick Brenes:

    Thank you for the insight @Franklin S. !

    If I'm looking just to break even on a place that rents for 1200, what would be my target purchase price (20% down)?

     My quickest (back of the envelope) response will be purchase price $60,000 minus repair cost, if rental income is $1200 a month. 

    Hope it helps.

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  • Lee S.
    Northern, CA · Member since 2014 · 674 posts · 444 votes
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    Originally posted by @James Syed:
    Originally posted by @Roderick Brenes:

    Thank you for the insight @Franklin S. !

    If I'm looking just to break even on a place that rents for 1200, what would be my target purchase price (20% down)?

     My quickest (back of the envelope) response will be purchase price $60,000 minus repair cost, if rental income is $1200 a month. 

    Hope it helps.

    As we have been discussing, i think numbers like that would be really difficult to find in California.  That's basically the 2% rule from my understanding, in the area we are talking about it seems the going rare is about .6% meaning you're taking a good loss on a monthly basis. 

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  • Roderick Brenes
    OP
    Modesto · Member since 2013 · 21 posts · 0 votes
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    Purchase price at 60k? Just not going to happen.

    What is the 2% rule @Lee S. ?

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  • Roderick Brenes
    OP
    Modesto · Member since 2013 · 21 posts · 0 votes
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    Or did you mean 60k would be the 20% down payment @James Syed ?

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  • Lee S.
    Northern, CA · Member since 2014 · 674 posts · 444 votes
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    Originally posted by @Roderick Brenes:

    Purchase price at 60k? Just not going to happen.

    What is the 2% rule @Lee S. ?

    Someone can correct me if I'm wrong, but the 2% rule means that the monthly rent is 2% of the purchase price.  I've only been looking around this past week in California and different areas of the country, best I've seen is around 1.4%.  Granted, this was not an extensive search, I just took a quick snap shot of a few markets but most of these were listed on "turn key" websites.

    So, the example above would be a 60k purchase price, 20% down of around 12k plus costs, rent of $1200.  I know these deals are out there, I've seen them discussed here on BP.  I'll take 100 please.

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  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
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    You got it right Lee. 60k renting for $1200 is possible. My friend has a triplex for sale at 75k that gets $1800. You can get 2% in many markets. Sometimes 2% is a warning sign that something is fundamentally off with the value. You don't want to get stuck with a Radio Shack and on the path to zero value. There were some posts about warzones....those get 3%. Typically, these 2% 3% numbers are not always bankable but it does happen. Mostly just locals get that privilege though. Figure the higher the % the higher the risk...couple that with long distance and that can be a recipe for trouble. 

    Here is one recent story from today:

    http://www.biggerpockets.com/forums/52/topics/1646...

    Some can get 1% in Cal with rehabbing.  What areas did you see the 1.4%?

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