1% Rule in California

13 Replies

Hello all, I have seen some SFH's and MFH's that meet or are close to the 1% rule upon first glance in the Sacramento, Modesto, and Fresno markets. Just curious, would you invest in a SFH or MFH in any of these California markets if it is barely cash flowing?

@Steven Trang

Typically a 1% rule property should cash flow. Your variables are going to be taxes, mortgage insurance, insurance and any additional (special) holding costs. If I lived in California and could find 1% deals there, I would be interested, with a couple caveats:

- They exist in neighborhoods I would want to invest in (not class D war zones). 
- I derive some benefit from having the properties nearby.

You're closer to Sacramento and Modesto. Since Fresno is 3 hours away, I would call that investing outside of the locality (usually use a two-hour bubble). Value your time, 3 hours (x2) is a long time to travel for a leaky faucet.

@Steven Trang

Think how you can create 1-2% rule,  everyone is looking to find that rule. Many properties advertised are under performing.  Weed through them and create.


Frank

I'm investing in the California Central Valley and find that my SFH's hover around the 1% rule, and cash flow $150-$250 per month. It depends on what you're looking for and what returns you are willing to accept. Don't limit yourself to the MLS, and make sure you run the numbers with real world data before you dive in.

@Trevor Ewen Great insight! Thanks for your suggestion. Yeah, Fresno is definitely further than I would like but it is still closer than out of state investments. I'm on the fence of investing here in California or going a turn-key out-of-state route. 

@Frank Romine That's great. Which city are your investments in and when did you get started? Yeah I will definitely do more in depth numbers on any potential homes, but was just curious on what others thought regarding the 1% rule in those markets

@Steven Trang

 I think like the others have said you need to look at actual numbers.  You need to understand your market.  What is the vacancy percent for the area, what is the condition of the property, what is the property management costs. I think you need to look at these numbers. Having said that 1% for California seems good deal if the area is good neighborhood.

Where I am investing if I hit 1% I would jumping but again here vacancy is 3% or lower. 

You asked Frank R how to create more than the 1%. You need to find under performing properties and get them to market rents and other value add  by doing any necessary improvements to the property .

Good luck.

@Radhika Miriyala Thanks for the feedback, I really appreciate it!

We buy outside of Fresno in Lemoore and Hanford. While we don't quite meet the 1% rule we have done very well.

@Elizabeth Colegrove Hey Elizabeth, I actually remember listening to your podcast! Great discussion amongst you, Brandon, and Josh lol. Thanks for responding as well. 

So it seems like most are fine with a property hitting the 1% rule in California as long as all the numbers look good. 

The real question is, in the areas that do meet the 1% rule (i.e. Fresno, Hanford, Lemoore, etc) - will it rent? Do majority of the people there own homes or rent?

If you lose a tenant, how long will it take to find a quality tenant?

Those are some questions to consider as well when purchasing in areas like that.

I'm in a similar situation as you, and California seems like a really tough market to find a property to buy/hold, especially right now. Hard to find something that would cash flow in an in-demand area.

@Steven Trang I think it is more important to meet your "goal" than the 1%. We have very tight margins and while we could never live off them, they do very well for us. So it REALLY depends on your goals

@Adam Ng

 My lower income rentals are tracking at about 2% vacancy for the past 5 years.  Clean properties under $900 per month rent very quickly.  You have a very large pool of tenants.  Finding tenants has never been an issue.


Frank

Make sure you are running actual numbers to determine whether a property is cash-flowing or not. Typically 1% properties will cash flow, but in markets like CA and FL and other places where property taxes can be very high and insurance or whatever....1% won't give you an accurate picture. So before you decide anything, make sure you run the real numbers (versus using a guideline) and confirm what you expect to see for returns.

Secondly...my only caution is if the property barely cash-flowing (not saying that's what will happen, but if it really is a barely)...there is an additional risk in CA in owning rental properties which is the extreme tenant-friendly laws here. If you get a bad tenant and need that tenant out, you could be facing a lot of expense with no income while the tenant squats there, eviction expenses, etc. I've heard so many horror stories it's crazy. So just be sure you weigh that risk in to your assessment. 

I think there are people hitting numbers in those areas, so none of this is to say you can't, but just be sure you have the full picture when it comes time to decide. (for example, I'd be too nervous to buy a property that is barely cash-flowing with the risk of the tenant laws. If it's cash-flowing decent, then that's another story.)

@Steven Trang

from my point of view with CA assets... if you believe there is room to run up in value cash flow is not the critical issue... CA appreciation is in many cases far more profitable than cash flow in other markets.. A long with CA assets being almost totally liquid.. Many other markets you will find cash flow SFR's next to impossible to sell with out a high priced and well organized national marketing effort like you see on BP.... I mean how many CA sellers are on BP trying to sell CA homes.... as compared to sellers from all over the US bringing product to CA investors to buy... think about it.. why is that... Well because there is plenty of demand for CA.. properties within the local and state wide investing community.

Where as if your in other parts of the country.. the properties in the quote un quote cash flow neighborhoods by and large are hard to sell to locals and its only out of area buyers who think they are getting some great deal that keep these markets going .

that's not to say you can't find good out of state RE you certainly can.. But in my mind if its a good 1% in CA  with up side there is very few out of area markets that would be better and the risk is just magnified by time zones and distance...  so something to think about

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