Sacramento, CA · Member since 2015 · 59 posts · 12 votes
Would it be a good idea to rent out this property?
3 Bed / 2 Bath / Family room / Living room / Dining Room / 2 car garage house Location: South Sacramento, CA Principle/Interest/Tax = $1100/month Water/Sewer = $85/month
Possible Rental amount = $1350-$1470
I know that if the loan amount was less, it would be better in terms of positive cash flow but this is where it's at right now. I know it doesn't meet the 50% rule but I'm looking for some ideas. Please help!
Rental Property Investor · Sacramento, CA · Member since 2011 · 2k+ posts · 1k+ votes
10y
Forget the 50% rule. Create your on hyper local X% rule. National averages are useless - they are just an example of a system you could implement for your area.
Now, regarding your question. It makes no since to buy negative cash flow unless you know of something that would change the situation... Like a high tech business opening up an office down the street.
If you don't have that type of an advantage, then keep your powder dry, wait for the right time to buy in the neighborhood that you know like the back of your hand.
Realtor · Rocklin · Member since 2016 · 128 posts · 67 votes
10y
From my limited experience I would say probably not... There are no allowances for vacancy, repairs, management, or capital expenditures. You might end up losing money every month. Were you planning on managing it yourself? I really like the Rental Property Calculator in the "Tools" section. It's a great number crunching tool. I use it daily. Good luck!
Rental Property Investor · Sacramento, CA · Member since 2011 · 2k+ posts · 1k+ votes
10y
Forget the 50% rule. Create your on hyper local X% rule. National averages are useless - they are just an example of a system you could implement for your area.
Now, regarding your question. It makes no since to buy negative cash flow unless you know of something that would change the situation... Like a high tech business opening up an office down the street.
If you don't have that type of an advantage, then keep your powder dry, wait for the right time to buy in the neighborhood that you know like the back of your hand.
Investor · Norcross, GA · Member since 2016 · 87 posts · 20 votes
10y
Paul, pass and keep looking. There are better deals out there. Previous posters have mentioned you haven't factored in any expenses for vacancies, repairs, prop mgmt, or capex.
Investor · Norcross, GA · Member since 2016 · 87 posts · 20 votes
10y
I didn't notice you were in Sacramento. California is hard. I'm not sure how to give you advice on properties that are so high. But just remember that an investment is an investment. Just because you live in California doesn't give you permission to justify a mediocre investment. If you can't get more than 10% ROI after a generous allotment for vacancies and capex, just put your $ into the stock market. 10% should be your measuring stick.
Sacramento, CA · Member since 2015 · 59 posts · 12 votes
10y
@Eliot M. thank you for the insight. I wish the market was better here but its not. Everything is ridiculously expensive here... not as much as the Bay Area but it's still expensive.
Compton, CA · Member since 2016 · 36 posts · 7 votes
10y
Yeah @Paul Vang I am with everyone else on this one. It's hard to find cash flow property out here. I am looking for a multiplex to live for free in So cal. I'm looking to benefit from appreciation instead. That way I can save my money to put into other investments until the market turns.
Keep looking though, it may be a motivated seller out there sitting on a gold mine!
Sacramento, CA · Member since 2014 · 513 posts · 319 votes
10y
Paul, It depends on where it's at in South Sac (there are pockets out there that are decent, C working class areas 95828, 95823, with a 3/2 getting $1370-1450 per month, for example) and what improvements you can make to increase the rent. If you are managing it yourself and doing own repair and maintenance you've saved some of your costs, but you'll still have to budget for vacancy and cap expenditures. If you can net $250-$300 after expenses, it might be okay. I would also have the tenant pay their own water.
Sacramento, CA · Member since 2015 · 59 posts · 12 votes
10y
@Penny Clark the idea is to have the tenant pay their own water. This home is in the 95828 area code. The exterior has been done. The kitchen cabinet has been done. The carpet has been replaced.
@Jamal Wilson I will keep looking for the motivated seller. Thank you for the info.
@Dylan Vargas I see properties about 30-50 minutes out from Sacramento but I'm not sure if they are a good buy since I'm not too familar with that market. I'm not at the stage where I can determine if the deal truly is good yet. Hopefully you can shed some light.
Sacramento, CA · Member since 2014 · 513 posts · 319 votes
10y
@Paul Vang, You probably won't find a 10 percent cap rate here at least on the MLS in this market. What amount of cash flow would be acceptable to you? If it's more than $300 per door, you should be looking in other markets like Stockton, Modesto, or Merced, or do what Derek suggests and find a fixer that hasn't had most of the major Reno already done.
Investor · Coppell, TX · Member since 2008 · 2k+ posts · 646 votes
10y
Hello and welcome to BP! You might be right but you might have to drive a little farther or change your market, or offer cash to close deals. Is the economy diverse? Is the population growing? Is anything happening in the future that will change your area? With inventory low you might have to wait to get a better deal. Good luck to you!
Investor · Georgia, GA · Member since 2015 · 29 posts · 21 votes
10y
I think that's a negative sir, you'll barely make any profits. It's as if you're renting for free and paying all the bills. I would increase the rental rate..
Anther option:
I would use airbnb on an overly expensive place, you'll double your profits. Might want to check with city's guidlines.
Rental Property Investor · SF Bay Area · Member since 2015 · 154 posts · 179 votes
10y
From as cash flow perspective I would not buy that. It might be from an equity growth point of view, but that all depends on the property, location, market outlook etc. I myself are a cash flow investor, so I can't say much about the equity part of things.
My own properties are all located in Stockton, and while I look at all new property that comes on the market if found that at least in my market (and I assume the Sacramento market is similar) single family homes do not pencil out (from a cash flow point of view). It has even gotten to the point where Duplexes and Triplexes in my market don't make as much sense anymore either.
Redding, CA · Member since 2016 · 224 posts · 143 votes
10y
Paul
Having owned 250+ Northern Calif. homes at my high point, I realized very early on that there is no excitement owning a rental(s) that just breaks even (maybe), while you are crossing your fingers hoping for some appreciation. That is not really a business model.
I needed more cash flow to make a living doing my investing after I left my telephone company management job. Here is what I did, and have perfected pretty well over the last 40 years. I look for groups of older homes, on a single parcel, in blue collar areas (not slums). It takes some time to find these, but it is worth it. The property may have 5-9 or so rentals on a single lot. These rentals may be small houses, duplexes, conversions, even a mobile periodically. These w ill ALWAYS be older properties, not in the suburbs. I like to find them when they need work. Because I buy these with work needing to be done, I could usually buy with about 10% down.
Because banks will not finance these "challenged" properties, 90%+ of my buys came with the seller carrying the financing. These type of sellers know they will be carrying the financing. If fact over the years as I sold, I did do with me carrying back the financing.
Check these areas around where you live or with in 30-50 miles. These properties are not always easy to spot. Here is a tip: If you see a bank of mailboxes in front of a home, there may be more homes on that parcel (in the back or even next door).
A little change in what you are looking for can make a big difference for long term net worth creation.
Sacramento, CA · Member since 2015 · 59 posts · 12 votes
10y
@Jay DeCima I appreciate the advice. I will definitely look for multi home deals. I'd like to discuss ideas with you if that's okay.
@Chris V. thank you for the info. It's so hard finding deals in Sacramento. What do you actually mean by cash flow? Do you look for the cash flow to double the principle/interest/tax/insurance? I'd like to meet up with you one of these days to pick your brain over lunch if you're okay with it.
Redding, CA · Member since 2016 · 224 posts · 143 votes
10y
Chris V.
His is what I try to do or come close to:
1. Raise the rents 50% over 24 months...remember I buy the places looking bad and poorly managed and the rents are significantly lower than they would be if fixed up.
2. Because I fix the places up, the amount an investor would pay for them fixed up (if I was selling) would be about 2 GRM points (gross rent multiplier) higher. So hypothetically, if I bought them at 6 GRM, by fixing them up, they will be worth about 8 GRM. (note, GRM are different in every area).
3. If I am able to do #1 and #2 over 24 months, I have just about doubled the value of the property. Play with the math and you will see what I mean.
By the way, you must develop a GRM chart for you specific area. Rent X GRM is the value. Make a GRM chart from lets say 5,6,7 etc to 15. 5 may be slum in your area and 15 fixed up real nice in nice part of town. You look for the lower end of the other numbers. Agents can give you an idea what GRMs are of sold units.
Not rocket science and you don't need a computer to figure this out. I got by for many years with yellow pads and pens...Just a different mindset and what to look for.
I just started posting a blog on BP and will add one each week, with subjects like what we discussed here.
Hi Jay - Thanks for explaining your business strategy! I like how you go by the numbers and have a clear plan of your exit strategy. Judging from your profile you've been very successful with it too over a long period of time!
As for myself, I am investing par-time and I am currently not setup to do any "flipping" or anything else that is to intensive. For right now I am really a 100% buy and hold investor; once I finally have a property up and running I don't really care what another investor thinks its worth:). I am just happy that I finally have it dialed in and can move on. I understand that this is not the best way to get-rich-quick, but I the time I can spend on my real estate is limited, so I am very busy setting everything up so it does not require my involvement much. This allows me to spend enough time on my W2 job to keep that money flowing in and the health insurance rolling:).
Also, a strategy like yours (increasing value/equity) would require me to acquire undervalued properties at below market prices and, and I am not complaining here, just stating my experience, in my the current market I have seldom been able to do that. I am not saying it is impossible, or that nobody can do it, just that unfortunately *I* have not been able to. I am not proud of this, but I found that when given the choice between spending a lot of time trying to find that one *awesome* deal while the market goes up, or buying multiple deals at retail now, I have found that I have been best off buying now, vs. maybe later. Also the market in Stockton, CA is at such a point that multi-family values are judged by the #units, bedrooms # bathrooms, with very little attention given to "details" as location, state of building, tenant quality and current rent. So it does not make a huge difference if you have the best or worst building on the block, as long as its a 3/2 Duplex you will be able to sell for close to X amount. So any value added will (in the current Stockton market) likely be wasted:(
Anyway, as you can tell, I don't have a great system and I guess that's why I am not a best selling author:))). On the positive side, before this year is over I will hold over 20 units that are all cash flowing (modestly). My "systems" are getting better and are setup to run everything with "minimal"(ahem:) ) input from me. That should give me a solid basis to move forward from.
In the future I might get into the more intense flipping and buy-add-value-sell business, but for now I am in a rush to take full advantage of my 10 mortgage Fannie/Freddie backed limit. Once I hit that I will see where I want to pivot.
Again, thanks for laying out your value-add strategy so clearly!
@Jay DeCima I appreciate the advice. I will definitely look for multi home deals. I'd like to discuss ideas with you if that's okay.
@Chris V. thank you for the info. It's so hard finding deals in Sacramento. What do you actually mean by cash flow? Do you look for the cash flow to double the principle/interest/tax/insurance? I'd like to meet up with you one of these days to pick your brain over lunch if you're okay with it.
Hi Paul - What I mean by cash flow is that I am building a portfolio of properties that are steadily generating reoccurring revenue money (cash flow) every month. I need this cash flow in order to keep growing my portfolio.
Now you would say, would not everyone want that? The answer, strangely enough, is "no". There are a lot of other valid strategies, to make money in real estate. For example Jay, buys undervalued assets, polishes them up with repairs and good management so that their value (equity) grows before reselling them. This also generates short term revenue, but it is pretty intensive, and (in my opinion) not the best strategy for par time investors that do not have a strong affinity with the industry (like for example that are already realtors, or contractors etc.) but that is an opinion.
Then there are also investors who seek short term tax relief by buying a portfolio of properties that while not very profitable are in locations that will probably over time see a very nice growth in equity. These investors have a very robust stream of other income and are looking to shelter that money until they retire and can slowly sell off their portfolio which will be worth a lot more money 30 years down the road. This is a great long term strategy that is low intensity but in order to keep buying property that does not really cash flow in the shorter term, you will need a lot of regular income to be able to keep coughing up money for your next down-payment. If you want to grow that is.
There are a lot more ways and combinations of ways in which you can make money, and the BP podcasts cover many of them in a very understandable way. I recommend starting there to educate yourself. Does not cost you a cent out of pocket. I have listened to most of the BP Podcasts and while a lot are about areas of real estate that I am not interested in, but I still find that I learn a lot from every one. You'll want to probably start with the more recent ones and work your way back from there. On every PodCast they recommend books and if you hear a certain book a lot that sounds interesting you can consider reading it.
If you are serious about getting into real estate and interested in talking about my type of cash flow investing (check out some of my other posts) send me a colleague request and we'll take it from there. Lunch is probably out but I am happy to spend an hour or so of my time on the phone with you to answer any questions that you might have. However I must warn you that I have no magic bullets, special formulas, or insider tips, or anything else to sell you:).