Bay Area Investors: Tracy v.s. Stockton v.s. Sacramento?

24 Replies

I am living in the Bay Area (South Bay). I have been researching Sacramento and even been there 2-3 times looking for houses.

Then I noticed that Tracy's rent to price is just a little bit worse than Sac, while being ~1 hour closer to Bay Area by car.

Thoughts on which one to choose? I am looking for something close to cashflow neutral.

I am thinking in the same direction. Those three areas seem still possible to have positive cash flow. What really drives the price in bay area/silicon valley is the new immigrant young family coming to bay that work in South bay and looking for a great school. Many engineers in South Bay is living in Tracy due to train availability from the south bay to Tracy. Stockton is just too far off from South Bay. Sacramento is not for a south bay engineer.

In term of price, in Tracy, you could get a nice SFR for $300k. The neighbourhood is pretty decent too, unlike Stockton, many South Bay Engineers avoid Stockton altogether due to various reason.

Many engineers moving to mountain house near Tracy, that may increase Tracy value a little bit.

In Sacramento, you could get MFH with pretty decent GRM.

For me, it is either Sacramento vs Tracy, and if I work in South Bay, it's still possible to live in Tracy (even Manteca).

@Carlos Ptriawan thanks for the reply. I should have been more clear that this is for investment property, not primary residence. I mentioned distance to South Bay because I would need to go visit the place I invest in.

I found it hard to find a property that's cash flow positive, if I assume 50% of the rent goes to operational costs like maintenance. That's why I said I look for property that's at least cash flow neutral. If I only look at PITI, then Tracy's rent can also cover that.

One thing I thought about Tracy is that, since many people live there and work in the silicon valley (when economy is good and housing price in the valley is high), the next economic downturn may hit Tracy (valley becomes less expensive and people living in Tracy can than afford to live in valley).

Sacramento has its own economy. Maybe same thing for Stockton.

@Account Closed what I meant was "at least cash flow neutral", meaning I want to avoid negative cash flow (like properties in the Bay area). Property prices are so high now compared to before. If it's positive cash flow, that would be even better.

If you want to avoid negative cash flow you need to be creative. I'm planning to buy another property in Bay area with larger square foot/smaller living space and building ADU on top of that. Basically converting your home to duplex,etc. That way cash flow is easy to mitigate after all the renovation costs/etc.Additional per sq value in Bay can be rented > $3.00/sqft .

Again, a home value in Tracy is still relevant to the development in South Bay because many tech engineers moved to Tracy as it's the last city that's affordable and the price is making sense. Sacramento and Stockton have their own economy.

If I want to buy in Sacramento (or even further out), I will buy multi-family with low GRM, there's still some out there.....

Here's an interesting question.. if you spend $300,000 on a home in Tracy or Sacramento, How much rent will that generate?? If you spend $300,000 to build an ADU in the Bay Area, How much rent will that generate? Depending on where in the Bay you're investing, I hear real numbers of 2,500 -3,500 per month or more for a 1 bedroom and 2,800 - 4,000+ for a 2 bed. What is the better investment??

@Vickie Johnson That's a good point!

I'm already house hacking in my house in the Bay area. It has a very small back yard. Maybe something can be built there but it would feel very compressed.

If my yard is bigger I would probably build ADU such that I can rent or let family live in. I really hope I had a bigger lot.

On the other hand, building adu with 300k is different than buying property with 300k. The later allows to use mortgage more easily. 20% down and 4.5% or 5% investment property mortgage. I haven't researched on ADU loan but would imagine it to be more expensive. It also takes multiple months to build.

@Yaohua Li the rent to purchase ratio is better in Sacramento. You’ll be able to find more opportunities there vs The other cities you mentioned. Also Sacramento long term is a city that continues to be redeveloped which makes it a more favorable city for people to want to live in.

If you want to get a good idea on the rents and if an area is a class a,b,or c area reach out to a few local property managers and also ask if they have any clients that’s thinking about selling.

@Yaohua Li between the two I would definitely recommend sacramento for some of the reasons mentioned here already:

1. Has its own economy

2. Larger growth plan vs Tracy

3. International airport

But let me ask you this, if all you are looking for is cash flow why don’t you take your money down to the Central Valley? Or better yet out of state?

@DJ Dawson thanks for your reply!

The 2 hours distance to Sacramento is a negative point for me ( vs 1 hour to Tracy ). So I'm trying to see if sac is clearly better than Tracy.

Speaking of cash flow, I don't have to invest in high cash flow property or market (sac is not). High appreciation property would be my ideal target, some I think that would grow my wealth faster. I can tolerate if it doesn't always appreciate fast. I don't need the extra cash flow for now for a living, as I have a well paying day job. But I don't want a negative cash flow to drag me down.

Tracy's rent can pay PITI but doesn't have room for maintenance and other costs ( unless I really try hard?).

@Yaohua Li Error #1: your operational expenses WILL NOT be anywhere near 50%! The “50% rule” is very misleading for the CA market. It mainly applies to class C-D fly-over-states lower end rentals. When you rent units for $600-800/month, and profit $100 per door, than yeah replacing a water heater will basically wipeout your profit on that unit for a year. 

Since you plan to manage the home yourself, a 5% vacancy rate and several hundred dollars a year in maintenance (depending on the home’s condition) is what you will typically spend, assuming no significant upfront deferred maintenance. Example: yearly rent of $36,000. Vacancy is -1800, maintenance say -1200, and you’re at a whopping 8.33% operational expenses! More cashflow than you think :)

As for sac vs Tracy it’s a tough call and really your preference. Sac economy is independent, but it’s a real pain to drive 2 hours for minor issues...which will definitely occur. So it’ll either be drive 2 hrs or pay handyman $150 to unclog simple kitchen sink, free up disposal, tweak front door lock, fix a loose tile, or any of a number of small things that can, and will, go wrong. I personally prefer being close in (I can walk to one bldg and am 7 minute drive to my others :) So I personally vote for Tracy, and ride the coattails of the massive South Bay tech economy. One caveat, when thing slow down here, they will be even slower in Tracy. But you’ll always be able to get decent tenants, just make sure that the school district isn’t crap. At the end of the day, it’s hard to argue with the long term appreciation of the Bay Area. 

my2c

Tracy is a small subburb. Developers there are throwing up track homes and industrial buildings. Those track homes are for people to commute into the Bay Area for jobs, not to work in the city itself. There are not the economic prospects for people who live there like Pleasanton and Dublin to the west. 

I'm not sure what is meant by "Tracy's economy is relevant to the Bay Area". Tracy is basically an affordable place to live for people who don't mind terrible commutes. The public schools are not the greatest. It's not a Bay Area employer, and its small population wise. There are less than 100,000 people there.

Sacramento on the other hand is a capital city. Over 500,000 people live in the city itself. For so long it was a forgotten one, but the amount of outside investment over the past 5-10 years has turned it into one of the nation's fastest growing metro with three large subburbs sprouting off of it (Roseville, Folsom, and Elk Grove). The new soccer stadium development is going to double the size of the city's current downtown. Heck, I'd rather invest in Elk Grove versus Tracy because the schools and continued development (i.e. casino) happening there.
 
Originally posted by @Yaohua Li :

@Embert Madison jr thanks for your reply. Could you elaborate on why Sacramento is better than Tracy?

Tracy's economy is relevant to Bay area. How does that play in the REI game?

 

@Embert Madison jr thanks for the detailed reply!

In fact, I did see Elk Grove before Sacramento. Better school than South Natomas (the place I'm looking at in sac) and closer to Bay area. Elk Grove is farther from downtown (jobs!) and has slightly worse cap rate but supposedly higher tenant quality?

When I went to Elk Grove in 2017, at least 2 agents mentioned Natomas for investment. But this year another agent seems to slightly prefer Elk Grove.

I know it's better to act than think back and forth. But my day job is busy before the end of year so I don't plan on buying anything before next year anyway.

@Amit M. Thanks for the reply!

I understand that actual operational cost would be lower than 50% if landlord manage wisely. The 50% would include property tax, capital expedite and maintenance cost (I use percentage like 8% for example). The final numbers is like 40% or higher.

I'm trying to be pessimistic when doing the numbers, knowing that actual reality would be better. For S Natomas, the numbers would likely give neural cash flow or better. For Tracy, the rent (excluding vacancy) would barely cover PITI, so I would expect negative cash flow overall.

At this moment, I'm leaning towards Sac, for diversification from Bay Area and cash flow.

People in EG drive to downtown for work, if they work for the state. Even some partners at my old firm. Personally, I would pick EG over Natomas if I wanted a safe, cookie cutter investment.

Originally posted by @Yaohua Li :

@Embert Madison jr thanks for the detailed reply!

In fact, I did see Elk Grove before Sacramento. Better school than South Natomas (the place I'm looking at in sac) and closer to Bay area. Elk Grove is farther from downtown (jobs!) and has slightly worse cap rate but supposedly higher tenant quality?

When I went to Elk Grove in 2017, at least 2 agents mentioned Natomas for investment. But this year another agent seems to slightly prefer Elk Grove.

I know it's better to act than think back and forth. But my day job is busy before the end of year so I don't plan on buying anything before next year anyway.

 

Originally posted by @Dhanasekaran Ranganathan :

Hi, i came across your post while searching for areas to invest. Was wondering if you made a deal and any advice on areas to invest!

Thanks

Dhana

No. I might buy another house in Bay area to live in, since my company will move within the area.

but if I do buy a property for pure investment, I would consider something that doesn't have a deep negative cash flow




You will get more cashflow in stockton then the other two places. You may also want to try East Oakland and get a Section 8 tenant. Guaranteed income.