Hi All! 

For those who have chosen to set up roots and invest in the small, multi-family real estate space in Sacramento - have you been able to find any turnkey duplex/triplex/quadplexes that would fit the 2% rule? 

The 2% Rule as I understand it is this: Monthly rent (rental income charged to your tenants) should be approximately 2% of your property's purchase price. An example would mean that a $350,000 triplex should be renting a total of $7,000 each month (assuming all units are the same 3/2, and that each unit would rent for approx $2,333 each month.)

Doesn't that monthly rate seem a little steep? Or is that just about right as far as what tenants would expect to pay? I see a lot of 2 or 3 bedroom single family homes in my area that are renting in the $1000 - $1800 range, and so I feel like the 2% rule doesn't really work out here. And it only gets worse when you calculate for owner-occupancy - (i.e., in my triplex example above, IF the owner lives in one of the units and rents out the other two, he would effectively either increasing the tenant's rents to $3,500 a month in order to live for free and fulfill the 2% rule, OR keep the prices the same and effectively only be at 1.3% of the purchase price. 

I would love other local investors' perspectives and insights on how they either force appreciation on their small multi-family properties (does everyone in Sac just BRRR?), OR how they justify purchasing these types of small, multi-families even if rules of thumb like the 2% rule don't work out or make sense.

I hope this makes sense - I'm really looking forward to your responses. 

the 2% rule works almost nowhere, especially not in a place like SAC.

In 2020,  its an unrealistic expectation.  

Agreed. Very unlikely.

@Brian Larson @Joe Bertolino @Aaron K.  

Got it.

And so the next most logical question would be - how or what metrics should the aspiring, 2-4 unit real estate investor in the Sacramento market focus on, in order to ensure that they can be successful in analyzing or purchasing a multi-family home? 

Could we/should we still look for $200-$300 cash flow per month deals? Or are we now more heavily on the value-add / fix and flip type of strategy? 

@Emil Pinlac - the short answer is....”it depends”.  What are your goals?  If you are trying to maximize a monthly cash flow, there are better markets than Sacramento

You MIGHT...MIGHT be able to find something in Sacramento for 1% Rule but you would most likely need to find something off-market.

Agreed with @Brian Larson point. 

You might be able to hit 1% but they are def harder to find. I've found success in maximizing by renting out by the room. Average room rents in Sacramento can go to around $500 so  if you find a duplex or triplex with 3 bedrooms at least that can be a pretty good set up. Doing room rentals on anything more than a 3/2 can be quite hard because vacancies will be higher as people don't like living with too many other strangers. Proximity to colleges and public transportation is vital for the room rental model from what I found. 

@Emil Pinlac , I live and buy MFH in Sac, keep a very close pulse on market here. You will not find any 2% properties here. Like others have said, this is very unlikely in almost any market. It’s a type of deal you would have to make by buying way under market value.

@Brian Larson

Hmm. Let's say my goals are to just get some "skin in the game" and start my REI journey.

Maximizing cash flow is what appeals to me the most, as I feel like it could definitely be a good crutch to help support the financing for my future deals - but if Sacramento isn't the best market for maximizing cash flow, does that mean I should just jump right into out of state investing? 

 It just feels like OOS investing has a lot more risk and has a much higher learning curve overall especially for a newbie who hasn't bought any homes yet locally. Do you recommend jumping into OOS as a complete newbie OR should I start with my local market? 

@Emil Pinlac , it's probably harder today than it used to be, but the word "impossible" doesn't exist in the investor's mind set.

Too, you and I have a different approach going after the 2% rule.  You want a turnkey where all the heavy lifting has been done for you.  Someone else found the off market deal, fixed it up to ready to rent condition, and marketed it to you all nice and wrapped up with a bow on top.  That means usually you are paying close to if not full retail price.

I find 2% rule property (usually better) by picking up dumps that no one else wants (cheap purchase price) and fixing them up (force appreciate, drive up rents).

So it will probably be very difficult if you expect someone else to do all the value-add stuff for you, but nothing is impossible.  If you stumble across a flipper/turnkey providers who needs the property gone yesterday, it's amazing what you can get.

I wouldn't do out of state investing as a newbie.  Personal preference.  More things can go wrong when you're 1000 miles away and it is much more expensive to travel back to see your property and ensure your property manager is doing what he/she is supposed to be doing.

Hey @Johnny Hoang -

That was definitely an idea I considered, even changing my home purchase preference from small multifamily to single family homes, and considering value-add renovations or the building of an ADU in either the backyard or a garage conversion.

Also just to clarify: just because a property DOESN'T meet the 2% or the 1% Rule, does not necessarily mean it will not cash flow, right? Do you think it is still a "win" for the investor, if they house-hack a property but the rents do not fully pay for all operating expenses? (i.e., only partially pay for mortgage, etc. etc.) 

Hey @Kevin Reinell ! 

Thank you for your response, man. 

If you do not mind me asking - if you aren't looking for 2% Rule in buying the MFHs you've seen, what has been your approach/strategy with buying MFH in Sacramento?

Are you buying MFHs in specific areas because you are betting on appreciation (I know conventional wisdom isn't to bet on appreciation, but hey who knows?), or are you working the BRRR? or are you just scooping up small-minimally producing cash flow properties to build up your portfolio in general?

Forgive me with all the questions - I am just trying to find a reason to justify my strategy to purchase a multi-family home in Sacramento to house hack as my first investment/primary residence. 

Hey @Erik W.

Thank you for this insight. I was recently browsing through Realtor.com and found a promising 3/1 SFH that was at a very modest price - only to scroll through the pictures and find that the roof had caved in, and it looked like there had been squatters living there. (which was scary.)

Perhaps I am looking for more-or-less turnkey properties at this point ... but at the same time, I'm just trying to really solidify my initial preliminary investment/real estate strategy. I know I still have a tremendous amount I need to learn, which includes being able to estimate rehab costs, being able to consistently analyze property deals, and actually learning about my Sacramento market - so I'm hoping that'll all come for me in these next few years, not to mention continuously saving for the downpayment. 

@Emil Pinlac - I think you will find way, way, more success in SFH with an ADU than you will with straight multi-family. I had a client do exactly this 6 months ago. He purchased a SFH in the downtown area with an existing ADU. If my memory is correct, he put down 5% and got a really, really low interest rate on a 30 year fixed. He currently lives in the main house and rents the detached ADU to a nursing student. The ADU pays most (but NOT all) of his mortgage on his $315K home purchase.

Furthermore, cash flow is determined by the down payment and loan terms.  If you only put 3.5% down and try to house-hack, I think it is very unlikely for you to make a positive cash flow.  HOWEVER, you will live cheaply, create some tax write-offs, and possibly gain some appreciation over a period of years.  All of this will place you in a better position for future real estate investments.

Good luck with your property search and feel free to private message me if you want any representation for a real estate purchase.  I am a licensed realtor and even though I live in San Jose, I spend lots of time in Sacramento because I grew up there and all my family is there.

I think the 2% "rule" or the 1% "rule" are the worst rules in existence, especially for newbies.  Here is why:

• Typically the lower the price with respect to rent, the higher the expected risk and the lower the expected return.  That is why the property is priced the way it is.  
• Related to the first bullet, the higher rent to value ratios in most cities are in the worst areas.  This is exactly the type of property new investors should avoid.
• The rent to property ratio that results in positive cash flow is not so simple as this simple formula.  Too many expenses are market specific.  For example, states without income tax have, in general, higher property tax and therefore a higher percentage of rent goes to property tax.  We used to have a duplex on the Gulf coast.  Our insurance was $6K/year a decade ago (no idea what it would cost today).   This higher than typical insurance would result in a higher percentage of rent going to insurance.  In addition cap ex varies by location.   Most exterior cap ex items last longer in milder climates than harsh climates resulting in lower long term costs.  This also applies to heater/AC.  Pro forma must be run on each property.
• Higher rent markets do not need as high a ratio and lower rent markets need a higher ratio.  if I have a 2/1, 700' class B rental that rents for $4K in San Francisco but $600 in Cleveland, will both require similar expense ratios?  The cap ex/maintenance costs will be a little less in Cleveland due to lower cost of labor but the material costs will be similar.  As a ratio to rent, San Fran cap ex/maintenance is much less than Cleveland.  The vacancy rate is less than half as high in San Fran than in Cleveland so as a percentage of rent, less has to be allocated for vacancy in San Fran than Cleveland.  The property tax in San Fran is lower percent than Cleveland so as a percentage of rent, less has to be allocated for property tax in San Fran.  San Fran has lower insurance costs per value than Cleveland. As a percentage of rent, San Fran has lower expenses than Cleveland.  In general, the higher the area's rent, the lower the percentage of rent required to cover expenses.

The 2% "rule" and the 1% "rule" can get new investors to invest in properties that are best left to experts.  In addition, it can get them to pass on good investment properties.

You will not get 2% rule in California, period. not even on a fourplex in an "up and coming, blue collar area".       I had to buy in Cleveland in "C" areas to get 2% rule

Hey @Brian Garlington ! Thanks for your reply, man. 

Is it justified to have a strategy in California to be buying small multi-family properties, even if they do not cash flow then? Obviously house-hacking a duplex, triplex, or a quad would help make your mortgage payment, but you would still be in the red, as far as budgeting for other operating expenses go. 

For someone starting out, and with a long-term plan to buy and hold - does it make any sense to do that? 

Originally posted by @Emil Pinlac :

Hey @Brian Garlington ! Thanks for your reply, man. 

Is it justified to have a strategy in California to be buying small multi-family properties, even if they do not cash flow then? Obviously house-hacking a duplex, triplex, or a quad would help make your mortgage payment, but you would still be in the red, as far as budgeting for other operating expenses go. 

For someone starting out, and with a long-term plan to buy and hold - does it make any sense to do that? 

>Is it justified to have a strategy in California to be buying small multi-family properties, even if they do not cash flow then?

Historically, Yes it is justified to buy small multifamily in CA.   It is a falsehood that CA Residential buy n hold RE does not cash flow.  Cash flow is defined as the cash flow over the hold period.  It is not defined by the initial cash flow.  My market is San Diego (which is CA), not Sacramento.  

• In my market rents have gone up on average over $100/month annually over the last 6 years. 
• Case Schiller list the top 3 residential burn hold cities for total return for this century are all Ca cities. 
  BP recent analysis on buy n hold returns had as its “long” period 2010 to 2018.  It has a cash flow calculation error related to property taxes.  Do you know where it showed the coastal Ca cities in cash flow?   In the middle of all cities.  That is just average and nothing special.  Then realize 1) this was with the property tax error 2) this was a fairly short “long” period. What do you think it would show the cash flow for a 15 year hold?  A 20 year hold? 3) this was just the cash flow.  It does not include the property appreciation.
  Never forget the property appreciation.  I judge my RE investments by their total return.   I care little if the return comes from cash flow or appreciation.  

My average monthly return (Profit) per unit is over double the average rent in most traditional zero appreciation (appreciation rate historically lower than the inflation rate), high initial cash flow cities.   

Good luck

@Emil Pinlac while we don't have any multifamily properties in the area, we own a rental house in Woodland, about 20 minutes away from Sacramento. We house hacked and rented out the rooms for a couple of years while living there, which covered most of the mortgage, and then rented the house out when we moved. In 5 years we gained $90k in appreciation by conservative estimates. We actually refinanced and paid the property down because we would like to eventually have our rentals paid off and it increases the cash flow, which decreases the risk substantially for us. Even if you just consider the appreciation, it would definitely be justified. Just make sure you don't put your self in a risky negative cash flow situation that may not be sustainable. 

@Kelsey T.  

Hi Kelsey - Thank you for your insight! 

This is great to know. Initially, I was feeling disheartened seeing that I wouldn't easily find something that would cash flow right out the gate - and that to have any potentiality of having it "cash flow" would require implementing the BRRR method and fixing up a terrible property (I know nothing still and would not like to touch the complexities of rehab work just yet!) haha.

I guess my first main goal then is to get my feet wet in real estate by house-hacking a property in an area that appreciates in Sacramento: either through the purchase of a small multi-family, or a single family home with potential to build an ADU in the garage or the backyard. I'm glad you brought up to not put yourself in a risky negative cash flow situation - I plan on being completely debt-free in the next year., and have lived pretty frugally throughout my life. Hopefully that will be enough to really nail this down.

Not sure if you answered this already: 

Do you own a place already? (primary home?) 

It seems that you are contemplating great options and terms like the 2% rule, but you have to know that not even savvy investors are achieving this around the US and def. not in California. 

based on some answers you gave above: you said you don't know anything about rehabbing, managing a property, etc 

Learn more about this: read the books, go to the meet ups, network. 

The 1% rule is difficult enough out here. 

The only way I've seen people be able to cash flow in CA with a SFH is either by putting down a large down payment or by going the ADU route.

That alone requires you to understand a lot of things: 

1. assessing property 

2. Rents 

3. Construction 

4. building plans 

5. city permits (zoning and building) 

etc and you or anyone else may be saying : well you are not going to do all of those... you are not... but you need to be able to recognize when people are over changing you, or not doing enough work for the money you have paid them already... etc 

You have to  be able to assemble teams: realtors, contractors, architects and drafters... or work with someone that can plug you in with their team. 

the list goes on. 

Too often I see on here, people wanting to "start" investing and running before walking. I am not saying you cannot do it. I am saying that you need education, experience, money.... 

start small: 

buy a condo- sfr and renovate the kitchen, or don't and live in it a couple of years. Just like monopoly, you will get the hang of it soon. Why rush it... no need. Patience is key. 

build up your capital, grow, educate yourself. 

Unless you have a million dollars under a mattress somewhere and don't mind losing it. In that case I say, go for it! You only live once.  :) 

@Sebastian Marroquin

Timely reply, haha. 

Thank you so much for your response, Sebastian! 

Yes, I am currently in the very early stage of my REI journey; I've been watching a ton of YouTube videos, taking a lot of notes while reading the PDF Guides BiggerPockets provides for Pro members, and signing up for newsletters for other resources like Maxable, which focuses on ADUs in California. I've honestly been fortunate enough to have lightly met and corresponded with a few investors in my area who are way more seasoned than I am lately, and so I am trying my best to keep up with their grasp of the material, as I only started a couple months ago. I'm definitely a little embarrassed to have been asking about the 2% Rule in this post but hey, now I know. haha.

I'm doing everything that I can to mitigate my risk in jumping into the game, and for now, that's mostly building my knowledge base, analyzing deals, and saving for a downpayment. I've created my 3-4 year timeline. And while my actual REI strategy still fluctuates between SFR + ADU, or a small multi-family, at least those are some pretty solid options. (and I think my downpayment amount in 3-4 years will help determine that).

Currently, I am now trying to determine if I need to reach out to any credit unions or loan officers in order to get a solid idea of what I can expect from a financing standpoint. I currently have excellent credit, a very low DTI ratio, and my income is expected to grow even more in the next 3-4 years. Do you recommend I reach out to them now, or should I wait once I am closer to my projected timeline?

@Emil Pinlac : Even if you plan on buying in 3 to 4 years : get a pre-approval now. This is just like starting to get personal training : you want to know exactly where you are now to see if you have to pivot and adapt? 

(this is from a realtor that has nothing to win with you) :) so you can take it for face value. 

consider this: 

How much are you paying in rent? 

You could qualify for a down payment assistance program as a 1st time buyer right now and may not have to wait 3 to 4 years. 

Take a look at your financial situation: and let that determine if you buy now, next year or in 3 to 4 years. 

Interest rates are so low right now that you may buy and even pay less than your rent. 

at 500k : your payment will be around $2800 per month (full Piti) : If you do an ADU (research the numbers) but you could probably rent it out for about $1500 (I don't know where you live... so research)

your mortgage payment effectively becomes: $2800 minus $1500 : or $1,300 per month. 

Look at the zillow mortgage calculator and you will see that : $807 goes towards the principal and that would put your out of pocket at $1,300 minus $807 : or $493 (on paper as you will still have to make the payments every month). and lastly, 

the interest you are paying is $1,200 per month or $14,400 per year and if you are in a (lets be conservative), a 15% tax bracket: then you will be saving around $2,160 (deduction) for the year divided by 12  months: $180 per month or 

$493 minus $180 : $313 to own your home per month.  (check with your tax professional for this: sometimes the max deduction is a flat number... etc) 

You could rent out a bedroom and live for free.... 

Now... I would venture to guess that even if you live with 10 roommates right now... you are probably paying more than $313 for rent...  :) 

This is on a $500k home. 

Numbers will vary with a lower priced home (or higher of course). 

So... if you qualify to buy now... why wait? ;) 

@Sebastian Marroquin

Hmm, but wouldn't a pre-approval only be valid for 60-90 days? And on that note -

Would I be able to/is it common practice to get multiple pre-approval letters from different banks or credit unions to "shop around" and see which ones would give me the best terms?

I'm mostly worried that if I requested an appointment THIS early (3-4 years early), they wouldn't take me as seriously, or they'd feel that I might be wasting their time, especially since I don't have the cash reserves in the bank to back myself up (even though I have a relatively stable job, and my credit score is excellent.) Is that the wrong line of thinking? Should I just go out there and scrounge up what W-2s, bank statements, and retirement account balances I have, and talk to a lender?? 

Qualifying for a down payment assistance program could be a potential opportunity to really get started; however, a huge part of me is skeptical/uncomfortable with paying an additional interest rate from the Downpayment Assistance, on top of the mortgage interest every month. I'd rather just save up for a downpayment and just make the play when I can. 

Thank you so much for your quick example (with numbers!!) I'm a little wary of building an ADU at the moment (est. is an additional $75k-100k on top of the mortgage). I'd rather just first get started house-hacking a duplex or a triplex. Let's keep things simple.

There are still a lot of moving factors, but I would really like to hear your follow-up insight. 

And also - I currently pay $250 in rent per month. hahhahah. 

@Emil Pinlac I'm new to the REI game and have been devouring as many books and podcasts as I can over the past few months. I've been advised that it is common practice to shop around for quotes, and I plan to start soon. This way when we're ready to make our move, we'll know the lingo, the right questions to ask, and which programs to aim for. Knowing our buying power would only set the fire even stronger under our asses to make a move too.

My lady and I are setting our sights on researching our first potential SFH in Sacramento and I'd love to talk with you further about your findings. Please DM if interested and we can trade ideas on the Sac market.