New discouraged investor in Sacramento
Hello to all and a big thank you to BP. I've been a member here for over 2 years and never posted but I've done a ton of reading. A little about me and my situation. I'm mid 40's, work a pretty time consuming job, and I'm looking to pull some cash out of my home to begin investing. I will have 30-40k to begin with.
My discouragement comes from listening to podcasts where Joe Investor buys a duplex for $80k and his net cash flow is $600 a month or the famed 2%. The market in the Sacramento area is very competitive. Duplexes in far less than desirable neighborhoods are 150k+ and I dont see rents that support most properties i would be willing to buy as a new investor. I'm not stuck on multi family properties but this is just an example as many of you know who are from this area that unless you're a cash buyer or a retail/primary residence buyer it's a difficult market. BRRR seems almost out of the question unless I come across something that's off-market.
I've looked into out of state turn-key opportunities that would bring in cash flow but then all my capital is tied up in those properties at least in the near future and would prevent any resemblance of an aggressive investment strategy that I need to have to build wealth before retirement.
Maybe find a wholesaler? Or? I would like find something that would allow me to perpetuate investing. I would really like to attend some local meetings but they usually occur on days that I work but I hold out hope to attend someday.
Thanks for reading my rant and again thanks for any help. Happy investing.
Regards,
Wes
Don't count yourself out Wes. I began investing at age 41. I was working a very demanding, high stress job. I live in the Seattle area which, I'm sure you're aware, is getting to be like San Francisco as far as housing prices.
It's important for you to attend those local REIA meetings. I called in sick to work so I could do RE stuff when I first began. Not saying you should do that. But you have to figure out a way to make it happen if becoming an RE investor is what you really want.
Turn-key is not a bad idea, but do your research. I have a good friend that provides turn-key services if you're interested.
Money: at those local REIA, you will find people who have money who may be willing to partner with you.
Start building relationships. You can't do this business alone.
The only thing I can really offer is that you have to start somewhere. Let's say you can pull $40k out of your house, and after all of your expenses you can make 10% annual return on that $40k. Well, in 2 years you'll have $48k or thereabouts. If you do what you're doing now, you have $40k. You can take the returns from your rental property and either stash it away for the next purchase, or use it to pay down the costs of that purchase. Save up some money from your W2 job and do it again.
If pulling money from your house is your only source of funds - i.e., you have no excess cash from working your day job - you may want to consider how you can make more money on your day job before you go too far down this road. People who crap out in RE usually have no liquidity. I see people on here all the time who think they're going to live off of the proceeds from RE next year, starting from no money down. It's a pipe dream. Any business takes time and reinvestment to get it off the ground.
Yes the Sacramento market isn't what it once was. Cash flowing multi family units are hard to come by out here unless you are putting down 40+% or looking in D/F neighborhoods. Most mfr's I see would put people in the red.
Sounds like you want to have multiple long term investments. Out of state might be best for you. How about house hacking?
Hi @Wesley Duvall, I understand where you're coming from on this. You're probably going to have to go the wholesaler route, or maybe even become your own "wholesaler." Even then, a lot of wholesalers are letting stuff go at 80% of ARV or higher due to crazy high demand. In my market we've resorted to new construction for multi family. That's the point this has come to. Hang in man!
Originally posted by @Derek Jones:
Yes the Sacramento market isn't what it once was. Cash flowing multi family units are hard to come by out here unless you are putting down 40+% or looking in D/F neighborhoods. Most mfr's I see would put people in the red.
Sounds like you want to have multiple long term investments. Out of state might be best for you. How about house hacking?
Thought about house hacking but it would be difficult with my wife and daughters. In another 4 years once our 15 year old is off to college I could totally see house hacking as a solution.
I have considered the Yuba City/Marysville area but again we are talking C,D,F neighborhoods. Cask flow would be decent but the risk is a concern with being a new investor.
Wes
Listening to podcasts of how people do it in the midwest and trying to apply those numbers in California is like trying to open a fine dining restaurant based on watching the guys behind the counter at McDonalds. You'll definitely get frustrated trying to make those numbers work. Here's my opinion of how the Sacramento market currently looks:
- Most neighborhoods in Sacramento are not investment grade. The prices are too high, and you'll be much better off in the handful of lower grade neighborhoods that have bad reputations but are improving. Granted, these neighborhoods probably aren't any worse that what you'll get with out of state turn keys, you just have the benefit of ignorance there. Learning these neighborhoods around here, and being comfortable in them, is crucial.
- Multi families are generally over priced, especially on the MLS. This is due to lots of out of city money pouring in, especially from the Bay Area. Like you mentioned, you can find duplexes in worse parts of town that might appear to cash flow, but likely don't in the long run due to the issues that go along with the type of tenant you get there. Some people are successful with this strategy, but you really have to make that your thing. Personally, I'd prefer a Single Family in those neighborhoods in order to get higher quality tenants.
- The 2% rule doesn't apply. It has no meaning here. I suspect the really good investors buying off market with cash are probably hitting about 1% when considering rehab costs. (Someone with more experience please correct me if I'm off). Personally, I think .8% is an attainable target that still works.
- Properties with opportunity to add value is key. You're not going to be able to even hit .8% without adding value by rehab. Turn key properties go for a premium here because in addition to people not wanting to, or not having the skill to make improvements themselves, they just don't have the money. Salaries are still low in the area, and most buyers are doing FHA @3.5%, and stretch all of their finances to do it. Buying a turnkey house for $40k more only costs them 1.4k now, compared to needing the 10k to do the improvements themselves. That 30k gap is where we make money.
- .8% is barely going to cash flow, especially after refinancing for BRRR. At the end of the day, you're going to want to consider your total equity in determining if it's a good deal or not. This means looking at your principal payments and conservative appreciation estimates. Granted, appreciation is NOT guaranteed; however, you can increase the likely hood by buying strategically. Plus that value added from rehab goes to your equity profit.
- You can find deals on the MLS, they are just becoming more rare. Diligence is key. Properties not conforming to FHA will be significantly less competitive. Properties going on and off the MLS are good targets.
- Like Jd Martin said, having 40k to invest is probably the absolute minimum for here in the current market. You'll need 30k for 20% down on a 150k property, and 10k for rehab. That doesn't leave any reserves. So you'll want to at least have access to some extra cash that you know you can support with your day job going in. Cash constraints will loosen up once you complete your first BRRR.
@Derek Daun. Thank you so much for taking the time to provide your input. That's exactly what I was looking for. I hear the Oak Park area and certain parts of Del Paso Heights are improving so I'll begin looking in those areas and seek out some local agents that know the area well that might have visibility to some off market deals.
I knew the 2% model that some in the Midwest are getting is totally unrealistic here. I'm also not totally convinced that there's a whole lot more appreciation to be had in the near future but it may be a risk I have to be willing to take. I could come into a deal with 60k in pocket but was saving the 20k to buffer the deal if something went wrong which I failed to mention earlier. Thanks again for your time.
Wes
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one thing you could do with that kind of money is provide equity for fix and flip deals..
just make Darn sure your working with a reputable flipper.. often time you can make 30 to 50% of the profit by being the cash partner.. but again CAUTION you can also loose your entire sum if you choose poorly
Jay, I've never considered that. I could imagine that it would be easy to get taken advantage of or get involved in a bad deal. I'll look into that as well. Thanks
Wes
@Wesley Duvall I'm in the same boat... in my 40s trying to replace my income for retirement. You sound like someone that might have a (401k/IRA)? That can give you a few more options to help. You could roll it to a self-directed IRA and invest in real estate that way, or maybe do a 72t distribution and have it supplement your mortgage payments to help you accelerate the equity building. That also helps your DTI to get more financing, and you can later refi/HELOC to get at the equity.
I invest out of state and love it, so that would be my endorsement. $40k would still get a newer construction SFH (little to no CapEx for a bit), cashflowing place in a B neighborhood in Raleigh, NC, for instance. Vacancy rates are practically nil. It's nowhere near 2%, but I'm appreciating and cash flowing well.
Good luck!
Don't give up Wes. Expand your range and keep looking for properties. Not each area will be the same.
Wesley,
There's lots of great info in this thread and as you can see, you'll get lots of encouragement. I really do love this BP community.
I'm also in the Central Valley, mid 40s, and have a HELOC/cash combo ready to go. I've submitted a couple of offers and we'll see where that goes. I'm proceeding very cautiously....
I can't help but be reminded of the irrational exuberance we experienced in the lead up to the Great Recession. Do you remember? Everyone saying it's a good idea/time to buy.... The Valley just had 6 straight years of appreciation following the GR so naturally deals are hard to find here. In 2009 I was trying to buy a 4-plex for $129k with $2150 in rents. Now they're more like $300k. I personally think that this might not be the best time for us newbies to enter such competitive arenas; I think these waters are better navigated by the more experienced. This all depends on personal circumstance of course; maybe you can house hack in your situation; I can't. Maybe I'm a pessimist but I think a market correction is coming. I'm no genius but I sold my personal SFR in 2005 (my city's peak) thinking, "WTF is going on with these people (buyers)? What are they thinking?" I then bought my current house in 2009 (my city's bottom). Personally, I'm trying to save as much as possible so that I can strike when the timing is right/better. No, I don't have a crystal ball but I make decisions based on value & I don't see a lot here. I'm a believer in market cycles so this is where I'm coming from.
There's a reason that BP has exploded in growth the last couple of years: Housing has recovered (read: most opportunities are already gone for now) and people are now jumping on the investment bandwagon because their confidence in housing has returned. Think Warren Buffet: Be greedy when others are fearful (2009-2013) and be fearful when others are greedy (2014-present). Years vary by market of course. And for the record, this site is totally F'N amazing and that's the other reason it's grown so much.
Before everybody gets too upset with me, please just understand that I'm only making the point to truly know your own circumstances, capabilities, risk tolerance, back up plan, local market, and a whole myriad of other things. If you are finding cash flow deals after proper analysis then go for it!! I'm certainly looking. I'm not giving up. Also, Wes, continue to make contacts and build your base.
I wish you and others the best of luck!
TJ
Lots of good advice and food for thought here. It's great to hear from other local investors that face or have faced similar challenges with similar situations. Thank you all for the input.
Regards,
Wes
Hi Wesley,
Thanks for your post about Sacramento Investing. This is not the market of 2008-2011 where you could buy and hold and generate nice cash on cash returns with 20% down.
There is so much truth in the responses to your post. Sacramento, especially Midtown in particular is very likely at the frothy end of this multifamily market. I have run the numbers over and over for midtown properties and for duplexes and fourplexes in North Highlands, Foothill Farms area, and Citrus Heights. In Midtown, most duplexes are asking 500k and up. Based on my numbers, and these numbers are real, obtained from my property manager and selling agents, you would have to put down 375k on a 550k property to generate positive cash on cash return. You might as well put your down payment money in a cd as you could get the same with no risk.
You know what the monthly killer is? Property taxes! That's right. With such elevated asking prices the property taxes are reset to such a high basis. That 550k purchase results in a tax bill of 6875. That's 593 a month. Ouch!
The asking prices are lower in surrounding communities, but so are the rents. I was fortunate enough to purchase in 2010. Now, can't do it here unless you can connect with someone to buy below market and rehab. For this time period I am on the sidelines for Sac and surrounding area and am actively making offers in Phoenix metro area.
Good luck and let us know what happens!
Antonio. I agree. Midtown is ridiculously priced and the rents certainly don't add up to any positive cash flow without a substantial down and at that point I could imagine many other better options. Thanks for your input as well.
Wes
@Wesley Duvall Here is rough example of what you can do with notes. Buy two 5 year notes for @ 20k each. Payment would be around $410 a month with a 10% yield. Each note will yield about 4.4k in interest after expenses and they are fully amortizing. If you add another note every time you get to 20k saved up from the income growth looks what I pasted below. in that table I hid the rows where the data was just a repeat. Note the payments do drop off in month 60 as the first two notes are paid off but overall this should be a low drama experience and produces a reasonable return over time.
Keep in mind that there are risks along the way.
| Month | Notes held | Sched Pmts | Cash Positon | Spend |
| 1 | 2 | 820 | 820 | |
| 26 | 2 | 820 | 21320 | 20000 |
| 27 | 3 | 1230 | 2550 | |
| 42 | 3 | 1230 | 21000 | 20000 |
| 43 | 4 | 1640 | 2640 | |
| 54 | 4 | 1640 | 20680 | 20000 |
| 55 | 5 | 2050 | 2730 | |
| 60 | 5 | 2050 | 12980 | |
| 61 | 3 | 1230 | 14210 | |
| 67 | 3 | 1230 | 21590 | 20000 |
| 68 | 4 | 1640 | 3230 |
Great points @Antonio Guerrera, Jr.
I hate to look away from my home base but 2009-2012 was the time to strike (locally). I don't feel like waiting to invest but I want to be smart and wait for the impending market correction...
Originally posted by @Bob E.:
@Wesley Duvall Here is rough example of what you can do with notes.
Bob,
I have always been curious about being a private lender and the returns look pretty nice.
However you mention the risks and expenses that come along with it that concerns me. Understand that I can do the math but outside of that I know nothing about notes especially other regard to minimizing my risk. I could see if the notes were secured by real property that would be nice but I'm guessing they seldom are.
I suppose I have some research to do as you've piqued my interest. Thanks for your time.
Wes
@Wesley Duvall I was referring more to buying existing notes secured by a 1st lien on real estate.
Any investment has some amount of risk, there are usually ways to lower or reduce that risk. Costs on performing loans are pretty low, usually $20-30 for professional servicing (that was factored into my numbers above). If a loan defaults your costs can go up so you want to minimize your risk of default, there are ways to do that as well.
Remember - Risk is the likelihood of not achieving your goal.
@Wesley Duvall I would recommend connecting with local wholesalers/ investors to find off market deals. The fastest way to get your money back is fix n flips. If you don't want to do that then buy a house for 145k and put 20k into it to increase the value to 220k. Then do a cash out refinance to get all your cash back and use that money for your next investment . You can not do the refi right away but at least you do put your 40k into one property and can not get out the cash for a decade or more. Shoot me a email if you ever have questions. Make a lot of connections here on Bp
Originally posted by @Bob E.:
@Wesley Duvall I was referring more to buying existing notes secured by a 1st lien on real estate.
Any investment has some amount of risk, there are usually ways to lower or reduce that risk. Costs on performing loans are pretty low, usually $20-30 for professional servicing (that was factored into my numbers above). If a loan defaults your costs can go up so you want to minimize your risk of default, there are ways to do that as well.
Remember - Risk is the likelihood of not achieving your goal.
Agreed you should always think about an investment as
But always think worst case scenario. Exit strategies etc. It's all in the BP guide
This new political wave of rent control in Sacramento and through Califonria is also throwing a wrench into any investors
http://www.scpr.org/news/2014/09/12/45988/la-rent-...
http://www.tenantstogether.org/campaigns/rent-cont...
These groups like Tenants Together have a lot of state-wide funding from different larger groups and that would completely cap your rents. The main source of income for an investment.
So if you can add x amount of dollars in capital improvements you should be able to increase rents by y amount of dollars but the whole rent control thing would completely skew your NOI thus skew your CAP rate.
Cap rates are what lenders use to value your property.