Hayward, CA · Member since 2016 · 5 posts · 1 vote
Hi everyone!
Our goals are to 1. create non-401k retirement cash flow and 2. reduce our dependency on our wage jobs over time. We think the right way forward for us is to buy and hold cash-flow-positive rentals, (SFR or dup/trip/quadplexes), but I'd be happy to hear other recommendations from people with experience. I don't know much at all about the pitfalls and upsides of turnkey investing, for example.
We only own the home we live in (our 2nd) but we'd like to get started on REI. We've been kind of stuck at 'we think we're ready' for a couple of years now and always seem to stall out at market selection. I have just put out a request to my broker for pre-approval, so we're on the way :)
The Bay Area is daunting cost-wise so even though markets in faraway places are less financially scary, we think it would be smart to first invest in a place we can drive to. (Are we wrong about that?)
That puts our outer limits at Sacramento to the north and Fresno to the south we think. So we'd love to chat to anyone else invested in areas around Sac, Modesto, Stockton or Fresno who might have tips and gotchas.
Appreciate any thoughts the BP community has to share on this stuff And I'd love to hear about MeetUps in the East Bay as well!
Sandpoint, ID · Member since 2015 · 68 posts · 37 votes
9y
Hi Christina,
I am from the Bay Area but now live and invest elsewhere. It is smart to invest in areas that are in close proximity to you, but only if the numbers also make sense. Despite what projections are for the Sacramento area for the next couple of years, that does not mean those projections will become reality. Make sure you are asking yourself key questions before you move forward such as: What are the tax implications of owning rentals? Do you want to be in the bay area long term? How much risk are you willing to take on? I personally wouldn't feel comfortable being a limited partner because returns depend on the decisions of others. However, many people have been successful this way. My investment strategy, which has worked well so far, essentially leverages tax law to my advantage. My husband is a building contractor so that also helps increase returns. We have found it works well to buy a primary residence, live in it a couple of years and fix it up, sell it once the property appreciates significantly and then invest the profit tax free (no capital gains tax on sale of primary). On the last deal in California we bought at 350k, put in 30k in renovation materials, sold for 500k a couple of years later, and had 150k tax free to buy another property. For us, we decided to invest outside of California moving forward because of several factors including: we did not want to raise our kids there, we were not comfortable with the level of risk, cost of living was 3x that of where we live now, tax reasons. Best of Luck!
Rental Property Investor · Sacramento, CA · Member since 2016 · 267 posts · 214 votes
9y
@Christina Womack Hi Christina, congratulations on starting you real estate journey! I think your plan of buying and holding real estate is a fantastic idea. Real estate is a very strong tool to change your financial position, and your life for that matter.
As for the geography of your purchase, staying local is a good idea (in my opinion). Not only will you be able to drive to it and check up on it, but you will have a more intimate understanding of the markets that are closer to you. i.e. I would imagine that you could tell me more about Contra Costa than Tulsa, Oklahoma. There have been investors to buy out of state right off the bat, but that depends on the type of investor you're going to be. The most important thing you can do is learn as much as you can about how other people have done it, and then be true to yourself and determine what you personally want to do. For instance, many investors own dozens of SFRs; that's great, but I don't know much about it. Therefore, I'm true to myself in that I can't dip my toes in the water of SFR investing. I'll stick to what I know, choose my niche, and dominate it.
There are many markets within driving distance that will be good places to begin looking. That being said, I would do a ton of research on where we are at in the real estate cycle. Your findings that you discover from your research will be instrumental in you starting out in investing.
If I were you, my first action steps would be to start analyzing deals all the time. Find why investors are or are not buying certail deals. Understand what you're competitive advantage will be so that you can compete. Get on the forums and help other people analyze their deals. Through the forums, people will invariably critique or agree with your methodology. Iron sharpens iron, and you'll be that much closer to building your personal real estate empire.
Great choice! There are many people here on BP from Sacramento area that would be more than happy to give you a hand on investing. @Account Closed has some great spreadsheets on 2-4 unit buildings in the Sacramento area.
Real Estate Investor · Kansas City, MO · Member since 2015 · 222 posts · 121 votes
9y
Hi Christina, welcome! Many investors who live in a market like yours look to other markets where they can get a better return on their investment... makes sense, right?! Anyways, I am in the Kansas City market and help several out of state investors with securing their real estate investments. Please let me know if I can be of any help to you in your journey!
And don't fret! You aren't the only investor from the Bay Area in your situation, I have several other clients in your same shoes. They want to invest, but look at the local opportunities and realize the prices are too high for the returns to be worth it. They don't like the idea of all the challenges involved in investing out of state, and would prefer to invest somewhere they can drive to quickly if needed. Sacramento is experiencing a surge of investors for this exact reason.
As you said, the 1-2 hr drive limits your options to Sacramento and the rest of the Central Valley down to Fresno. I recommend Sacramento far and above all other options for several reasons, here they are and the links to the data backing up the claims:
So, it's simply supply and demand. Sure there are other options in the Central Valley, but they pale in comparison. Name another local market set to have 7.2% appreciation and 10% rental growth this year... you can't. For hot markets, Stockton-Lodi will be #28, and Fresno will be #43. Not even close to Sacramento at #4. And Modesto didn't even make the list. And that's because people don't want to live there, and with headlines like this there's no wonder why: Modesto Police Department Pushes City to Approve $15k for New Hires... makes you question why police officers don't want to work there...
A lot of the demand is coming from people moving out of the Bay Area, and so they'd like to remain close since they still have friends and family living in the area. And I-80 is so convenient because it makes Sacramento just over an hour away, compared to the 2 hour drive to Modesto and 3 hour drive to Fresno. Plus, Sacramento offers enough of a "big city feel" that Bay Area residents feel right at home. Modesto and Stockton simply don't cut it.
As far as investment opportunities go, your best bet is to go with 2-4 unit multifamily properties, as at any given time we have 80-100 for sale (winter numbers) and you can get some pretty amazing returns. SFR is pretty much out of the question unless you're coming with all cash and don't mind lower ROI.
Sacramento's main lure is that it's way more affordable than the Bay Area so it takes less money to play with and the returns are better. For a comparison of only the best of the best performing properties, investing in the Bay Area is going to cost you about twice as much for the average property leading to a higher down payment and monthly mortgage. Your annual GRM will go up about 2.5 years, and the 1% Test drops from 0.90% to about 0.70%.
These numbers are strictly for comparison of the best each area has to offer, so for the average one the numbers will obviously be lower. But I've ran the numbers for every single property for the following 7 counties: Alameda, Contra Costa, Sacramento, Placer, San Joaquin, Stanislaus and Merced. So I know these numbers are legit and dead-on accurate. And yes, it was very time-consuming lol.
But for example, just today I ran out to a new fourplex on the market priced around $350k in a C class neighborhood. It's tucked back in a practically unknown area with only one street in and one street out, so crime is extremely low for what is considered normal for the zip code as a whole. The property is completely remodeled and should easily rent for $750-900 per unit. So with 25% down and a 5% interest rate rented at only $750 per unit (which is what is was rented for prior to being remodeled) that puts you at $1,100+ positive cash flow per month based on PITI. And Capital Expenditures should be next to nothing since the property comes with brand new appliances and was just remodeled. You won't find anything like that in the Bay Area no doubt about it.
My recommendation would be to learn about the current potential deals available on the market and the local neighborhoods they're in. Once you're able to take a look at the entire Northern California multifamily market as a whole you'll easily be able to discern where the best opportunities are and will be armed with the information you need to make the best possible investment decision. Best of luck no matter where you invest, and feel free to ask any follow-up questions or reach out if you need some help getting started as it can be a little overwhelming :-)
Investor · Austin, TX · Member since 2013 · 933 posts · 1k+ votes
9y
Hi Christina,
A lot depends on your willingness to invest outside of your area and are you comfortable participating in real estate but in a passive manner by being a limited partner. I speak w/busy professionals on a daily basis, many from high cost states such as CA, looking for better value, geographic diversification and expert care / investing of their funds. Yes they want to be educated to be more informed investors but they rather be experts at what they do for a living and let others be experts at what they do and leverage that. They can't even imagine on their own investing in one of the best asset classes out there, large apartment buildings (200 to 300 Units - where scale and forced appreciation w/commercial property are key benefits).
I like the MF apartment asset class for the cash flow and appreciation potential. Not any MF apartments, but selective growth markets with solid relative value add opportunities to makeover of vintage 1980s properties, bring in more efficient property management team, essentially re-positioning the asset to make it more attractive to existing and prospective renters. The demographic trends and supply / demand factors for these more affordable class B/C apartments are very strong and are expected to continue, especially in the right markets.
Syndicators (general partners) do all the work. Find the property, negotiate the contract, do the due diligence, develop the strategic business plan, bring in more experienced property managers and raise capital from investors like yourself (limited partner) to share in the profits. We find the risks in solid class B/C apartments where one can add value and expertise located in solid growth markets are fairly low risk ways to earn a solid return. Most syndicates look to target in the 10% cash on cash range with 20% IRR over a 5 year hold period. Cash is distributed quarterly while the operators re-position the asset, improving it to gain higher rents and then sell the asset once the value is optimized.
Something to consider. As the market is on the higher end of the cycle, more than ever experienced syndicators can add their value and help investors grow their wealth in niche asset classes and geographies that are very hard for the average investor to participate in on their own.
Sandpoint, ID · Member since 2015 · 68 posts · 37 votes
9y
Hi Christina,
I am from the Bay Area but now live and invest elsewhere. It is smart to invest in areas that are in close proximity to you, but only if the numbers also make sense. Despite what projections are for the Sacramento area for the next couple of years, that does not mean those projections will become reality. Make sure you are asking yourself key questions before you move forward such as: What are the tax implications of owning rentals? Do you want to be in the bay area long term? How much risk are you willing to take on? I personally wouldn't feel comfortable being a limited partner because returns depend on the decisions of others. However, many people have been successful this way. My investment strategy, which has worked well so far, essentially leverages tax law to my advantage. My husband is a building contractor so that also helps increase returns. We have found it works well to buy a primary residence, live in it a couple of years and fix it up, sell it once the property appreciates significantly and then invest the profit tax free (no capital gains tax on sale of primary). On the last deal in California we bought at 350k, put in 30k in renovation materials, sold for 500k a couple of years later, and had 150k tax free to buy another property. For us, we decided to invest outside of California moving forward because of several factors including: we did not want to raise our kids there, we were not comfortable with the level of risk, cost of living was 3x that of where we live now, tax reasons. Best of Luck!
Investor · Saratoga, CA · Member since 2016 · 22 posts · 12 votes
9y
Hi Christina,
I purchased a few properties in Modesto/Stockton about five years ago around ~160K. Now they are around ~220K but still getting about $1000 rent. If you buy something there now, you'll be looking at no more than 6-7%.
It's a better appreciation play when it dips. I ended up going to Macomb County, MI and found better success getting 9-10% ROI.
The Bay Area is daunting cost-wise so even though markets in faraway places are less financially scary, we think it would be smart to first invest in a place we can drive to. (Are we wrong about that?)
Hi Christina, I live in Silicon Valley, and I'm an investment advisor who specializes in real estate. I can tell you what people here have done to set themselves up for retirement. There are two types of investors here:
1. Buy or inherit and hold for a long time, then cash out and redeploy equity into potentially higher cash flowing properties or other investments.
2. Buy or inherit and hold all their lives while working the properties for income.
I've seen teachers, firemen, software engineers and all sorts of people utilize both strategies successfully. One way or another, however, the investors must work to pay down loans, increase rents and decrease expenses wherever possible. One way or another, they are building their net worth.
Building net worth is how you may possibly retire with fewer worries. If your retirement utterly depends on having adequate cash flow from your properties, any downturns will cripple you. AND you must maintain adequate reserves to take care of the disasters that may happen.
Most of my clients fall into the first group above and I help educate them on buying into institutional grade $50-125M projects (available only to accredited investors).
Specialist · Indianapolis, IN · Member since 2014 · 670 posts · 352 votes
9y
@Christina Womack my parents grew up in Castro Valley and my grandparents still live in San Leandro off of Washington Manor. I was down recently and couldn't believe the price of real estate in your area. There are many opportunities to stretch your dollar further, but as you said there are also pitfalls to be aware of. We invest in 10 different markets and can pass on advice if your looking out of state. Best of luck!
Hayward, CA · Member since 2016 · 5 posts · 1 vote
9y
Thank you so much everyone!
I have a series of follow-up questions for people now, but those will take me a while to put together. In the meantime I wanted to say I really do appreciate all your detailed advice!
Hayward, CA · Member since 2016 · 5 posts · 1 vote
9y
@Kenneth Reimer, I can actually tell you more about Dunedin, New Zealand, than either Tulsa or Contra Costa :) But NZ now mandates a 40% down payment on investment properties so I don't want to invest there. I think the hardest thing about investing out of state would be visiting potential properties and putting together a team (realtor, broker, prop mgr, contractors) to rehab and rent them out. Unless we go turnkey, I guess. That's roughly why we think local-ish is the right call, at least until we know what we're doing.
In analyzing deals, how do you figure out why investors are/aren't buying certain deals? Primarily here on the forums?
Hayward, CA · Member since 2016 · 5 posts · 1 vote
9y
@David Thompson, that is something to consider, thank you. I think we actually want to get our 'hands dirty' and gain expertise outside of our day jobs. Skill diversification seems as reasonable as investment diversification :) But as a total novice I'm happy to consider other options. How does one find information on syndicates like that?
Hayward, CA · Member since 2016 · 5 posts · 1 vote
9y
@Jeff Wallenius, yes even East Bay is fantastically (horribly?) expensive now. Question for you though... before we decided on the driving distance thing Salem, Oregon was on our list. Are you in that market at all?
Salem, OR · Member since 2014 · 22 posts · 4 votes
9y
Im in Salem. We're experiencing a lot of people who commute to Portland and its outlying areas. There's a lot of opportunity here. Let me know if I can answer any questions you have about the area. Acquisition is the same as anywhere else. You will need to put in the work to find deals here. They're certainly here though. I would describe Salem as pockety. The rental market is very strong here.
Rental Property Investor · Sacramento, CA · Member since 2016 · 267 posts · 214 votes
9y
@Christina Womack New Zealand ! The best I can do with that is point to it on a map !
I agree, first time buyers take on a very interesting challenge when buying out of state, as do seasoned investors for that matter. I would just find what your main strength is and build your strategy around that.
I think looking over the deal analysis that exist on the forums is a great start. Many of the users here are very knowledgeable. They put the time in to help one another, which offers all of us great information. Spend time on these forums, offer up advice, and let people either agree or critique your train of thought. I would also start to find the Offering Memorandums of deals and go through their financials. Then, once you start to understand the numbers, go drive the properties. Understand where the properties are, and the prices that certain areas are trading for as compared to others.
These recommendations don't have any science to them, but the most important part is that you learn everything you possibly can about the market you're thinking of investing in. Marry yourself to it, and you'll be able to spot deals much, much faster than the rest of the newer market players. In turn, you'll be able to compete and start investing!
Specialist · Indianapolis, IN · Member since 2014 · 670 posts · 352 votes
9y
@Christina Womack I have purchased several fix and flip properties in Salem and last year bought two rental properties just outside of Salem in a small town named Dallas. The market is not as hot as Portland area but still is very strong as our states capital. I'd be happy to answer any questions you have via PM.
Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
9y
@Christina Womack I'm in the Bay Area so I know your challenges well. The problem is that although the areas that you mention might be cheaper, the rents are also much lower so they don't cash flow much better. Some of those areas (i.e. Stockton and Fresno) are very rough and in my opinion, far riskier than some of those "faraway" markets. Ask yourself what the advantage to being able to drive to a sub optimal market is. Why would you handicap yourself from the start and choose a poor market (Fresno has one of the highest unemployment rates in the nation) over a market with strong economic and demographic fundamentals just because you can drive there. You don't buy a companies stock because you can drive by their headquarters and keep an eye on the building. Why would you treat real estate any different? I always tell people to think like an investor and NOT a landlord. Investors aren't driving by their properties to look at them. They put them in the hands of well vetted and trusted property managers. Personally, I would recommend considering affordable cash flow markets with good economies like Indianapolis and Kansas City over a weak more local market. I wrote a report on how to invest in the best real estate markets regardless of where you live. You can find it on my website if you're interested.