So, this morning I log into Facebook and see that several people have shared a video that I can only describe as an action movie trailer for the city of Sacramento... check it out below:
WOWZA... I gotta admit, they make the city look pretty dang good! Better than I would've been able to describe, but then again I worked 16 hours yesterday and never get to experience half this stuff!
If you haven't heard the news already, there's currently a mass exodus from the Bay Area to surrounding counties that are more affordable. And a big part of the migration is the younger generation of working professionals who are quickly realizing their money goes twice as far in Sacramento as it does in the Bay Area. We're projected to have 18,000 - 20,000 people moving to Sacramento this year from the Bay Area alone.
"If you are under 40, use hashtags and enjoy networking over craft beer, what do you like best about Sacramento? The cost, the weather and the options for fun."
For even more evidence of this mass migration, just look at all the recent headlines about rents in the Bay Area plateauing or even falling in some areas. That's because tons of people tired of living in a cardboard box for $2,000 a month and are quickly getting the hell out of dodge:
This "mass migration" is a large part of the reason that Sacramento rents are continuing to rise, and we're projected to be the #1 rental growth area in the nation this year, with a 10% year-on-year growth for rents.
This increase in rents is driving millennials to get off their butts and become homeowners, because why deal with regular rent increases when you can buy a home and pay basically the same amount?
This huge surge in demand will be met with low inventory, as we simply do no have the housing to satisfy it. New construction easily costs $40-100k per lot BEFORE breaking ground, and most of California would've needed to build 10,000+ housing unit per year FOR THE PAST THREE DECADES to keep our housing prices on par with the rest of the country.
So if you hear people talking about the "bubble bursting soon" or anything like that, they're tripping. Hold onto your butts, because we've probably got 12-36 months of continued appreciation. Short of Donald Trump starting World War III on Twitter, there won't be much to slow it down. This is part of the reason why Sacramento will be the #4 Hottest Metro Market in the Nation this year with an estimated 7.2% appreciation and 4.9% increase in sales growth:
All these things are evidence that we're about halfway up the mountain before the next peak, and we're probably somewhere in between an Early & Late Stable Market. We're climbing the ramp to the top again, much in the same way we did in the early 2000's:
So... what does this mean for you? If you can, buy now. Yes, the best time to buy would've been 2009-2010, but you've still got some solid appreciation coming your way and if you're living in the property you can probably hit the 2 year residency mark and be capital gains exempt if you sell at the peak. "The best time to plant a tree was 20 years ago, the second best time is now."
If you're looking for investment property, the mass migration to the area should be welcomed by your lovely 2-4 unit multifamily property. I'd shoot for 6 month leases so you can have more regular rent increases :-) And if you think that hipster millennial won't pay good money to live in your C class neighborhood because it's all that's available, think again:
Remember this is the same generation that thinks it's cool to pay $60,000 for a cramped 200 sq ft tiny house that they can park on their great uncle's lot and gladly post pictures on instagram about it all day long... until reality hits them:
Tim explains how the reality hit him suddenly as well. “I didn’t really foresee having to choose between owning a fridge or getting rid of all of my shirts.” <-- lolz
But if you've got a property in the Midtown-Downtown or East Sac area, hold onto it and watch the rents surge like crazy so all the young singles can be close to the night life. I know a young couple that pays $1,800 a month to rent a small house near downtown and think I'm crazy for moving out to the burbs and owning a home twice the size for the same cost. They're having a hard time justifying making the move... which is quite silly indeed:
In sum, my opinion is that it's a great time to invest in real estate, and the high housing cost in the Bay Area is driving literally tens of thousands of people to our city of Sacramento, and if you get in front of the demand you'll experience some awesome appreciation and some massive rent increases, and laugh out loud all the way to the bank :-)
well that's good news for me!
I really enjoy your optimistic analysis about the Sacramento market, @Wes Blackwell .
Do you think this will also affect less popular areas of Sac, such as Oak Park, in "a rising tide lifts all boats" kind of way?
@Gene Vityugov -- Yes, you're exactly correct. People live where they can afford to live. And if the rents in Oak Park go up several hundred dollars that will automatically push the thugs and riff-raff out. But unfortunately, this will cause a hardship for many lower-class families that are just trying to get a break, and we'll probably see a rise of homelessness:
"Despite federal and state money earmarked specifically to support children’s wellbeing, government programs are inadequate to meet the region’s rising housing costs and falling incomes, leaving the poorest families on the street.
California’s version of cash welfare, CalWORKs, gives a parent with two children a maximum of $714 a month. That’s meant to be flexible income impoverished and down-on-their-luck families can use to pay the rent and utilities or to buy their kids shoes.
But it’s not enough.
According to the California Budget & Policy Center, the average low-cost apartment in California costs $870 a month – about $150 more than the CalWORKs check.
“The maximum amount of assistance won’t even cover low-cost rent in California,” said Alissa Anderson, a senior analyst with the group."
Landlords are already trying to charge people $1,400 for a 1 bedroom apartment in Midtown. The massive influx of millennials will drive that number even higher. They want to be close to all the bars, clubs, and hot single 20-somethings they can flirt with. Those that can't afford it will start looking at other areas as an alternative. And North Oak Park has already gone under a ton of gentrification, and hipsters have jumped on the bandwagon and so now it's considered a cool spot to be.
Sure, they'll avoid Del Paso Heights at first, but eventually areas like that, Meadowview, Parkway / South Sac will be the only areas they can afford. Current tenants won't be able to afford the rent increases, and the demographics will shift. Only 4,400 new housing units and 512 new apartments were built last year, a far cry from the 18,000+ units at the peak before the housing crash. The only thing possibly alleviating the demand is Boomers cashing out on their equity and moving to the midwest where they can buy a house cash and retire to live like a king.
The new Mayor Darrel Steinberg is doing all he can to change the rest of the state's perception of Sacramento. "Nationally, we're either unknown or misunderstood. People in the Bay Area still think it's 1978 in Sacramento. Sacramento has long been a proud government town... but that's no longer enough. The real test is whether a young person who graduates from school either inside or outside Sacramento chooses Sacramento as their home." And with cool videos like you just saw earlier and the comments that were made in reaction, I think they're succeeding.
So before you know it, people from Oakland, Richmond, Fremont, San Jose, San Francisco and everywhere else in the Bay Area will start viewing Sacramento as the new hip spot that's way cheaper but still has several professional sports teams, a major college, an international airport, and the sparkling new Golden 1 Center to host all the music concerts their heart's desire. Remember that Millennials are the main consumers of the "Experience Economy" and Sacramento's cheaper housing frees up more dough to do stuff like go to Coachella later this year and party like crazy.
Thanks for this quality share
Thanks for sharing!!
Also, ironically I am looking to relocate to the Sacramento area.
Can you PM, I have a few questions and it sounds like you are quite familiar with the area?
well, people who own rentals now will be stoked... others will rush in and overpay for current rents, in hopes that the rush will come...
Thanks for sharing the helpful information Wes =)
Anyone want to give me any tangible examples of a potential buy and hold? Someone just posted that Sac was done...:)
@Wes Blackwell , thanks for the awesome update!
319 Kelly Ct, Sacramento, CA 95838 -- $349,500 -- Sold in 2 days
Completely remodeled fourplex with all new appliances. Was purchased prior in October for $216k. Rents for $750-900 per unit. With 25% down and 5% interest rate your PITI would be roughly $1,875. Even if you only get $750 per unit that's a total of $3,000 gross and your positive over $1,000+ per month before utilities and vacancy. Repairs will be next to nothing since it's all new, and you'll probably sell it at the peak of the market before CapEx even matters.
And for those investors sketched out by the fact that it's in the 95838 zip code (Del Paso Heights), here is the crime map for the past 6 months:
3 car thefts, 1 house broken into, and 1 case of petty theft. In six months. No assaults, no muggings or personal robbery, and no murders. I can almost guarantee you the neighborhood you live in has the same small level of crime seen here or more.
Now, grand opportunities like these don't come along often, but now that I think about it... here's another one currently for sale that doesn't have any pictures on the MLS because the agent isn't doing his job, and so that's why no one has bought it yet. Should've hired me lol:
Two Single Family Homes & Duplex on a Full Acre in 95838 Zip Code
Purchase Price: ~$450's
Gross Rents: $3,700
PITI @ 25% Down & 5% INT: $2,444
Monthly Cash Flow Before Vacancy, CapEx, & Utilities: $1,256
Number of Crimes in Past 6 Months: 6
4 Stolen License Plates
2 Car Thefts w/o owner
There are plenty of opportunities here in Sacramento, it's just that most people don't know about them or are screening way too hard based off of zip code alone.
@Wes Blackwell Thanks.
Perhaps I've been screening too hard, but I don't know the area well so that's all Ive got.
Nice post @Wes Blackwell
The only problem I see is that those millennials that are moving from the bay area aren't really looking for the affordable suburban lifestyle or area's like Del Paso Heights. They are looking for places like midtown/downtown and buying an investment property there is a gamble at best. And I'm sure you've noticed already the influx of bay area investors here driving up investment property prices. Yet wages aren't increasing as fast as rents are and soon much like the bay area people in Sacramento will start to look elsewhere.
Very true. Most of the younger clients I have been working with are looking to skip the "starter home" and move straight into the forever home in the best neighborhoods. They are members of what I like to call "The Pinterest Generation." For the last 5-10 years they've been looking at picture after picture of beautiful remodeled and staged homes and so that's what they expect the average house to look like, when we both know that's simply not the case.
Besides the movement from the Bay to Sacramento and the Central Valley, you're correct that we're having tons of people leaving the state. From what I've experienced first hand it's mostly been Boomers and Gen-X'ers who were sitting on a pile of equity and sold their home to move to another state and live like a king for a bit, or Millennials who moved to California to go to college but have most of their family back home in another state.
The middle class is currently experiencing the biggest squeeze, with many members pushed either up or down, and if the soon-to-be higher rents become too much, many people will be left without an option. When the only affordable options left are Stockton and Modesto, many people will just say "screw it I'm outta here."
Sacramento and Reno are certainly benefitting from the high prices in the Bay and LA. I can't even tell you how many smart, educated and successful people under 40 I run into that have moved here or are from here and are in the process of moving back. It is not just midtown. If I hold a nice open house in Folsom or EDH I will have a half dozen come through. I am 38 and have a ton of friends that left for college at Cal/Stanford/USC/UCLA and settled into those cities but have moved back or are now in the process of trying to move back. These are the types of highly educated and motivated people that never would have returned to Sacramento 10 years ago. As far as income goes... many work remotely and will travel into the City or fly down to LA a few times a month when needed. They are still making big city wages. Yes, that will make Sacramento unaffordable for some but I think it is a positive thing in the big picture.
Great information, however an investor must include property management, utilities, repairs and vacancy as part of the expenses. I hope the investors out there calculate those very real costs in every deal.
Assuming your correct that most millennials are looking to bypass the starter home entirely and go to the "forever" home, what do you see as the long term implications of that on the larger market?/ Odds of that happening in any significant numbers.
I'm seeing the exact same sort of thing. When I lived in Stockton sooooo many good people left the city simply because it had nothing going on, and thought they had to go the Bay Area or SoCal to get some excitement. I think many people might have thrown Sacramento into the same lot with Stockton and Modesto. And whatever happened to the nickname "cowtown?" I swear I haven't heard Sacramento called that in forever lol. I agree that increased prices and rents will be better for the city in the long run, let's just hope it doesn't get outta control.
Very true. Management, repairs and vacancy are usually on a case-by-case basis so I always advise the investor on each individual property. For example, some people plan to self manage, so that isn't an expense. But you're correct in that people shouldn't go run out and buy a property without really knowing ALL of the numbers involved at first. Great tip.
I think the major implication is the "pinterest worthy" homes will fetch a larger premium than ever before. I had a client recently who refused to look at homes that weren't updated, even when those homes had 400-500 sq ft more space. I think the concept of "Let's buy this home and fix it up over time" has been replaced by "Let's buy this home and fix it up right away" or "Let's just buy this home that's already fixed up."
Non-remodeled homes will be purchased by the buyers that got beat out trying to purchase the remodeled homes. I'm one of them. I was one of 17 offers for a fully remodeled house priced under $350k, and I offered $27k above ask and STILL got beat out by somebody who came in higher with all-cash. So now here I am in my lovely home that needed a little TLC but was $65k cheaper. Much happier to be honest :-)
Nice Post on the Sac Market! Hopefully Stockton and the Central valley will see some of that price and rental growth as well.
Ultimately it will, I just don't think it will be remotely on par with Sacramento. Stockton, Modesto simply aren't as desirable of places to live. For Bay Area natives, Sacramento is only an hour or so away straight up I-80, and has enough added features to offer a big city feel.
- International Airport
- Major Sports Teams
- CSU Sac State
- Golden 1 Center for Live Shows
- Farm-to-Fork restaurant scene
- TONS of Night Life, Bars, Clubs, Etc.
- Basically everything that video showed above
I lived in Stockton for a long time, and all the good people eventually leave. And I don't blame 'em... every time they get their hopes up for something good another bank gets robbed lol. Stockton might have a new mayor in Michael Tubbs, but let's not forget the city filed for bankruptcy just 2 years ago! C'mon man!
Something as simple as wanting to see regular live music is nearly impossible in that area. Move up to Sac an hour away and there's live music nearly every day of the week. Little things like that will cause people to choose Sacramento over the rest of the Central Valley.
Fresno has some of those things and is a college town, but has an unemployment rate of 9.3% which is double the national average. So why move down there if you can't get a job?
In sum, people that can afford to live in Sacramento will choose Sacramento, and people that can't will choose Stockton, Modesto, Fresno, etc. instead.
This is a great read, thank you for this. It was a breath of fresh air for a newbie to the area!
awesome post @Wes Blackwell
Wow!!! @Wes Blackwell Thank you so much for this post. As a newbie to the investing, industry this has broaden my perspective of Sacramento and what is to come in the future.
@Wes Blackwell Great post! Sending you a PM.
Thank you Wes for taking the time to post on the Sacramento market. It's a great confirmation of what I have been seeing. Great and informative
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