Sacramento Not on List of Best Markets for SFR Rentals - WTF?!?
While reading over the local real estate news this morning, I stumbled across a headline that made me do a double-take and drop my spoon into my bowl of delicious honey nut cheerios:
Sacramento Not On List Of Best Markets For Buying Single Family Rentals
"Sacramento is not the most lucrative real estate market for people who want to get into the landlord business.
If you want to buy a single-family rental, you'll get the highest annual return in places like Atlanta, Baltimore City, and Pittsburgh. But not in Sacramento.
"Well if you're buying in Sacramento, the average return, if you're buying this year, is going to be below the national average," says Daren Blomquist with the research firm ATTOM Data Solutions.
He says the national average is 9%. In Sacramento, it's only 6.4%. That's because median sale prices for single family homes are rising faster than average fair market rents. (Remember this part in bold as you read the rest of this post).
"The rents are increasing but at a slower pace than prices are increasing which means the yields on those rental properties are coming down and not as attractive in a market like Sacramento," says Blomquist.
.........................
Now, here is a prime example of someone who doesn't understand California real estate.
And here's why:
Real estate investing really all boils down to 2 key metrics: Cash Flow and Appreciation.
When most investors think real estate investing, they think cash flow. The thought process is essentially as such:
"If I buy this property at the right price, and rent it for the right amount, I'll get some cash every month after paying all my expenses. Sweet! Can't wait to quit my day job!!!" <-- *eyeroll*
But most investors don't really think about the appreciation. Why is that?
Well, if you ask me, it's because humans are extremely short sighted. You may have forgotten your history lessons, but just a short time ago humans were only living to be roughly 30 years old. That means just about everyone reading this post would've already been dead by now.
Back in the caveman days, if you stumbled across a gazelle trotting along the plains of Africa, you killed it and ate it ASAP. And that's probably because you hadn't eaten in forever, and weren't sure when you'd be able to again. So the need for IMMEDIACY is hard-wired into our programs.
(If you ever want to see just how bad humans are at impulse control and thinking long term, just google "Stanford Marshmallow Experiment": https://www.youtube.com/watch?v=QX_oy9614HQ)
Cash flow is immediate. You can even get a rough calculation for it before you buy the property. So you see it up-front, and within 1 month you will start to see your returns. The need for immediacy is satiated and satisfied.
But what about appreciation? Well sheesh, that takes years!!! Ain't nobody got time for that! Even worse, it's not guaranteed! "Pure speculation" you say, and only need to point back to the early 2000's to see where that type of investing got us.
But here's the thing... real estate cycles go up and down. Always have, always will. And now that you're on BP you should know this by now. Here's some proof for you skeptical fellows:
- https://www.cato.org/publications/commentary/great-18year-real-estate-cycle
- http://www.theepochtimes.com/n3/2000510-economists-explain-why-our-economy-crashes-every-18-years/
California is all about buy low and sell high, more than just about any other market in the U.S. And that's because California is completely different than just about every other market in the U.S. Take a looksie here at a heat map of home prices across the U.S.:
Notice something about that area all the way over on the left side of the country? Quite expensive now isn't it? But you already know that, I didn't need to tell you.
But, you probably didn't realize just how cheap the rest of the country is, did you? I mean, just LOOK at how much of that map is green!!! Cheap, cheap properties as far as the eye can see!
If you're a boomer thinking about retiring and selling your California home to move somewhere out of state that's more affordable, here's a comparison to get you motivated:
- California's Median Home Price: $490,100
- Kansas City, MO's Median Home Price: $118,400
That's make California nearly 4 times as expensive! YIKES!!!
But, here is where most investors go wrong in their thinking:
"California is 4 times as expensive as Kansas City... do I get 4 times the cash flow? NOPE = California is a bad investment."
But here's what they should be thinking:
"California is 4 times as expensive as Kansas City... do I get 4 times the appreciation? YEP = California is a GREAT investment."
Allow me to explain:
Let's just say that both areas get 7% appreciation next year. Let's do the math:
- California's Increase in Value: $490,100 x 7% = $34,307
- Kansas City's Increase in Value: $118,400 x 7% = $8,288
So, let's say you bought out in Kansas City and got $1,000 per month cash flow, and I bought here in California and just broke even. Who made a larger gain at the end of the year?
- California: $34,307
- Kansas City: $20,288
- $34,307 - $20,288 = $14,019+ California for the win!
Now run that calculation out like 3-5 years... and now who is REALLY ahead? If we buy and sell at the same time in those markets, at the end of 5 years I will have realized $70k more than you!
Plus, even if neither property appreciates and we make the same cash flow over 30 years, once it's paid off the one in California will easily rent for 2-4 times as much, so the Golden State wins again!
And that's what this guy missed in his article. It cracks me up because he even directly brought up home values increasing, but didn't even address it!:
"...median sale prices for single family homes are rising faster than average fair market rents."
Also, this guy must've missed the news that Sacramento rents went up over 11% last year, are projected to go up 10% this year, and 8.5% next year. Meanwhile appreciation is projected at 7.2%. So his statement isn't even correct to begin with.
But here's the thing folks... rental property should really be about retirement. The days of working 40 years for the same company and getting the gold watch when you retire are GONE. Long gone.
Robots are coming for your jobs... they're even coming for your boyfriends... and universal basic income is inevitable... so wouldn't it be nice to have a nice rental property 30 years from now to provide housing to those jobless, mateless souls who can pay you direct deposit from their universal basic income check? :-)
Sorry to get all dreary there at the end with humanity's bleak future... I know it's not something we like to think about it, but perhaps we should.
Long term, remember? ;-)
