Investing in Sacramento or Stockton? Which One Is Better?
Investing in Sacramento or Stockton? Which One Is Better?
I work a lot with Bay Area investors looking to invest in the Central Valley, and a question that comes up time and time again is "Should I invest in Sacramento or Stockton? Which market is the better investment?"
After answering that question countless times, I thought I'd lay out the pros and cons of each market for you here to consider if you find yourself in these same shoes.
SACRAMENTO VS. STOCKTON - A BASIC OVERVIEW
Whenever a potential investor calls me up, the basic question they ask me sounds something like this:
"I live in the Bay Area and am looking to buy some investment property, but I can't find any deals out here where the numbers make sense here. I'd like to stay in California if I can, and I'm considering somewhere in the Central Valley. The two options I'm considering are Sacramento and Stockton. I'm more familiar with Sacramento and more comfortable with investing there, but I've looked into the returns I can get in Stockton and they're really appealing. Which market should I invest in?"
Or in other words:
- I like the idea of investing in Sacramento, but don't like the numbers as much as investing in Stockton.
- I like the returns offered by investing in Stockton, but don't like the idea of investing there as much as I do Sacramento.
WHY PEOPLE LIKE SACRAMENTO
For Bay Area investors, Sacramento is a lot more comfortable than investing in Stockton. And that's because it's a more similar market to the Bay Area than Stockton.
Sacramento offers people the "big city feel without the big city price."
We have several professional sports teams you can watch on TV, a metro area population over 1 million, and after all we are the state capitol with a lot of political power and control in running things for the state.
If you're from the Bay, you can come visit the downtown / midtown area of Sacramento and almost feel right at home. We've got all kinds of cool bars and restaurants, art galleries and museums, and enough tall buildings to ensure you can't see your shadow when you're walking around experiencing it all.
WHY PEOPLE LIKE (AND DON'T LIKE) STOCKTON
Put simply, the main reason people like Stockton is because of the returns.
Higher ROI across the board and lower cost to get in makes the market super appealing to most investors.
BUT -- Stockton has a bad history. Real bad. Everybody here remembers how it was the foreclosure capital of the nation back during the recession, and the city has made numerous negative headlines since then because of bad leadership. Most notably with the city filing for bankruptcy several years ago.
Obviously, this gives most investors pause.
BUT THEN AGAIN -- Stockton has definitely turned itself around recently:
Two Years After Bankruptcy, Stockton Ranked Top 20 Fiscally Healthy Cities For It's Size
Yet still, Stockton has a long way to go to shake it's bad reputation, even if it's miles away from the really bad one it had in the past. People from the Bay Area just can't seem to forget.
RISK VS. REWARD
When I counsel investors on deciding between the two markets, I tell them that the decision is ultimately a game of risk vs. reward.
Just like all investment decisions, the bigger the risk you take, the bigger the potential reward you'll receive.
Sacramento is a safe bet. It's a bigger city with a more robust economy, and is attracting lots of the best and brightest from the Bay Area with it's more affordable housing. Once again, it's the "big city feel without the big city price."
People can move here from the Bay Area and almost feel right at home. Plus we've already got the killer downtown / midtown scene that will attract the younger hipper crowds too (AKA Millennials, AKA the next generation of home buyers.)
Stockton is a riskier bet, but offers greater ROI to start and greater potential upside. Stockton was projected to be the #4 metro market in the nation this year, and that's really because it's the last affordable place for middle America to move to in northern California.
Firemen, school teachers, janitors, etc. are quickly running out of places to be able to afford to buy a home, and Stockton offers them that opportunity.
And that's a big consideration when selecting the two markets... who's moving there?
To Sacramento, you've got more tech, startups, white collar jobs, etc. coming to town because the infrastructure is already there and it's a cheaper - yet still cool - alternative to the super pricey Bay Area.
To Stockton, it's probably going to be more middle class non-techy jobs that are more easily replaceable with relatively the same income from city to city. Firefighters, school teachers, etc. that I mentioned previously.
Why live in the Bay Area when you could receive relatively the same pay in Stockton and housing it AT LEAST 50% cheaper? Know what I'm saying? Shooooooot.
WHICH MARKET WILL HOLD UP BETTER IN A RECESSION?
Undoubtedly, Sacramento.
Stockton is a tertiary market... it has a much smaller economy and less variance. It's not as robust as Sacramento's is.
Now... that's not to say we're going to have a repeat of the complete nuclear meltdown we had in the late 2000's. We don't have all the ninja loans and ARMs that caused that catastrophe.
If anything, the market will probably stagnate (in both markets to be honest) but overall Sacramento should hold up better. Same thing goes for Bay Area. There's simply too much job growth there and super high incomes.
WHICH IS A SAFER BET FOR SUPER LONG TERM?
Undoubtedly, Sacramento.
Why? Because it already has the coolness factor needed to attract Bay Area millennials. We've got the restaurants, the bars, the hip downtown scene.
Stockton on the other hand still needs to develop that... a la the Open Window Project.
Now, if Stockton manages to pull this project off successfully, investors in downtown Stockton stand to make an ABSOLUTE KILLING over the next 10 years.
Downtown Stockton is still a ghost town. It was completely obliterated in the recession and commercial buildings have been sitting there for 10 years all boarded up.
Buy one of those bad boys and convert it into cool lofts or an office building, and once the Open Window Projects comes to fruition you may find yourself in the hottest place in town... and have bought in at bargain basement rates too.
BUT -- that's if it gets pulled off.
Sacramento doesn't have to rely on that. It already has the bustling downtown scene. It's a much safer gamble to make.
Plus, if Sacramento ever pulls off a high-speed rail of some sort that could get you from Sacramento to San Jose in an hour, the real estate market here would completely EXPLODE!!!!11!!11!!!11!!!
But that's like 10-20 years off AT LEAST.
Yet still, it's something you should take into consideration. And the same thing goes for personal teleportation devices in 50-100 years. That would throw the entire real estate market on it's head.
Imagine spending all day working in pricey New York and then teleport home to some super cheap housing market in the midwest at night. Shoooooooooooooooot x2.
WHICH MARKET OFFERS MORE ROI IN THE SHORT TERM?
Probably Stockton.
Why? It's super hot, and one of the most affordable places to live in Northern California. And let's face it... people from the Bay Area with a population of 7 million aren't going to move to a cowtown like Merced, CA (population 82,000) even though it's even more affordable than Stockton and doesn't have the bad reputation.
Bahahahah as a side note I just realized my post on BiggerPockets about Stockton being a hot housing market is the #3 result on Google for "Stockton Appreciation" <-- I rock lol
So in theory you could buy now, ride out the super hot appreciation wave for a few years, and sell and make your profit without having to deal with all the gambles of a potential recession.
CONCLUSION
Ultimately, there will be winners in both markets. You can win big in Stockton and win big in Sacramento. And because they are both WAY more affordable than the Bay Area I don't see any signs of the market slowing down, especially in the bread and butter price range right around the median home price. There's simply way too much demand coming from the Bay Area where people are used to paying a boatload more.
And with more and more tech firms and other industries allowing millennials to work remotely or commute only a few days a week, Sacramento and Stockton will be primo markets for high incomes who think they're getting an absolute steal.
Just had a new client contact me the other day who works in San Francisco and makes over $200k per year, and they're considering buying a home in Sacramento because they are able to work remotely.
And while $200k/year might not get you too far in the San Francisco housing market, out here in Sacramento or Stockton you can live like an absolute king.
So keep your eyes on the future when making these investing decisions... there are some really big changes that technology will make to the job market that will impact housing in ways you can't even imagine.
That is, unless you read all my posts on BiggerPockets and I'll tell you about them way in advance :-P
