Rent Growth in Sacramento is Triple the National Average
Rent Growth in Sacramento is Triple the National Average
From: https://www.sacbee.com/news/business/real-estate-news/article214089674.html
"Median rent rose faster in Sacramento during the past 12 months than in any other major U.S. metro, according to Hotpads, a subsidiary of tracking firm Zillow.com.
Monthly median rent for a two-bedroom apartment in the four-county region was $1,695 during the last three months, up 8.2 percent from the same period last year. That's roughly triple the rate of rental growth seen nationwide."
So what's causing this amazing rent growth in the Sacramento region?
Migrants from the Bay Area who are used to paying way more and think rents in Sacramento are a steal.
Imagine you're some young 20-something living in San Francisco and paying $1,350/mo to rent a room and another $500/mo for a parking space.
One day your hipster friend on Facebook messages you and says he just rented a 3 bedroom house in Sacramento for the same price!
"OH MY LAWD!!!" you say, realizing that the super cool tech startup you work for is willing to let you work remotely or commute only a few days a week back into the Bay Area...
You begin to wonder... "Why the hell am I paying the same amount to rent a room that I could pay to rent an entire house just a couple hours away?" (We here in Sacramento have been wondering the same thing for quite some time).
You do a quick search on Instagram for #MidtownSac, #EastSac and #Sactown and see that maybe Sacramento isn't the podunk little cowtown you thought it was growing up. Maybe it's actually kinda cool now.
And so... you make the move. You take you $200k+ per year salary and move to an area where the median household income is a third of that. You'll live like a king! You can blow all kinds of expendable income on things like craft beer, avocado toast, hot yoga and oxygen bars. (You know, all the cool stuff that attracts people like you).
Investors start seeing all the money being spent on this sorts of stuff, and decide to come buy up land and create all sorts of new, cool trendy pubs, bars, restaurants, yogurt shops and other stuff you might not expect to find in a city of this size, which attracts even more of your peers.
10-20 years from now when 50% of the workforce might work from home, or some high speed rail gets built that connects Sacramento and Stockton to the Bay Area in less than an hour, you'll look back and realize making the move to Sacramento was one of the best decisions you've ever made.
.....
And so will every investor who bought property here and the let the appreciation and rent growth boat take their portfolio to new heights.
I'm the perfect example... bought a single family home in October 2016 for $260k with only 5% down... remodeled both bathrooms, painted, replaced the AC and pool pump and that's it. Now worth $350k and renting for $500 over the mortgage payment. Hallelujah holla back.
As for those thinking maybe it's too late and they wish they would've bought in 2010-2012...
Wes this is crazy as I read this sitting here at my in-laws place in yuba City. Maybe I need to look more closely at Sac since I drive thru it all the time. Any zip codes that someone should stay away from? Looks like there are a couple places under 300k. Thanks, you the man!
There are a lot of different areas that work in different ways. Where I’m settling in is finding small multifamily that has a little cashflow. If you find something on the market with a lot of cashflow, something is probably wrong. There are lots of negative cashflow SFRs. With small cashflow, you can make your money on a combination of long-term appreciation, appreciating rents, and mortgage pay-down. It’s not the classic model of buying for lots of cashflow today, but that isn’t very practical in this area. There’s too much competition among buyers.
@Wes Blackwell. Great post. Like all the others you do. I am looking for multi-res (4 units+) in Sacramento. Can you recommend 3 zip code neighborhoods I should be focusing on.
@Kevin Moules / @David S. / @Jeremy Brown
The best advice I can give for where to look / where to not look in Sacramento is to check the local crime history and do a "digital drive by" via Google Maps Street View through the neighborhood.
You can check the crime maps by looking here:
https://www.communitycrimemap.com/
This data comes straight from the Sacramento Police Department. Be sure to set back the date range 6 months so you get a good idea of what the area is like over time. And be sure to focus on violent crime, not minor crime. Petty theft, loitering, and stolen license plates happens in all neighborhoods. Aggravated assault, shooting on an occupied dwelling and homicide tend to happen more often in the worst.
For example, here is a map of the violent crime in Sacramento over the past 3 months:
But note that this data doesn't tell the full story. For example, in the Downtown / Midtown area you have a lot of violent crime, but it's also the hottest neighborhood in the city with the highest rents and most demand. You just have more crime there than other residential neighborhoods because you've got all the bars (alcohol, drunken fights) and a larger percentage of the homeless population which represents a decent portion of the violent crime there.
See: Who is to blame for ‘aggressive behavior’ by homeless people downtown?
When doing a virtual drive by, some things you may want to be on the lookout for are chain link / metal fences around every home, trash / broken furniture out in the streets, stray dogs running around, uncut overgrown grass, broken down cars in people's drive-ways and lawns, bars on the windows of the homes, etc. Ultimately you'll need to see it in person and analyze the area yourself. Just go with your gut and your personal comfort level.
As Jeremy mentioned, California is an appreciation state. Not a cash-flow state. There is simply way too little inventory and way too much demand to be able to buy properties and get a ton of cashflow early on with only 20-25% down. You can get some, and ideally want to at least cover the mortgage and all the bills because you're still getting the principal pay-down every month, write offs, and appreciation.
Where you really make your money is appreciation over time. We've had 5%+ appreciation over the last several years, and on a median home price of $350k that's $17,500+ per year in added equity and value... more than $1,000/mo.
But unlike the cashflow, you don't realize the financial gain until you sell or refinance. So if you're willing to wait, it pays off big time. If you're trying to supplement your current income and get funds immediately, it's not the best strategy. That's what cheaper markets that don't appreciate as much are for.
Ultimately, you make much more money in the long run if you invest in hot markets that appreciate. $500/ in cashflow is great ($6,000 per year), but having the property be worth $50-100k more in 3-4 years is a whole lot better if you ask me.
Sacramento was also #6 market nationally for total returns, that is cash flow + equity gains since 2000 (sfr). Obviously rent growth is one key element in that number. I think many investors would be wise to consider the reasons behind this areas historical returns performance.
Well if somebody is looking to work remotely and live like a king, they might as well go all the way to Reno, across the border. That's an instant 20k pay raise with not having to pay taxes ...
Thoughts on growth in rental rates for a small ~800 sq ft., SFR, in downtown Sacramento? From what I can see, nothing in the area currently would generate income from rent (i.e. it is cheaper to rent than buy), and unsure of appreciation given potential location in market cycle, plus interest in larger homes.
This is a great article Wes. I'm currently in the process of getting my RE license and want to look to buy my first rental property in Sacramento or even further south in Dixon over the next 6 months. Has anyone had any luck with Dixon? I know it's a small town, but I think it could be up and coming as well with prices quickly on the rise.
Sacramento is not what it used to be. 12 years ago I laughed at all my friends who lived there. I was from SF. By comparison, Sacramento was a camp site.
Now I find myself there more than I visit SF. Lots of really cool stuff going on.
Plenty of opportunity in Sacramento. It won't be slowing down anytime soon.
moved to Sac in Sep of 17, started to look at housing prices when I moved and couldn't believe the affordability, bought a house 2.5 miles from the Golden 1 center that was built in 07 for 300k! Appreciation is king.
A big part of the reason for the growth here is the migration from the Bay Area. And it has happened multiple times over the past few decades. As prices go up and the Bay Area gets too expensive, homebuyers look further inland for more affordable housing. It's a little accelerated this time because of tech, and will only continue more so in the future.
The reason people don't move to Reno from the Bay Area is that it's roughly a 5 hour drive. With only two hours separating Sacramento and the Bay, it's much easier to get back and visit friends and family or get away for the weekend. Plus you're more likely to know some people who live in Sacramento (old high school friends on Facebook and the like). As for Reno, your spouse is probably the only person in town you'd know.
Same reason goes for basically any extremely affordable fly-over state. People don't move from an area with a population of 7 million to a small city with less than 250,000 people (Reno).
In October of 2016, I bought a house with my GF because they were just about to increase our rent to $1500. We bought a 3/2 in a B- area for $260k. Was dated and needed some TLC. PITI was $1750/mo. Now that home is worth $350k and rents for $2,300. It's almost always cheaper to buy than to rent.
Why? Because if your rent is $1,000/mo... at the end of 5 years would you have rather paid down $60k on your mortgage or someone else's? Plus the person who bought a home has equity and owns something. The other person doesn't.
Anyhoo, buying a 800 sq ft SFR in downtown Sacramento isn't a good buy unless you've got money to burn. That's an A class neighborhood. Lower ROI, way less risk. You'll pay $450k for that, when you could buy a 3 or 4 bedroom home somewhere else in town for the same price. If I were going to buy in downtown / midtown area of Sacramento I'd buy a fourplex or something. And that's only if you have like 50% down. You'll never go vacant and have a waiting list a mile long but it'll be hard to cashflow without a big down payment. You can get way better ROI investing in the B and C class areas of town.
Any market can work if you get the home for the right price. Dixon would work because it's a great little commuter town. Personally I'd advise being somewhere that has a much larger pool of potential renters. But for the right price these little towns stationed along the highway can work for good rentals.
Exactly. So many people from the Bay Area still think it's 1970 in Sacramento. They still think it's a "Cow town" but I haven't heard it called that locally in years. As more and more Bay Area migrants make their way out there, the more it's going to offer the big city feel without the big city price. Be on the lookout for the same thing to happen to Stockton in another decade as long as the city's leadership stays on track and doesn't run itself into a ditch like it did the previous two decades.
Eventually Sacramento will get pricey too, and if Stockton pulls off their Open Window Project and turns around the downtown scene, it'll be the last spot in Northern California for affordable housing that Bay Area millennials will be willing to stomach.
@Wes Blackwell, thanks for the input and good suggestions. Yes, I agree that downtown is overpriced (...although everything seems to be that way at the moment). I found a small SFH for quite a bit cheaper than you mentioned, but it would need significant updates, and does not have a garage or a yard (to build an ADU for rental income). I would see living here for sometime, then perhaps eventually renting or selling. However, (1) I'm not confident that appreciation will keep up at anywhere near where it has been the last few years, and (2) a SFH won't rent for as much as the mortgage is.
Maybe I am answering my own question here, but it seems like it is still cheaper to rent than buy in anything class A right now, unless the market somehow keeps on behaving wildly irrationally.
Trust me, I wish it were still 2016, but then again I wasn't knowledgeable enough or ready to purchase a house, or have enough funds to get a MFR, at that time.
@Wes Blackwell Would it be possible to do a new post going over the neighborhood classes of Sacramento? I remember seeing your initial post a while back and found it very helpful.
Hey Mike!
Yes, I've actually been thinking about making another post like that. Although, I'd have to do it differently this time and really just suggest places people look rather than places people should avoid. Stay tuned as I hope to have one out in the coming weeks.
all fun and games till rent control gets pushed through...
Once again, another great post! Thanks for the info. I bought a flip property last last year in Cameron Park and forced appreciation works but market appreciation on top of it was surprising to say the least.
We have been looking for 10-50 unit MF in Sacramento for a while and it's tough. cap rates compressed and it's hot everywhere. We look at 1% rule, 25% down, 10%+ cash on cash ROI, 1.3+ DSCR, 10 or lower GRM...a whole bunch of metrics and that almost eliminates everything we look at in Sacramento LOL.
I agree about Stockton and what the future may hold for that city. This news recently announced:
Stockton Could Be Home Of New California State University
https://sacramento.cbslocal.com/2018/07/09/csu-stockton/ We have acquired 31 MF units in the past 4 months in Stockton. And they cash flow AND they exceed all the metrics I mentioned above.
See my post here regarding Sacramento Rent Control: