Is it good to buy a rental property in Merced,CA?

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Is it good to buy a rental property in Merced,CA?

Ramki D.
New to Real Estate · Member since 2019 · 120 posts · 26 votes

I live in bay area (Dublin, 2hr drive to merced).I am planning to buy a rental property in merced,ca. This is my investment property.  I have visited merced 2 times in last one month. Some of my neighbors bought single family homes there( near merced college, aspire homes new construction)targetting for student rentals). I am not able to pull the trigger purely based on student rental population. I am considering Sacramento vs merced). Looking for suggestions on Which one is better to invest?

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Account Closed
Santa Clara, CA · Member since 2018 · 100 posts · 71 votes
6y

Alternatively, you could buy a larger house with a floor plan that allows you so divide it into 2 and then rent it to 2 families increasing your rental potential. With the right layout you can add internal walls & soundproof it. 

Buying a slightly larger house is not a whole lot of $$'s. Also look for lot sizes where you can add an ADU down the road. I would rather go this route than buy a smaller house just for 1 family.

You will not be able to divide utilities but you can bake that into the rent. 

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  • Kyle Kinsley
    Property Manager · Turlock, CA · Member since 2015 · 25 posts · 15 votes
    6y

    Merced is a good area for rentals. With the student population growing and the home prices not crazy high; it makes a good area to invest in. 

    I see this mistake happen all the time with out of the area owners. They buy big (5+ bedroom homes) and try to get $2,500 in rent. The numbers work out if you have students in there with the per bedroom simple math but you want to buy a house that appeals to both students and a family. 

    The bigger the house, the more you will pay for the house and the more you pay for the house the more you will expect in rent. Don't buy a 5 bedroom house in Merced. That would be a huge mistake. Keep your buy price under 300k and do your research on what you can get in rent.

    2Reply
  • Ramki D.
    OP
    New to Real Estate · Member since 2019 · 120 posts · 26 votes
    6y

    Thanks for quick reply. I am doing my research and planning to buy a property under 300k( 4 bed, 2bath around 1800ft). Is there any particular area with in merced I should target? I have visited khovnanian homes at ( M st, w cardella rd intersection)and lennar homes at moraga. Not sure which location is better to buy? Thanks in advance. 

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  • Account Closed
    Santa Clara, CA · Member since 2018 · 100 posts · 71 votes
    6y

    Alternatively, you could buy a larger house with a floor plan that allows you so divide it into 2 and then rent it to 2 families increasing your rental potential. With the right layout you can add internal walls & soundproof it. 

    Buying a slightly larger house is not a whole lot of $$'s. Also look for lot sizes where you can add an ADU down the road. I would rather go this route than buy a smaller house just for 1 family.

    You will not be able to divide utilities but you can bake that into the rent. 

    5Reply
  • Ramki D.
    OP
    New to Real Estate · Member since 2019 · 120 posts · 26 votes
    6y

    Thanks Pooja for your suggestion  and it is great option but as a first investor I would like to start with less risk option. Which area you think less risky Sacramento vs merced?

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  • Account Closed
    Santa Clara, CA · Member since 2018 · 100 posts · 71 votes
    6y
    Sorry Ramki, I don't know much about those areas. 

    Originally posted by @Ramki D.:

    Thanks Pooja for your suggestion  and it is great option but as a first investor I would like to start with less risk option. Which area you think less risky Sacramento vs merced?

    0Reply
  • Kyle Kinsley
    Property Manager · Turlock, CA · Member since 2015 · 25 posts · 15 votes
    6y
    Originally posted by @Ramki D.:

    Thanks for quick reply. I am doing my research and planning to buy a property under 300k( 4 bed, 2bath around 1800ft). Is there any particular area with in merced I should target? I have visited khovnanian homes at ( M st, w cardella rd intersection)and lennar homes at moraga. Not sure which location is better to buy? Thanks in advance. 

    Good question. I do like the Lennar homes in terms of quality, but both of those areas will see the same amount in rent. 

    1Reply
  • Brian Larson
    Investor · San Jose, CA · Member since 2018 · 313 posts · 230 votes
    6y

    @Ramki D. - Sacramento should be better by a long shot, capital cities tend to have a more stable government economy. Plus, there are more people and more students in Sacramento.

    1Reply
  • Saami Siddiqui
    Rental Property Investor · Fremont, CA · Member since 2017 · 22 posts · 10 votes
    6y

    @Ramki D. Personally, I am not a huge fan of Merced. Assuming, you buy a property for $300k you will be looking at rents close to $1800. I am basing these numbers off of what's on zillow. With these numbers, if you put 20% down, you will need close to $65k to close. Your mortgage will be close to $1150, plus taxes (~400), plus wear and tear (assuming a new house, lets say 10% of rent = $180) ,and plus (potentially) a property manager (~10% of rent = 180). All your costs added up, you are actually looking at a negative cash flow. If you are buying on cash, yes you will obviously cash flow positive (~$850) a month, but that's a return of just over 3%. If cash flow is what you want, there are far better options out of state.
    If you are wanting to invest for appreciation, the only reason that may be fathomable to me in Merced, I am still not convinced. To me Merced is in the middle of nowhere, yes there is a UC there, but it's the worst one. I don't see that university bringing in the needed growth to the area that will cause property values to rise where your investment will be worth it. I feel like cities have a high upside if there is potential for business to move there and for jobs to grow, in Merced I just don't see that.
    Between Merced and Sacramento, I would easily pick Sacramento. But before I invest in Sacramento, I would invest out of state. 

    3Reply
  • Ramki D.
    OP
    New to Real Estate · Member since 2019 · 120 posts · 26 votes
    6y
    Originally posted by @Saami Siddiqui:

    @Ramki D. Personally, I am not a huge fan of Merced. Assuming, you buy a property for $300k you will be looking at rents close to $1800. I am basing these numbers off of what's on zillow. With these numbers, if you put 20% down, you will need close to $65k to close. Your mortgage will be close to $1150, plus taxes (~400), plus wear and tear (assuming a new house, lets say 10% of rent = $180) ,and plus (potentially) a property manager (~10% of rent = 180). All your costs added up, you are actually looking at a negative cash flow. If you are buying on cash, yes you will obviously cash flow positive (~$850) a month, but that's a return of just over 3%. If cash flow is what you want, there are far better options out of state.
    If you are wanting to invest for appreciation, the only reason that may be fathomable to me in Merced, I am still not convinced. To me Merced is in the middle of nowhere, yes there is a UC there, but it's the worst one. I don't see that university bringing in the needed growth to the area that will cause property values to rise where your investment will be worth it. I feel like cities have a high upside if there is potential for business to move there and for jobs to grow, in Merced I just don't see that.
    Between Merced and Sacramento, I would easily pick Sacramento. But before I invest in Sacramento, I would invest out of state. 

    @Saami Siddiqui other than bay area what states would be better for investment? Texas or north Carolina or any other states?

    0Reply
  • Saami Siddiqui
    Rental Property Investor · Fremont, CA · Member since 2017 · 22 posts · 10 votes
    6y

    @Ramki Dirisala

    Of course, people have had success all over the U.S. Personally, I have invested in Charlotte, North Carolina and Atlanta, Georgia. Both have worked out well for me.

    2Reply
  • Scott ScovilleBusiness Member
    Real Estate Agent · Sacramento, CA · Member since 2019 · 502 posts · 274 votes
    6y

    @Ramki D. I live and have my 2 rental properties in Sacramento. While prices are high, there are some unique opportunities still, especially in the affordable housing market. Look at the South Sacramento and Del Paso Heights areas, as it's growing, and with the increases in job growth in the region (i.e. hospitals, tech, etc.) it should be a good base to pull from. Both are close to Midtown/Downtown and have seen a recent surge in interest. I'm also looking closer to the Stockton metro area, C class units / multi family, as bay area residents are looking for a more affordable place to live that's still within commuting distance. However, the Stockton area would be a greater risk for investment and may require more time and attention. Probably a longer term play.

    [email protected]415-933-2202
    Scoville Realty & Investments LLC
    WebsiteView Page
    1Reply
  • Laura Shinkle
    Realtor · Charlotte, NC · Member since 2017 · 357 posts · 292 votes
    6y

    I don't know anything about the Bay Area market, but I thought you might find this study by the National Association of Realtors interesting. It looks at where new residents are coming from, job growth, demographic data, housing affordability, etc. 

    If you're comfortable with investing out of state, perhaps one of these cities would be more appealing to your strategy? Just a thought.

    1Reply
  • DJ DawsonBusiness Member
    Real Estate Agent · Sacramento, CA · Member since 2015 · 394 posts · 259 votes
    6y

    Merced is a nice little town with potential for growth coming from the UC that has been growing at a nice tick for the last couple years. I would agree with others in the sense that you need to find something practical 3/2 would be my suggestion and do your research. Sure the college will breed expansion but then who are your tenants? College students, I think we all know how that can turn out lol.

    2Reply
  • Ramki D.
    OP
    New to Real Estate · Member since 2019 · 120 posts · 26 votes
    6y

    Does merced has Mello Roos(MR) tax?

    0Reply
  • Shane Avila
    Investor · Merced, CA · Member since 2017 · 47 posts · 13 votes
    6y

    @Ramki D. some areas do. 

    1Reply
  • Ramki D.
    OP
    New to Real Estate · Member since 2019 · 120 posts · 26 votes
    6y
    Originally posted by @Shane Avila:

    @Ramki D. some areas do. 

    Thank you.

    0Reply
  • Suman Kumar
    Member since 2022 · 5 posts · 1 vote
    4y

    Dear Friends,

    This is my first post. I live in Pleasanton (2hr drive to merced) and looking for investment for rental in the 300K-350K price range.

    Any suggestions on the areas/locality in Merced to look upon?

    @Ramki D. Did you buy any in Merced?

    0Reply
  • Eric HammPro Member
    Developer · Merced, CA · Member since 2017 · 47 posts · 26 votes
    4y

    @Suman Kumar...I own Next Door Real Estate in Merced, a family/locally owned brokerage.  I've lived in Merced my entire life (except for 4 years at Cal Berkeley for college) and know the area very well.  My wife and I also invest here. 

    I'd be happy to talk to you if you are interested.  Let me know!

    [email protected]
    0Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    4y

    I'm very data-driven based on evaluating market (tired with RE agent that's saying their market is the best). Your target must be appreciation.

    In terms of past history IRR from 2019/2020.

    Sacramento 40%
    Merced 28%
    Pittsburgh/North Bay 50%

    You use software to analyze this data, then buy the exact block that has the potential growth. The next problem that you need to analyze is the level of inventory in that particular area. Problem with Sacramento is there're just more seller unload their homes to the market in the last 60 days, compare to Santa Clara/Alameda county where it's very flat on inventory growth.

    Also, the Stockton area is actually one of the highest growth in recent run-up, but of course, crime is also higher there.

    0Reply
  • Alex Doria
    Member since 2021 · 2 posts · 0 votes
    3y
    Quote from @Kyle Kinsley:

    Don't buy a 5 bedroom house in Merced. That would be a huge mistake. Keep your buy price under 300k and do your research on what you can get in rent.

    Curious why you think so. I'm an out-of-towner that literally just closed on a $475k 5 br / 2.5 ba new construction near UC Merced with the intention of renting out to students, by the room. I know someone who's doing well with this strategy so I thought I'd try it out myself. Thanks in advance.

    0Reply
  • Kyle Kinsley
    Property Manager · Turlock, CA · Member since 2015 · 25 posts · 15 votes
    3y
    Quote from @Alex Doria:
    Quote from @Kyle Kinsley:

    Don't buy a 5 bedroom house in Merced. That would be a huge mistake. Keep your buy price under 300k and do your research on what you can get in rent.

    Curious why you think so. I'm an out-of-towner that literally just closed on a $475k 5 br / 2.5 ba new construction near UC Merced with the intention of renting out to students, by the room. I know someone who's doing well with this strategy so I thought I'd try it out myself. Thanks in advance.


     At the time a 5 bedroom property did not have a significant difference in the rent you were able to get. 

    0Reply
  • Hari Swarna
    New to Real Estate · Dublin, CA · Member since 2023 · 1 post · 2 votes
    2y

    Hi, I am new to investing. Researching Merced economic growth to find if it is good place to invest in a single family, multifamily or retail commercial property.

     I noticed there is lot of apartments construction going on in Merced - https://www.cityofmerced.org/home/showpublisheddocument/1821...

    Recently I heard there is funding came to university for research, Is there any impact on this market in coming years. 

    - https://news.ucmerced.edu/news/2022/state-budget-allocates-o...
     

    2Reply
  • Nick Maugeri
    Real Estate Broker · Modesto, CA · Member since 2023 · 192 posts · 77 votes
    2y
    Quote from @Hari Swarna:

    Hi, I am new to investing. Researching Merced economic growth to find if it is good place to invest in a single family, multifamily or retail commercial property.

     I noticed there is lot of apartments construction going on in Merced - https://www.cityofmerced.org/home/showpublisheddocument/1821...

    Recently I heard there is funding came to university for research, Is there any impact on this market in coming years. 

    - https://news.ucmerced.edu/news/2022/state-budget-allocates-o...
     

    Merced is going to be a great market for appreciation. The high speed rail has some approval: The high-speed rail station in Merced is environmentally cleared to be located adjacent to State Route (SR) 99 and the Union Pacific Railroad (UPPR) line on SR 59 – also known as Martin Luther King Jr. Way – and the SR 99 interchange. The California High-Speed Rail Authority (Authority) is studying an alternative station location between O and R Streets in downtown Merced along 16th Street. Link: https://hsr.ca.gov/high-speed-rail-in-california/station-com...

    The residential demand will increase as fire hazard insurance requirements remain high and increase. You should buy here if you have a desire for appreciation or need to let funds sit/tax benefits. Commercial is a great prospect here. 

    1Reply
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