Rental Market in Stockton and Modesto

11 Replies

Hi All.. I am looking to invest in multi-family properties in Stockton CA and would like to get your opinion in the rental market and would ideally love to connect with some fellow investors in the area. Am also looking at Modesto as another options. Please share your thoughts.

Hello Ritesh, I'm from the Modesto area and have a multi-family property. What questions do you have about the area/rental market? I'll try to help the best I can

@Ritesh Dalal

I work with a lot of Bay Area investors looking to buy multifamily property in the Greater Central Valley, and regularly analyze every single 2-4 unit multifamily property from Placer county all the way down to Merced county. 

The best thing about Stockton and Modesto is the low prices, which makes it really easy to get in and buy since 25% down will be much lower than it would be in the Bay Area, MUCH lower lol.

San Joaquin county (Stockton) will have about 3 times as many properties that are deals than Stanislaus county (Modesto) will, but the numbers are roughly the same.

Here are the numbers you can expect from the average property that I consider a deal:

List Price: $261k
Cost Per Unit: $89k
25% Down: $65k
Gross Monthly Rents: ~$2,100
Gross Annual Rents: ~$26,000
PITI Mortgage @ 5% Interest: $1,400
GRM: 10.13
1% Test: 0.84%
Gross Annual Yield: 10.03%

The thing that you're missing in Stockton and Modesto is desirability. Right now there is a huge surge of Millennials moving from the Bay Area to Sacramento, which is driving up prices and rents like you wouldn't believe. You can read more about it in my post here:

https://www.biggerpockets.com/forums/621/topics/396725-millennial-migration-to-sacramento-2017---here-comes-the-rush

Sacramento is simply WAY more desirable a place to live than Stockton or Modesto. We've got an international airport, several major sports teams, a local CSU, tons of night life, cool restaurant scene, and offer enough of the "big city" feel that the younger generations (your tenants) crave. Something as simple as wanting to see regular live music is nearly impossible in Stockton and Modesto. Sacramento has regular live music in Spades.

So if you buy a property in Sacramento now, in 2 years it will be worth 11-14% more and the rents will 18.5% higher. Stockton and Modesto simply cannot offer that kind of appreciation and rent growth. You can still make money there for sure, but there are better options available.

So if you're strapped for cash, Stockton and Modesto are good options for you. But if you're thinking long term you might as well go another 30 minutes north to Sacramento and invest there.

@Wes Blackwell do you have investors looking for SFH in the Modesto-Stockton area? I live in the foothills but due to population I'm looking for houses down into the valley as well. Always good to have access to other investors if I have a house I can't close on myself. I'm a Realtor also but only for investment purposes.

@Lee S.

No I currently do not. Most of them are investors looking for somewhere to park their money and get some returns or are looking to maximize cash flow. I believe the opportunity for SFH investing has come and gone because prices are too high to make the numbers work. But you can buy 2-4 units and see a decent monthly return and the appreciation will be just the same as SFR.

If it were 2009-2012 it'd be a completely different story, but in the last 5 years the average sales price in San Joaquin county has gone up 92.6% so most of the appreciation has already happened.

But if you're coming across leads you can't close on or make the numbers work, you could always consider referring the lead out to another Realtor who could pay you a referral fee, or possibly even co-list it with someone who is an active agent that can do all the work of selling the home to an end-buyer for you. 

For a $300k house your 25% referral fee would be $2,250 for doing absolutely nothing or you could split it 50-50 at $4,500 each but the other broker / realtor would probably expect you to do have of the work. Paying for a referral is a regular practice in the industry and you could make a nice little side income just referring these leads to a stellar agent who can sell these properties for full market value to an end-buyer in 7 days or less. Completely doable by the right agent.

Hi Ritesh, 

I am an investor and real estate broker in Stockton.  Fell free to reach out with any questions about the Stockton market, the preferred areas to invest in etc...

Stockton is a very desirable rental market.  We had 36 inquires on a rental property within the first 12 hours after we posted it for rent.  Rents have climbed considerable and with this competitive rental market they will continue to climb.  

David

@Wes Blackwell I should have been more clear, I was referring to off market below market properties that could be bought at a wholesale price. Properties bought this way can still do well as buy and hold.  My Broker and I are already doing exactly what you mentioned with listings, Im taking a referral fee and he does the rest.

@Wes Blackwell I am open to Sacramento area as well. Basically anything that is a decent driving distance from SF Bay area. Please PM me if you come across anything interesting. 

Thank you all for taking the time to respond to my query. 

@David McKeever

Thank you for your offer to help. I will reach out to you with the addresses. There is an investor moving out of the area and is selling his portfolio of about 80 doors (16 properties) but I don't know the city well enough to pick the right ones. 

Originally posted by @Mark Silva :

Hello Ritesh, I'm from the Modesto area and have a multi-family property. What questions do you have about the area/rental market? I'll try to help the best I can

 Thank you for your offer to help. As for Modesto, I was looking at the 623 Tully Rd. complex but it seems a bit overpriced. Would really appreciate your perspective.

Ritesh,

As a MFH Bay Area investor, please allow me to offer my 2 cents before you're being taken for a ride and learn it the hard way. Everything in life has a price. Something is expensive for a reason so is something cheap.

First, we're approaching the later part of a RE cycle so almost everything is expensive and over-priced. Also, why would you want to invest in tertiary markets during this late part of the cycle. If history is any guidelines, these markets tend to get whacked the hardest during the downturns. Some properties have even been foreclosed on multiple times.  

Second, when you analyze these low-end deals, the real expenses are on the order of 60-70%. I've seen it as high as 80% in rough areas. Screw that PITI garbage, and screw the 1% and 2% rule. Know your numbers and your market. Otherwise, you'd be taken to the cleaner.

People sent me "deals" in the Central Valley claiming it's an 8 cap. When I ran it through me spreadsheet, it comeback w/ 5-5.5 cap with 60-65% in expenses and vacancy. Why the heck would I want to pay those prices when I could pick up real deals in the Bay Area for 6 to 7 cap? Of course, those days are also over for now.

Networking is where you would get your "deals". Patience is a virtue. Good luck out there.

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