Is this triplex worth it? Downtown Sacramento

15 Replies

Looking at a triplex near downtown in Sacramento. It's listed at 354,500. Now, when I do the math, I'm coming with a cash to cash rate of 7% with an offer of 330k but a cap rate of 3.3%. MLS: 14048301

- What does it mean that the cash on cash rate is higher than the cap rate?

- Is this not a good buy? 

The property has 3 units rented at:

3BR 2BA: 1050

2BR 1BA: 700

2BR 1BA: 725

Thank you in advance for your replies and suggestions!

Originally posted by @Jeff Jamieson :

it depends on your method of financing abs condition of the property.... those rents won't cover a mortgage unless you have a lot to put down, please expand

 Thank you Jeff. The property is this one: https://www.redfin.com/CA/Sacramento/3021-U-St-95817/home/19433701

1) I can do 20% down, investment loan from BOA at 4.3% so that would be ~1200 per month in payments.

2) do 10% down, live in one of the units myself, I currently pay $750 in rent 

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@Minka Sha  

What expenses are you specifically including in your calculation for cap rate? Do you feel your expenses are realistic or more based on generic assumptions? Do you know that area well?

I ask because I also invest locally in downtown Sacramento and have some knowledge of expenses.

Originally posted by @Taylor McClung :

@Minka Sha 

What expenses are you specifically including in your calculation for cap rate? Do you feel your expenses are realistic or more based on generic assumptions? Do you know that area well?

I ask because I also invest locally in downtown Sacramento and have some knowledge of expenses.

Thank you for your input Taylor. For my cap rate calculation. I am adding up all the expenses besides mortgage and then dividing by the purchase price.

Here is a break-down of the monthly expenses: Assuming, 5% vacancy rate, 1.2% tax rate and 6% property management.

mortgage$ 1,332.65

insurance (fixed)$ 83.33

vacancy rate$ 122.50

taxes$ 330.00

property mgr / maintenance$ 147.00

water bill$ 100.00

cost of landlord$ 75.00

misc big ticket items$ 100.00

TOTAL MONTHLY EXPENSES (with mortgage)$ 1,868.49

TOTAL MONTHLY EXPENSES (without mortgage)$ 957.83 

TOTAL YEARLY EXPENSES (with mortgage)$26,885.82

Yearly Cash Flow (with mortgage) $2,514.18

Cash on Cash return: 4%

TOTAL YEARLY EXPENSES (without mortgage)$10,894.00

cap rate(mortgage not included):  3.3%

Originally posted by @Jeff Jamieson :

what type of mortgage is that? 

 It's a conventional loan at 3.5%

List price: 354500

Offer Price $330,000.00

down payment $66,000.00

loan taken $264,000.00

Rate: 3.5%

Periods (30 yr)360

Minka,

I am an investor in Sac and also manage properties here.  I think that this isn't a good deal because the return is very low.  There are much better deals out there.  Your vacancy rate is fairly low but not too far off.  I'm not sure where you found 6% for property management but I'd verify that number.  I have never seen 6% in Sac unless you have many properties under a single company.  I see you have property management and maintenance together.  I use 8% for EACH.  There is no money for repairs unless you are counting the "misc big ticket items" for that.  That is too low.  Also, you have cost of landlord and property management but only list $75 for landlord.

Finally, the total I get when adding up your expenses is $2,290.48.  Overall I don't see this being a good deal.  If you want to message me I can forward you a spreadsheet I use to evaluate deals quickly.  I'm sure it's similar to what you can find on here also.

P.S.  Us local BP'ers have meet ups here in Sacramento.  It's a good place to come meet others in our market.  We have another meeting in Jan.  It's downtown and $10 to cover the cost of room/food. 

Originally posted by @Minka Sha :
Here is a break-down of the monthly expenses: Assuming, 5% vacancy rate, 1.2% tax rate and 6% property management.

mortgage$ 1,332.65

insurance (fixed)$ 83.33

vacancy rate$ 122.50

taxes$ 330.00

property mgr / maintenance$ 147.00

water bill$ 100.00

cost of landlord$ 75.00

misc big ticket items$ 100.00

TOTAL MONTHLY EXPENSES (with mortgage)$ 1,868.49

TOTAL MONTHLY EXPENSES (without mortgage)$ 957.83 

TOTAL YEARLY EXPENSES (with mortgage)$26,885.82

Yearly Cash Flow (with mortgage) $2,514.18

Cash on Cash return: 4%

TOTAL YEARLY EXPENSES (without mortgage)$10,894.00

cap rate(mortgage not included):  3.3%

Just a couple thoughts on your expenses....

- The projected vacancy rate seems a little low (I'd probably use at least 8%)

- Property mgmt rate also seems low (have you actually found a company that will do it for 6%?) and combining it with your "maintenance" and coming up with only $147 is definitely low

- What is "cost of landlord $75.00"?

Minka,

I would suggest reassessing some of the numbers. From experience at my properties in Sacramento, see some notations I made below to your figures and see what you think. Another aspect to think about is demographics of renters and location. This property would be nestled in between two freeways right off Alhambra which sees a lot of transient foot traffic. Rents are low too, however, that probably reflects the location and demographics you can attract. I have one bedrooms in midtown renting for $975, just to give you a geographic comparison of how sac rent rates vary by area.

It has been fun to run numbers and hope it helps you make an informed decision.

Taylor




Thank you for your input Taylor. For my cap rate calculation. I am adding up all the expenses besides mortgage and then dividing by the purchase price.

Here is a break-down of the monthly expenses: Assuming, 5% vacancy rate, 1.2% tax rate and 6% property management.

mortgage$ 1,332.65

insurance (fixed)$ 83.33

vacancy rate$ 122.50

taxes$ 330.00

(Assuming a 330k purchase price. Investment properties in Sac are competitive, so you may not be able to get your offer price. If not, then taxes are $354. Also Sac city charges you rental inspection fee ($25unit annually, plus fire inspection fee of $45 annually, plus business tax which is roughly $50 annually).

property mgr / maintenance$ 147.00
(Quality property mgmt in sacramento runs upwards of 7.5-10%, making this number closer to $185-$247. Also, don't forget placement fees and project surcharges your mgmg company may assess.)

water bill$ 100.00

(landlord pays water, sewer, and garbage, which works out to roughly $250-275 for a triplex.)

cost of landlord$ 75.00
(what exactly is this for? are you referring to some sort of mgmt fee not included in prop. mgmt?)

misc big ticket items$ 100.00

(i know this property looks like it was renovated, so it might be safe to assume only $100/month for the first year or two, but consider when you have to replace carpet, paint, hiring a plumber/electrician, etc. This can easily add up to $2000-3000+/year.)

TOTAL MONTHLY EXPENSES (with mortgage)$ 1,868.49

(Given my above numbers which would be conservative, monthly expenses work out to $2738 +any extra prop mgmt fees as noted above)

TOTAL MONTHLY EXPENSES (without mortgage)$ 957.83 

(Calculate using conservative numbers)

TOTAL YEARLY EXPENSES (with mortgage)$26,885.82

($32856 using conservative numbers)

Yearly Cash Flow (with mortgage) $2,514.18

($-3156)


The "cost of the landlord" metric is my time. I'm assuming this is 1.5 hour per month if I hire a property management company, so at $50 / hour it works out to be $75 per month.

This is a very helpful breakdown for us newbies who are looking to make our own deals in the area.

@David Hutson  would you mind sharing with me your spreadsheet and/or the link to the Sacramento meetup?

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@Embert Madison jr  Below is the link to the meet up.  Come on by and invite others.  @Al Williamson  is putting this one together and it should be a good event with lots of people if it's anything like the last event.

http://www.biggerpockets.com/forums/521/topics/159496-sacramento-meetup---jan-15-2015