Is it possible to brrrr in Sacromento, CA 2021?

16 Replies

Is it possible to Brrr in Sacramento, CA? I've been looking at the housing market in that area for the past year and ran some Brrrr analysis' with poor results. One of which recently was:

7709 Jarvis Ln, Sacramento CA (I posted so someone could eyeball it real quick and see if there's something I'm missing, although I ran the analysis 4 or 5 times so I don't think I'm too far off. However, the ARV estimate and Annual growth assumptions might need work: Added repair cost to purchase price, expense growth 1.5%, income growth 3%, property value growth 6%.

I picked this property because I could add value with repairs and thought it was a good deal compared to comps.

I ended the deal analysis with poor outputs like -$122 monthly cashflow, -173 after refi, 3.43 purchase cap rate, -15% annualized return on first year with only %10 annualized return on year 30. 

These are the kind of results I'm finding in that area. I live in Santa Cruz, CA (near San Jose) and would like to Brrrr somewhere drivable if possible. Do I need to wait for a better deal or should I look in another area. Also, do I need to look somewhere more remote...

Thanks Joh, I just sent you a message with a bit more detail. 


@Joshua Haynes Thanks for the response. I guess my only hesitation is that I live in CA and wanted to be in-person to manage the rehab. How do you suggest managing a BRRRR long distance? Do you have any experience with this?

Originally posted by @Kevin Summer :

@Joshua Haynes Thanks for the response. I guess my only hesitation is that I live in CA and wanted to be in-person to manage the rehab. How do you suggest managing a BRRRR long distance? Do you have any experience with this?


I have 0 experience in investing in general so don't believe everything I say. I have just been studying for 2 years (waiting to turn 18).

If I were to long-distance invest I would probably try to find someone to partner with who lives in that area. You could also find a good RE agent in the area you are interested in and ask them for help. They will know a ton more about the location than you will so I recommend having multiple agents to rely on to get the most info.

One of the key components of Long Distance is you have to have good communication and systems in place so that everything runs smoothly when you're not around. Finding a Great partner or Property management company would be one of the best things you could do for a Long-Distance Investment. Even in normal Close Distance investing I would recommend doing this. Having these systems and people in place would help you make money from Thousands of miles away stress-free and have the possibility of making a lot more with your money (or a lot less stress).

Do your research into Long-Distance RE (in my opinion, CA is a low ROI state with Super high initial investment). Anyways I hoped this helped you in some way :D

@Joshua Hayes, great response. I'll try and brush up on Long distance RE. I have a feeling you'll go far in life...


 Had a great talk with Jon on the phone as well. @Jon Catterson Thanks for all the info and insight on the Sacramento area. I Look forward to hearing about your project as well. Looking forward to updates on your progress!

Look for a property with a dettached garage so you can turn that into a rental. With the new ADU laws you can turn any single family home into a small apartment building.


@Pavan Sandhu Interesting! This could help bring my calculations into the positive cash flow range. I'll run some numbers and post my findings! Thanks Pavan.

If you have any examples of this please share. If not, your comment was still immensely helpful. 


best,


Kevin Summer

Originally posted by @Joshua Haynes :

Why BRRRR in CA when you could BRRRR long distance and get better returns somewhere else

How do you figure you get better returns?  The value of any rehab will be greater in Coastal CA than the midwest.  Once I extract all or almost all of the investment out, my appreciation will far exceed the midwest.

Questions:

  • Why do you think so many of the flipping shows are based in CA? A: Because the profits from the rehab is superior to other locations.
  • What cities do you think Case Shiller has as top 3 buy n hold returns for this century?  A: 3 coastal CA cities (San Fran, LA, San Diego).
  • Where do you think NeighborhoodScout ranks those 3 cities for appreciation for this century? A: Each has a 10 out of 10 in nation score.

Simple fact is rehabs product greater returns in higher value areas (NYC, coastal CA (San Fran, San Jose, LA, OC, San Diego), boston, Seattle, etc.).   Therefore, the rehab in coastal CA will be worth more than a rehab in the a Midwest city.   

Originally posted by @Kevin Summer :

@Pavan Sandhu Interesting! This could help bring my calculations into the positive cash flow range. I'll run some numbers and post my findings! Thanks Pavan.

If you have any examples of this please share. If not, your comment was still immensely helpful. 


best,

Kevin Summer

Make sure you understand how the property will appraise with the ADU. ADUs are typically one of the worst RE investments primarily because of the difference between the value added and the hands off cost to add an ADU. In most locations, a hands off ADU addition starts with at least $50K negative position. This negative position consumes years of cash flow to just get to even. Add in that the ADU typically has less advantageous finance options compared to other RE investments and traps significant capital and the ADU is often not a good choice.

Note if you are a developer, contractor, skilled handyman, willing to act as GC, etc., the negative position will not be as substantial and could end up being a value add (but it requires much more work than a hands off ADU addition).

Basically do your due diligence before starting down the ADU path. The rent associated with the ADU can be tempting, but typically is a Lorelei that is revealed if you do a thorough pro forma.

Good luck

Originally posted by @Dan Heuschele :
Originally posted by @Joshua Haynes:

How do you figure you get better returns?  The value of any rehab will be greater in Coastal CA than the midwest.  Once I extract all or almost all of the investment out, my appreciation will far exceed the midwest.

Questions:

  • Why do you think so many of the flipping shows are based in CA? A: Because the profits from the rehab is superior to other locations.
  • What cities do you think Case Shiller has as top 3 buy n hold returns for this century?  A: 3 coastal CA cities (San Fran, LA, San Diego).
  • Where do you think NeighborhoodScout ranks those 3 cities for appreciation for this century? A: Each has a 10 out of 10 in nation score.

Simple fact is rehabs product greater returns in higher value areas (NYC, coastal CA (San Fran, San Jose, LA, OC, San Diego), boston, Seattle, etc.).   Therefore, the rehab in coastal CA will be worth more than a rehab in the a Midwest city.   


"How do you figure you get better returns? The value of any rehab will be greater in Coastal CA than in the midwest. Once I extract all or almost all of the investment out, my appreciation will far exceed the midwest."

Yes, appreciation will be much better there BUT Remember, We are not talking about flipping but BRRRRing. They are similar but both are two different things. When you BRRRR, you want to buy a house undervalue, rehab it, RENT IT, and then refinance it to pull out the equity from buying undervalue. Then you repeat the process with the refinaced money. When you flip, you do the BR but you don't usually rent it or refinance it. You instead Sell the property for a profit when you Flip. But when you BRRRR, you are not looking to make a ton of money, But instead to get high returns and your initial cash back. That is why I would say to invest in the midwest due to the fact that the rental price ratio (rent divided by the purchase price or the 1% rule) is much higher in the midwest than in CA. If I were to BRRRR in the midwest I could see returns much greater than in CA. Plus I get the added bonus of diversifying my money into multiple units (since property prices are much cheaper in the midwest). This in turn safer to invest in the midwest. Let's say I want to invest in SFH. Instead of investing in CA where I might be able to buy only one SF home worth 500K and only having a single tenant who could mess up my ENTIRE investment, I would have 5 SF Homes worth 100K each with 5 tenants paying 5 mortgages. If one of my tenants doesn't pay, I have 4 others that are still paying me. ALSO, if both places receive 5% price appreciation every year, I will still make the same amount in appreciation in both locations. 

So, From a BRRRR perspective, I would much rather have higher returns than profit. After refinancing and making my initial money back, I would like to have high returns and be able to do the BRRRR process over again.


Let me know what you think




 

Originally posted by @Joshua Haynes :
Originally posted by @Dan Heuschele:
Originally posted by @Joshua Haynes:

How do you figure you get better returns?  The value of any rehab will be greater in Coastal CA than the midwest.  Once I extract all or almost all of the investment out, my appreciation will far exceed the midwest.

Questions:

  • Why do you think so many of the flipping shows are based in CA? A: Because the profits from the rehab is superior to other locations.
  • What cities do you think Case Shiller has as top 3 buy n hold returns for this century?  A: 3 coastal CA cities (San Fran, LA, San Diego).
  • Where do you think NeighborhoodScout ranks those 3 cities for appreciation for this century? A: Each has a 10 out of 10 in nation score.

Simple fact is rehabs product greater returns in higher value areas (NYC, coastal CA (San Fran, San Jose, LA, OC, San Diego), boston, Seattle, etc.).   Therefore, the rehab in coastal CA will be worth more than a rehab in the a Midwest city.   


"How do you figure you get better returns? The value of any rehab will be greater in Coastal CA than in the midwest. Once I extract all or almost all of the investment out, my appreciation will far exceed the midwest."

Yes, appreciation will be much better there BUT Remember, We are not talking about flipping but BRRRRing. They are similar but both are two different things. When you BRRRR, you want to buy a house undervalue, rehab it, RENT IT, and then refinance it to pull out the equity from buying undervalue. Then you repeat the process with the refinaced money. When you flip, you do the BR but you don't usually rent it or refinance it. You instead Sell the property for a profit when you Flip. But when you BRRRR, you are not looking to make a ton of money, But instead to get high returns and your initial cash back. That is why I would say to invest in the midwest due to the fact that the rental price ratio (rent divided by the purchase price or the 1% rule) is much higher in the midwest than in CA. If I were to BRRRR in the midwest I could see returns much greater than in CA. Plus I get the added bonus of diversifying my money into multiple units (since property prices are much cheaper in the midwest). This in turn safer to invest in the midwest. Let's say I want to invest in SFH. Instead of investing in CA where I might be able to buy only one SF home worth 500K and only having a single tenant who could mess up my ENTIRE investment, I would have 5 SF Homes worth 100K each with 5 tenants paying 5 mortgages. If one of my tenants doesn't pay, I have 4 others that are still paying me. ALSO, if both places receive 5% price appreciation every year, I will still make the same amount in appreciation in both locations. 

So, From a BRRRR perspective, I would much rather have higher returns than profit. After refinancing and making my initial money back, I would like to have high returns and be able to do the BRRRR process over again.


Let me know what you think



I think too many investors equate initial cash flow with actual cash flow.  Actual cash flow is the cash flow over the hold period.  Coastal CA actual cash flow is outstanding.  How outstanding? A: Most of our properties have rents at over 2% of purchase ratio.  Rents of our STR duplex was over a 4% ratio in 2019 ($375K purchase with over $16k/month rent).  How?  A: What do you think happens to rents when a property doubles in value?  The rents appreciate.  My experience is the rents lag behind the property fluctuation in both directions When property prices go up, rents go up but not as fast.  When property prices drop, the rents have stayed flat (we have never experienced significant rent depreciation in San Diego since we have been buy n hold investing).

San Diego historically has outstanding long term cash flow.  The cash flow is included in the Case Shiller calculation on buy n hold returns that has San Diego as having the 3rd best return in the nation for this century (behind San Fran and LA).

All of our San Diego properties have appreciated over $1k/month over the hold period.  Two of our San Diego properties have appreciated over $4k/month over the hold period.  You can envision how the rents have appreciated.

Good luck

 

 

Thanks for all the input guys. I like the ADU idea and thinking about converting a garage into an office. That way the tenant can have separation from distractions or children during zoom calls and it would be cheaper than making an additional living space. Less red tape too. I estimated that I could be the GC and convert it for around 13k:


floor-3k
dry wall - 2K

Recessed lighting - 1k

Electrical - 1k

Paint - $250

Insulation - 1k (fiber glass)

Floors - 1k

Hvac/vent - $1500

Baseboard crown molding - 2k

What are your thoughts. I really appreciate all the feedback. Do you think this would increase the rent even tho I’m eliminating the garage?

Kevin this is exact what you can do! It works, it's a proven method. Many "case studies" available. Feel free to connect in DMs to continue the conversation.


Originally posted by @Kevin Summer :

Thanks for all the input guys. I like the ADU idea and thinking about converting a garage into an office. That way the tenant can have separation from distractions or children during zoom calls and it would be cheaper than making an additional living space. Less red tape too. I estimated that I could be the GC and convert it for around 13k:

floor-3k
dry wall - 2K

Recessed lighting - 1k

Electrical - 1k

Paint - $250

Insulation - 1k (fiber glass)

Floors - 1k

Hvac/vent - $1500

Baseboard crown molding - 2k

What are your thoughts. I really appreciate all the feedback. Do you think this would increase the rent even tho I’m eliminating the garage?

 

I think it makes better sense to find a property to add an ADU versus converting a garage into an office. The panasonic won't be here forever and I can't imagine a tenant paying you more money than a similar home simply because there's an added office. Don't think the juice is worth the squeeze with that approach.