All Forum Posts by: Matt T.

What does it say about a particular market when the rent to price ratio is higher for single family homes?

I’m in northern California and am looking at several markets on the outskirts of the bay area.

One of them is Tracy. In Tracy, houses that sell for 140K, generally get about 1300 a month in rent. These are retail prices and there are tons of houses that sell and rent for these prices. Yes, I know that these are not good deals, but I’m using off-the-shelf prices for the purposes of this question.

Another market is Antioch. In Antioch, houses that sell for 140K rent for about 1450 a month. Again, there are many homes that sell and rent for these rates.

What I want to know is what does it mean that houses can be had for the same amount, but rent for more in two markets that look and feel very similar? Does this mean that one market is declining? Is this an indicator of something I should know about?

It seems to me that if one place, Antioch, had superior traits, then the rents would be higher, but so would the prices. Why is this not the case?

There are a couple of other markets around the bay area that also seem equivalent but, have varying rent to price ratios. What do I not understand here?

Thanks.

Thanks you guys.

I should have added that my specific goal is retirement savings and income. I will not be quitting my job or trying to retire early on RE. That being said, I'm thinking that I would be better off buying houses that nearly break even (again, I say break even, but that is with the 50% rule. I'll be managing them myself, so maybe 45% is better. In other words, I know that cash flow is not rent-PITI).

Part of my thinking is that the break even houses are built in the 80s and 90s, so I won't ever have to deal with lead or asbestos abatement, and hopefully the plumbing and electrical will be better for the long run.

The area I'm looking at also has cheaper houses that beat the 1% rule by about a quarter of a percent, and would cash flow much better. But those places seem to be in declining areas and are older, so are likely to be full of lead and asbestos that I worry might be more of a problem in the distant future.

On paper, my plan to use the 50% rule to buy long-term, sfhs built after 1981 looks like a good way to save for my retirement. Especially since they are currently on sale. But since so many pros here, and in RE books, emphasize cash flow, I'm still feeling like an outlier, and wondering if I'm not seeing some obvious pitfalls.

So, I'm hoping to hear from some break-even type of investors who might confirm that this is a good idea.

@ Steve L The full-time guys cannot afford to keep buying anything with negative cash-flow because one day they will end our ability to participate in the game.

Thanks, Jon. Rent them out. Here's a question about that very thing I just posted in the starting out forum:

http://www.biggerpockets.com/forums/12/topics/71438-seems-like-a-good-deal-to-me-tell-me-why-its-not

I should probably learn to better embed links.

I’ve been reading through the threads here for a couple of months and have learned a lot. Great site. Great source of education.

I have a couple of questions that have, in some ways, been answered before here, but not in ways entirely specific to my situation.

I’m 42, a new father, and make 85K a year. My wife makes 100K. Here in California that puts us just about in the middle of middle class. The home I live in is in the East San Francisco bay area and is worth about 350K. I plan to stay there. I have no equity in this home—it’s all been washed away since 2007. But no problem; I’m staying.

Question one is sort of specific to California RE investors: Why should I not buy a fairly nice 3/2 home in a middle class part of Tracy or Ripon California? These are central valley cities that are almost in the bay area and were commuter towns at the height of the boom. Houses out there (specifically the ones I’m looking at) were going for 450-500K in 2005. Now they are 140-160K. They haven’t been this cheap since the mid 1990s.

These places rent for about 1300 a month and with twenty percent down fall just under the 1% rule.

I have a mentor out here who buys these houses in bulk, but he doesn’t seem to follow any sort of purchase rules. He just buys more. He was buying at the height of the market and seems to have no regrets about having paid 500K for homes that now are worth 150K. He’s got enough money, evidently, not to care. So since I’m not so able to lose money, I ask this question here, where I see that every dollar counts.

So, again, why should I not buy in Tracy or Ripon CA?

Question 2: is it okay to buy houses that simply pay for themselves? So few people on this site suggest this, and I’m wondering why.

After reading all the posts in the landlord forums, I know that many investors would only buy if they could hit 2% and that if I post this question there, many posters will tell me to run from these deals.

But I wonder if this would be good for ME. Not a big time investor, not someone who has tons of time to wheel and deal and scour the central valley endlessly.

With the 50% rule, at 1300/month I have a NOI of $7800
I’m pre-approved for a 30 year mortgage with monthly P & I of 590.
House cash-flows at 60/month
However, I will manage, so I’d want to use the 45% rule and get a bit more.

Now I know I’m putting money (20%) into it to make it work. And I know that 60/month isn’t much, but it seems like buying nice (1980s) homes at break even levels in nice, stable neighborhoods would be a great idea—in the long run.

Sure I’d have to drive out there (one hour away) and fix things and deal with tenants, but wouldn’t this likely be a solid investment in the long run?

I ask because I’ve read so many threads where people post their deals and the hardcore RE investors eviscerate the OP, stating that the poster is being a fool for not making more cashflow.

I believe these posters are right about the importance of cash flow and right to find the very, very best investments, but I wonder if the bar on Bigger Pockets is set to the level of “full time, pro investor” and that I’m being scared out of the market by warnings not to buy without at least coming close to the 2% rule.

If I buy a 3/2 house in the valley that pays for itself and cash flows just a little bit—and will allow me to pay PITI with 75% of rents, isn't that "good" in the long run?

Thanks.

Been reading threads on the forum for a few months. What a great site. I'm just starting to make offers on sf homes in the central valley (around Tracy), so I thought I'd start posting and introduce myself.

I live in the Walnut Creek area (East San Francisco Bay Area) and would love to meet some other local investors.