All Forum Posts by: Wes Blackwell

@Glenn Metz

The tough thing about cash flowing SFR neighborhoods here is that the prices tend to be so high that you can't rent the property for enough to make it cash flow.

Case in point: Here's a property for rent in Curtis Park, one of Sacramento's nicer neighborhoods. It's 3 bed / 2 bath and 1,272 sq ft, and is renting for $1,988 per month.

https://sacramento.craigslist.org/apa/5998643729.html

This property would sell for somewhere in the ballpark of $400k, so with 25% down and a 4.25% interest rate your mortgage payment will be roughly $2,010 per month, so you're already negative before you account for vacancy, utilities, and repairs. With more money down it can cashflow a little bit, but it's really not the best ROI.

I'm not saying that it can't be done though... here's another example from Tahoe Park, which I would consider a B class neighborhood. It's a 3 bed / 1 bath 970 sq ft home renting for $1,750 per month:

https://sacramento.craigslist.org/apa/6004782376.html

A similar home on this same street would sell for $300k or less, and so your mortgage payment with the same terms as above would only be $1,500 or so, which allows a little room for profit. 

The challenge is that why would someone rent that home for so much, when they could buy it for less? That's the conundrum with SFR here. Often you can buy the property for the same or less you'd rent it for. All you need is good credit, solid job history and a 3.5% down payment.

Duplexes might have some potential for you, as you can find them in nicer areas and the rents can easily get in the $1,000 to $1,200 range per side, for $2,000 to $2,400 total. At $1,200 per month rent, that tenant will be hard pressed to find a home of equal quality for the same price, as with 5% down they'd need to buy a home for $180k or less. And that's slim pickings... median home around here is roughly $300k, so for $180k or less you're probably in one of Sacramento's C or D class neighborhoods with significantly more crime.

The whole 1-2% rule is meant for lower priced properties in the midwest where if you can find a $50k property to rent for $1,000 per month it meets the 2% test and could be considered a great investment. Here in California you'd need to find a $400k property to rent for $8k per month, and as soon as you find one of those lemme know because I'll be the first in line to buy it!

The 1% test doesn't work either, as you could buy that same $400k home with 5% down for only $2,680 per month, so why the heck would you rent it for $4,000? Every week I analyze every single 2-4 unit property from Placer county all the way down to Merced, and for the average property in Sacramento you can expect 0.57% and 0.75% to 0.95% for the better performing properties. Extremely rare something cracks the 1% barrier.

But in San Joaquin county for example, the prices are much lower (median home is about $40k less) but the rents are still comparable so the 1% test creeps up to 0.74% on average and 0.85% to 1.15% for the better performing properties. But obviously Stockton isn't as desirable a place to live as Sacramento, so you're not guaranteed the same level of growth in appreciation and rents.

Sorry for the super long post but hopefully you find it helpful and informative hahaha.

@Account Closed

There are DOZENS of other investors in your same shoes. You're in the Bay Area so your income is probably great, but looking around you see that the prices are too high for the deals to pencil and make financial sense. You want to invest, but don't want to have to hop on a plane and fly to North Carolina to learn about the market there either. Enter Sacramento...

Sacramento is a great market for investing right now, specifically for multifamily investing right now. We're projected to be the #4 hottest metro market in the nation this year with 7.2% appreciation and a 4.9% increase in sales growth. We're also projected to be the #1 rental growth market in the nation with 10% growth this year, and 8.5% growth next year.

A large part of the reason for this is the massive migration of Bay Area transplants who are looking for more affordable living. I've written about this migration pattern extensively here on BP:

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

Every week I analyze every single 2-4 unit multifamily property from Placer county all the way down to Merced, and here are the numbers you can expect from the better performing properties here in Sacramento county:

PRICE: ~$306k
25% DOWN: ~ $76.5k
MONTHLY RENTS: ~$2,250
ANNUAL RENTS: ~$27,000
PITI @ 5% w/ 25% DOWN: ~$1,640
PITI CASHFLOW MONTHLY: ~$610
PITI CASHFLOW YEARLY: ~$7,320
1% TEST: 0.74%
GROSS ANNUAL YIELD: 8.92%
PITI CASH ON CASH RETURN: 9.95%

If you ever have any questions, or simply want to reach out and connect with other local investors and real estate professionals, simply join the conversation already going on in the local forums here on Bigger Pockets for Sacramento:

https://www.biggerpockets.com/forums/621-sacramento-real-estate-forum

Feel free to reach out if you have any questions about the Sacramento market, and best of luck!

@Jeff Yates

Welcome to Bigger Pockets! You're in the right place!

Sacramento is a great opportunity for multifamily investing right now. We're projected to be the #4 hottest metro market in the nation this year with 7.2% appreciation and a 4.9% increase in sales growth. We're also projected to be the #1 rental growth market in the nation with 10% growth this year, and 8.5% growth next year. 

A large part of the reason for this is the massive migration of Bay Area transplants who are looking for more affordable living. I've written about this migration pattern extensively here on BP:

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

Every week I analyze every single 2-4 unit multifamily property from Placer county all the way down to Merced, and here are the numbers you can expect from the better performing properties here in Sacramento county:

PRICE: ~$306k
25% DOWN: ~ $76.5k
MONTHLY RENTS: ~$2,250
ANNUAL RENTS: ~$27,000
PITI @ 5% w/ 25% DOWN: ~$1,640
PITI CASHFLOW MONTHLY: ~$610
PITI CASHFLOW YEARLY: ~$7,320
1% TEST: 0.74%
GROSS ANNUAL YIELD: 8.92%
PITI CASH ON CASH RETURN: 9.95%

If you ever have any questions, or simply want to reach out and connect with other local investors and real estate professionals, simply join the conversation already going on in the local forums here on Bigger Pockets for Sacramento:

https://www.biggerpockets.com/forums/621-sacramento-real-estate-forum

Feel free to reach out if you have any questions about the Sacramento market, and best of luck!

@Jo-Ann Lapin

The main reason for the recent rise in rents and home values is a migration of the lower and middle class from the Bay Area. They are currently leaving the area in droves.

For many Bay Area residents, Sacramento offers affordability and enough of a "big city feel" to make it an attractive alternative to the Bay Area. We've got an international airport, major professional sports teams, night life, culture, art and more. Everything a big city offers, without the big city price.

Millennials are entering their prime "settle down" years where they are in their late twenties / early thirties and are ready to start a family. Buying a home in the Bay Area is too expensive for them, and most are already loaded with debt from college. The median home price in San Jose cracked $1 Million back in August 2016, while it's right around $300k for Sacramento. You don't need a loan calculator to see what's the better option for most households.

For Boomers and Gen-Xer's, many in the Bay Area have recently inherited a property from their grandparents that was originally purchased in 1950 for next to nothing, and are shocked that the rinky-dink little home they grew up in is worth over $500k, so they are choosing to sell and take the massive windfall out of the state or to more affordable surrounding counties like Sacramento, San Joaquin, and Stanislaus. They can sell in the Bay Area and have enough profit to purchase something all-cash out here, setting themselves up for an early retirement.

Plus, Sacramento is a straight shot up I-80, so it's a 2 hour drive at most. That makes it real easy to travel back to the Bay Area on the weekends and see friends and family whenever you like. Areas like Stockton, Modesto and Fresno offer a much more windy and longer commute.

I've written about this in-depth here in the Sacramento forums in the post below, and it will give you a more comprehensive overview of this migration pattern:

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

And whaddaya know?!?! The property on 79th St had been for sale for 289 days, and they just accepted an offer 3 days after I posted about it! They haven't changed the status on MLS yet, but I just got confirmation from the listing agent. Somebody owes me 3% :-P

@Vamshi Ananth @Dottie Matheson

True, those are expenses that should not be overlooked. But every property is different, and every investor is different. Some don't use property managers, some do all the repair work themselves, and some properties have tenants that have been there for 10+ years. Therefore I didn't include those in the calculations because they are not hard numbers that can be accurately projected for every single investor. But I always advise my clients to include those expenses as well.

@Account Closed

The Sacramento real estate market is so hot, if you purchase a property for even just $10k below market value you can consider it a steal. Every single transaction I'm involved in is a multiple offer scenario and just about every offer is above the asking price.

Looking at high DOM properties allows you the opportunity to be the only offer on the table and gives you lots more leverage in negotiations. I can easily beat the seller up on price when I'm the only offer, but can't do that at all when there are 5 other offers above ask.

Plus, I didn't have to say that you had to offer FMV... it's just a starting point. You can offer whatever you want. As long as the numbers make sense, it doesn't really matter.

I wanted to be realistic, not sell a dream of somebody getting $50,000 below FMV when that's simply not possible. $10-20k is realistic and certainly doable, and that's far better than most buyers in our market are getting.

And c'mon, I'm a salesman... it wouldn't sound very sexy if this thread was titled "CASE STUDY: How to Pay Full Market Every Time, No Matter What!" now would it? ;-)

CASE STUDY #2: 4411 79th St, Sacramento, CA 95820

4411 79th St is a duplex in the 95820 zip code near Power Inn Rd just south of Hwy 50. It's on a street that's full of cookie cutter duplexes, so it's extremely easy to comp. This is a typical C class neighborhood in an industrial area, but once again, crime isn't as bad as you'd think it would be. 

This time you have zero violence in the last 6 months, and it's mostly just stolen cars. This can be typical of lower income neighborhoods, because if you take a look at the Top 10 Most Stolen Cars many of them are 90's imports like Honda, Toyota, and Nissan. 20 year old imports are cheap, and generally more reliable than domestic vehicles, which is why lower income areas tends to have more of them. Here's the crime map from the past 6 months:

4411 79th St - On the Market 286 Days!!!
Duplex, 2/1 and 3/1, both 625 sq ft
Price: $199,000
Cost Per Unit: $99,500
25% Down: $49,750
PITI at 5% Interest: $1,067
Gross Monthly Rents: $1,350
Gross Annual Rents: $16,200
PITI Cashflow Monthly: $283
PITI Cashflow Yearly: $3,396
Gross Rent Multiplier: 12.28
1% Test: 0.68%
Gross Annual Yield: 8.14%
PITI Cash-on-Cash Return: 6.83%

Here's part of the property description from the MLS:

Remodeled in 2009 with new flooring, interior and exterior paint, cabinets and counters, new central HVAC unit and more. Long term Tenants. Excellent cash flow. Close to schools, parks, shopping and has easy freeway access.

Long term tenants are good, although we may plan to raise the rents. Remodeled not too long ago, and in this price range tenants don't care if you have quartz counters, they just want something nice and clean. HVAC should be in good shape, and should be easy to rent because this is a great location for commuters.

Now let's take a look at the comps:

If this property was worth anything near $250k like some of the other duplexes in the area, this property would've sold a long time ago. Therefore, the true comps are the properties that sold for $182k and $189k, which both sold in less than a month. 4411 79th St has been on the market nearly 10 months, and they still haven't lowered the price. So it's pretty easy to see that this property seems to be overpriced by about $10-20k easily.

If you were able to purchase this property for $179k instead of $199k, that would lower your mortgage payment approximately $108 per month. That still doesn't make the numbers too great, so let's take a look at the possibility of increasing the rents...

The property at 5871 Wilkinson St that sold for $189k was a duplex with 2/1s, 700 sq ft each, and were rented for $750 each for a total of $1,500 per month. That's close enough in size to 4411 79th St that we should have no problem getting the same amount. I'm guessing that because the tenants have been at the property a long time, the owner simply hasn't kept up with market rents. 

Here's what the numbers look like with $108 less per month for the mortgage payment and another $150 per month in increased rents:

4411 79th St
Duplex, 2/1 and 3/1, both 625 sq ft
Price: $199,000
Cost Per Unit: $89,500
25% Down: $44,750
PITI at 5% Interest: $959
Gross Monthly Rents: $1,500
Gross Annual Rents: $18,000
PITI Cashflow Monthly: $541
PITI Cashflow Yearly: $6,492
Gross Rent Multiplier: 9.94
1% Test: 0.84%
Gross Annual Yield: 10.06%
PITI Cash-on-Cash Return: 14.51%

Much better! All with a little discount on the price and increasing rents to the market rate. Piece of cake. No upgrades, rehabs, remodels, or repairs needed. Just some simple math.

Granted, this is all dependent on the seller accepting an offer for $179k, but it's been nearly a year and he hasn't sold at $199k, so he's never going to. Stuff like this is all over the place, you just have to do a little extra research into the comps and the possible rents.

As most of you know, Sacramento is a super competitive market right now. Every time a new listing hits the MLS, it's literally a matter of hours before the first offer rolls in (and several more after it), which makes it incredibly difficult to get your offer accepted and beat the competition.

For those of you who have felt the sting of losing out on an amazing deal because somebody else came above you with all cash, I have a suggestion for you... 

Try looking at overpriced properties that have been on the market a really long time.

When a new listing hits the MLS, every single person looking for a property like that is notified via email. That means the property will get the most views and attention when it's new, and plenty of investors are just waiting in the wings to jump on a properties like this when they hit the market.

Every single transaction I've been involved in lately is a multiple offer scenario. I've been involved in transactions with 8 offers, 14 offers, 17 offers!!! Hell, I just put up a listing the other day and had 5 offers in the first 48 hours. And each offer that comes in is higher than the last one, making it all the more difficult for an investor to get the property at a price that makes the numbers work.

BUT -- the overpriced property that has been sitting on the market 3 months has ZERO offers, and everybody is passing it up because they can easily see it's simply not worth the asking price.

THE PROBLEM WITH OVERPRICING

Overpricing is the "Original Sin" of the real estate industry, and it causes more problems for sellers now more than ever before. And that's because every single buyer can look on their phone at Zillow, Trulia, Realtor.com, etc. and see all the comps in a matter of seconds. 

So they instantly know your asking price is absolutely ridiculous. It wasn't like this back in the 90's, but now buyers have more information than ever right at their fingertips... literally.

When a property is overpriced, it doesn't sell. And when it doesn't sell, it accumulates high days-on-market. And then buyers start to wonder "What's wrong with that house? How come it hasn't sold yet? Something MUST be wrong with it!" 

Even if absolutely nothing is wrong with the property, buyers will THINK there is. This negative perception leads to either no offers or low offers, and is the reason most properties don't sell in today's market. There is a beautifully remodeled property sitting on the market right around the corner from my house, that won't sell because they overpriced it. 

And it's gorgeous, believe me... new kitchen, bathrooms, flooring, paint, appliances, the whole nine. But they're asking $36 per square foot above the average for the neighborhood, and there are simply no comps to justify this asking price. And so that's why it's been sitting on the market 2 whole months, and will now go below what it would've originally sold for all because of the bad perception from the high days on market.

WHY OVERPRICED, HIGH DAYS-ON-MARKET PROPERTIES OFFER OPPORTUNITY

You may be thinking "Well, that's all great info Wes, but how does it help me?"

Put yourself into the mind of a seller for a minute... you want to sell this property, and have plans for all the money you're going to make. Maybe it's the down payment on your next house, or maybe you'll use it pay down other debt, or maybe it's just a trip to Bermuda for you and the kids.

Each day that goes by and your property doesn't sell, you start to wonder what's the problem... 

"Why isn't my home selling?! That home around the corner sold, although it was a lower price, and it wasn't as nice as mine... maybe the market is bad right now? No, that's not true, I just read about how hot the market is. Maybe it's the agent?... Yeah! That's it! I hired them to sell my home, and they haven't brought me a single reasonable* offer! It's all their fault!!!"

(*Maybe they did bring a reasonable offer, but the seller has a different definition of "reasonable")

Now put yourself into the mind of the agent listing the home...

"This seller is nuts if he thinks he's going to get this price, but I told him that's what it was worth so he would hire me instead the other realistic agents. But no one is biting! Crap, if I don't get this thing sold soon the listing is going to expire or they're going to cancel, and then I'm out a commission! I wish someone would make an offer so I at least have something to work with!"

Are you beginning to see why this type of scenario offers some opportunity for you? The seller needs their trip to Bermuda, the agent needs their commission check, and you need a deal. The best part is you'll be the only offer on the table for consideration, so your chances of getting it accepted are much higher :-)

CASE STUDY: 1139 Clinton Rd, Sacramento, CA 95825

1139 Clinton Rd is a duplex in the 95825 zip code near the Arden Fair Mall and Sac State. It's on a street that's full of cookie cutter duplexes, so it's extremely easy to comp. Crime isn't too bad, and you mostly have domestic violence related assaults which are very common in areas with high population density and lots of renters. Here's the crime map from the past 3 months:

No murders, no muggings, and only 1 burglary. Whoopty-do. Here are the numbers:

1139 Clinton Rd - On the Market 81 Days
Duplex, 2/1's, 900 sq ft each
Price: $324,900
Cost Per Unit: $162,450
25% Down: $81,225
PITI at 5% Interest: $1,741
Gross Monthly Rents: $2,190
Gross Annual Rents: $26,280
PITI Cashflow Monthly: $449 
PITI Cashflow Yearly: $5,388
Gross Rent Multiplier: 12.36
1% Test: 0.67%
Gross Annual Yield: 8.09%
PITI Cash-on-Cash Return: 6.63%

Here's the property description from the MLS: "New Plumbing, Roof, Water Heaters, Interior Paint, Blinds, Flooring and Carpet installed in 2015. Recent remodeling includes new dishwasher, stove, kitchen counter tops and shower tub in one of the units."

Now, the numbers aren't anything to write home about, and while it's great that so much on the property has been updated and replaced, by the time you figure in utilities your returns are too low to make this a worthwhile deal.

Now, let's look at the comps:

Uhm... notice something here? All the comps sold for WAY below the current asking price. Here are their addresses and the days on market before they sold:

1150 Clinton Rd - $257k -- Sold in 7 Days
1207 Clinton Rd - $259k -- Sold in 14 Days
1108 Clinton Rd - $273k -- Sold in 9 Days

This property is priced at $325k and has been on the market 81 days. But all of the comps on the same street sold in two weeks or less... why? Because they had an average price of $267k.

Someone is dreaming, whether it's the seller or the listing agent. They will NEVER sell at that high price and it will NEVER appraise for that amount even if they got an offer. I've got 3 comps that are all no more than 7 houses down, so there's no way to justify a price above $275k absolute max.

This is the classic case of the seller making repairs to a property and then trying to pass that cost onto the buyer when they sell, and it simply doesn't work that way. You could spend $100,000 to put a bowling alley in your house, but that doesn't mean your house is automatically worth $100k more when you do. Therefore, a $50,000 price reduction in this case is completely justified.

Here are the numbers with the new lowered purchase price based on comps:

1139 Clinton Rd
Duplex, 2/1's, 900 sq ft each
Price: $275,000
Cost Per Unit: $137,500
25% Down: $68,750
PITI at 5% Interest: $1,474
Gross Monthly Rents: $2,190
Gross Annual Rents: $26,280
PITI Cashflow Monthly: $716
PITI Cashflow Yearly: $8,592
Gross Rent Multiplier: 10.46
1% Test: 0.80%
Gross Annual Yield: 9.56%
PITI Cash-on-Cash Return: 12.50%

Those are much better numbers than before, with an additional $267 per month in cash flow and an additional savings of $50,000. And it's completely justified. You're not low-balling, it's all right there in the comps. Simply present the facts and make a logical argument for a lower price.

FIND A PROPERTY YOU WANT, THEN FIGURE OUT WHAT PRICE WORKS FOR YOU

This all goes back to a classic Bigger Pockets mantra "Find a deal you like, and then figure out what purchase price works for you." At face value a $50,000 discount seems like a lot, but when you look at all the comps you can easily see that the property is grossly overpriced. That's why no one has bought it yet and it continues to sit. Here are all duplexes sold in the last 6 months:

$275k seems to be the "price ceiling" for the neighborhood, and duplexes in this neighborhood sell for ~$256k on average. So even though you have some new flooring, counter tops, etc. it's simply not worth an extra $50k in purchase price. Even if you offered that amount it'd never appraise.

The lesson to be learned is that there are plenty of deals out there, it's just that you're passing them over because the price is currently way too high. Granted, this isn't a deal until the seller agrees to accept a lower price, but the comps are all right there for you to justify it. 

There are surely more examples just like this one. In fact, there are currently 16 multifamily properties with more than 200 days on market (as high as 383!) There are even more for SFR.

So what are you waiting for? Get out there and steal those overpriced properties! :-)

@Amir B.

This property was WAY overpriced when it hit the market. They were trying to get the same price as properties with lots twice the size. That said, it'll be tough to get the offer accepted at $215k, but they're probably hurting for offers right now so you never know.

You may have some troubles with appraisal though, remodeled home right up the street just went for $185k last week. 3025 San Rafael Ct. That could throw a wrench in things for sure.

Ideally you'd be north of Broadway, but this is Oak Park so it's still "up-and-coming." Below is a crime map of all the incidents within the last 6 months. Several assaults with a deadly weapon, one even with a firearm:

Average rent for a 3 bedroom in the area is $1,300 but since it's close to the Med Center and remodeled you might get lucky with an employee there and be able to press it closer to $1,500.

What does your financing look like? What interest rate and % down are you working with? Then you can truly analyze the property since you'll know what to expect for cash flow. What does your agent say about this offer? Or are you planning on submitting through the listing agent?