All Forum Posts by: Wes Blackwell

@Tim Jones

The tough thing about making market predictions in real estate is that despite knowing that the market repeats a cycle of highs and lows, no one has a crystal ball to accurately predict when the market will turn next.

An analogy I often use is that predicting market cycles is a lot like driving your car at night time. You have a general idea of where you're going and your final destination, but you can only see as far as the headlights. There may be detours and shortcuts ahead that you can't see right now, but will become visible as you get closer to your destination.

Therefore, I think accurate real estate predictions really can't project further than 1-2 years out. Anything beyond that is speculation and too much can change in that amount of time.

If you were to ask me, I would say that we are somewhere between an early and late stable market. Here is a graph to help show what I mean:

Where we are at now, rents are increasing and expansion is happening because of increased demand. Every single transaction I'm involved in is a multiple offer scenario with the winning offer being at asking price or above. 

Hell, I went to show home in Elk Grove yesterday, and it had been on the market less than 15 hours and 12 people had already viewed it and 4 offers were already made!

At least here in Sacramento, there are no signs of the market slowing down. Realtor.com just projected that we'll be the #4 hottest metro market in the nation this year with 7.2% appreciation and a 4.9% increase in sales growth. We will also be the #1 rental growth market in the nation this year with 10% year-on-year and 8.5% next year.

A big part of that increase is due to the massive influx of middle and lower class millennials migrating to our city from the Bay Area because they are being priced out of the region. I've written more about that migration here, and it applies to the rest of the central valley as well:

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

For the Bay Area, I'd be more hesitant to invest there. While it will still have high appreciation this year, the sales growth is some of the lowest in the nation at only 1.17%. And that's because of the high prices forcing out the middle class out to buy elsewhere. 

The main problem with the Bay Area is that Silicon Valley lacks economic diversity. Too much money is in tech and not enough is in other sectors. So if the tech industry crashes and 100k high paying tech jobs vanish, who is going to pay for all that high priced housing out there? Nobody.

They are at greater risk than more normal markets like where you live in the Modesto, Merced, Fresno area. In fact, our markets might even get better if all those layoffs happened since they'd be forced to move out here where it's more affordable. I've written more about the Bay Area here:

https://www.biggerpockets.com/forums/311/topics/402847-local-investors-feeling-the-crunch

The main difference about this climb to the top vs. the last one is that you don't have all the crazy loan shenanigans going on, so you actually have to be able to afford a house to get one this time.

Also, the great recession was recent enough that the same builders are around now and have learned their lesson not to over-expand. Last year only 4,400 new housing units were built in Sacramento County, a far cry from the 18,000+ a year built prior to the crash.

So from that standpoint, I'd estimate we're probably 2-4 years from the peak of the cycle, at least here in Sacramento and more normal markets like yours. There will be a massive "rush to exit" near the top and that would be the time to sell, or just before. If the Blackstone Group ever starts selling off most of their inventory here, you know it's time to get out for sure.

But then again, 1-2 years is the furthest you can reliably predict. Interest rates are set to go up several times this year, but how much? What will Trump accomplish in his first 100 days? Will he successfully repeal, dismantle, or restructure the Dodd-Frank Act? How will he impact the real estate investment market? These are all things that remain to be seen.

@Greg Leach

If you have the purchasing power to acquire the property by yourself I wouldn't worry about a partner for now, you can always figure that part out later. Beyond funds for a rehab, there isn't much they'd be able to contribute if you can afford the property by yourself. And you can always borrow those funds from somebody else.

For the rehab, it's really not as hard as you think, and you might even be able to do most of the work yourself. Home Depot sells a DIY book called Home Improvement 1-2-3 that walks you through every basic home repair and upgrade you can think of. Combine that with some YouTube videos and there won't be much you can't accomplish by yourself (depending on your level of skill for swinging a hammer).

You can pretty much count on new flooring, fresh coat of paint inside and out, new lighting, and remodeled / updated kitchens and bathrooms. That's where you're going to get the most bang for your buck.

Then you simply go down the list and replace and update what you need depending on the current condition and state of disrepair. Some of this work you will need a contractor for:

• Roof
• Exterior Siding
• Sliding Glass Windows
• Dual Pane Windows
• Garage Door
• Landscaping
• HVAC
• Water Heater
• Plumbing / Electrical
• Decks / Patios
• Concrete Work
• Sheet Rock / Drywall Replacement

As far as the maximum purchase price goes, that's really going to depend on your exit strategy. If you're looking to turn this thing around and sell it in 6 months or less you're going to need more of a discount. If you're planning on holding it for a few years to live in you could buy it for full price and still make money on it.

As an added step I would perhaps read Bigger Pocket's two books on rehabs and estimating costs. That will help you get your numbers for the the rehab and you'll need to calculate that into your expenses, along with the costs to sell (typically 7-8% of the selling price).

If the ARV is $400k, getting a 30% discount on a home that is owned outright is going to be a real difficult sell to the homeowner. That's a discount of $120k, and there's no distress or motivation to sell it for such a discount (like there would be if there was a mortgage payment coming every month they could not afford).

So the purchase price is really going to depend on what they want to get out of it and what they think it's worth. I would start the conversation with "What are you guys looking / expecting to get out of it?" as if they were just going to outright sell it. 

The seller might currently think it's worth way more than it is and that could throw your numbers all off since they won't be willing to discount to the price you need to make the numbers work. 

If you message me the address, I can tell you what it's currently worth and the potential ARV within 10%. Then you'll at least know what you're dealing with.

@Stefan W.

While it is true that no one has a crystal ball and can see into the future, the National Association of Realtors has access to far more data than other entity in the U.S. The local associations run hand-in-hand with the local MLS providers, which provides data for every on-market transaction. Therefore, this is the best prediction you're going to get.

Predicting the future of real estate markets is similar to driving at night... as you can only see as far as the headlights. For real estate, that's about a year into the future, but you need to constantly re-evaluate the market and update your predictions. 

The California Association of Realtors has an entire team dedicated to collecting and analyzing market data, and you can find more of their information here:

http://www.car.org/marketdata/

@Amit M.

People are leaving in droves. Here are the numbers to prove it, coming from just a small sample of Bay Area transactions (the actual numbers are much larger):

You've got negative net migration from nearly every single surrounding county. More than 34% of San Francisco residents are considering moving out:

• http://www.sfgate.com/bayarea/article/Cost-of-living-traffic-have-a-third-of-Bay-Area-7386717.php

For every 1 home buyer entering the state, there are 3 Californians selling and moving elsewhere:

• http://fox5sandiego.com/2016/11/07/why-a-lot-of-people-are-moving-out-of-california/

San Jose's "move-away rate," which is the current share of households living in the city compared with the share leaving the city, is a whopping 77.2 percent, meaning San Jose middle-class households are 77 percent more likely to move out of the city than to move in:

• http://www.newsweek.com/bay-areas-middle-class-being-squeezed-out-droves-report-454178

Yes, most of these people are in the middle class. But while high-paid people in the tech industry might not have to worry about prices, they might one-day have to worry about their job:

https://www.bloomberg.com/news/articles/2016-10-20/the-tech-bubble-didn-t-burst-this-year-just-wait

At the turn of the last century, the burst of the dot-com bubble wiped out $6 trillion in household wealth. Companies vanished and funding dried up. The tech bubble-burst will likely be much slower, but it's plain to see that "there are a whole bunch of businesses that are good, not great, but they've raised money as if they were great."

There are simply a ton of fair-weather start ups and fair weather investors, which has created a glut of capital that's made it harder to vet inbound deal-flow. That creates a lot of noise and makes the signal-to-noise ratio all out of whack.

I define a bubble as "something where assets have prices that cannot be justified with any reasonable assumption." Historically, bubbles occur when the last money in (investors late to the game) is highly unlikely to realize a return that justifies the risk that has been taken. 

For example, AirBnB $25 billion dollar valuation puts it at a 28x multiple of sales. Most other big hospitality providers are in the 1-2x range. Uber has lately been valued at 100x sales, while ZipCar only commanded 6x at it's peak.

So for me, it's not a matter of if the bubble will burst, but when. The main difference being this time the money is much more private than public so there won't be all the collateral damage. 

But if the high-priced housing market in the Bay Area can only be sustained by high-paid tech employees, a market correction in tech would be devastating when large companies go under and massive lay-offs ensue. Your buyer base will have disappeared and everyone in the middle class will have already been priced out. There will be blood on the streets and those investors who weathered the storm will have plenty of opportunity to buy at a discount. Some will end up making a killing.

When it comes down to it, a tech bubble burst may only really affect the housing markets where there is little economic diversity (Silicon Valley). The exodus of the middle class could be considered a "pre-pop" of sorts and shows how it has already affected Bay Area residents.

When the tech industry deflated in the late 90's, Silicon Valley high-tech industries declined about 17% according to the Bureau of Labor Statistics. That translated to a loss of roughly 85,000 jobs -- and home prices went down with them. And if 100,000+ high paid tech jobs suddenly go poof and disappear now, there's no way those high housing prices will hold up.

@Greg Leach

First thing I would do is talk with your friend and get a sense of what the family's plans are for the property. Mainly you need to know whether they plan to keep it or sell it. If they plan on selling it then you may have an opportunity here.

If you plan to buy the property, fix it up, and re-sell it immediately, you should tell them. They might not like the idea of you making money off their dead grandma. Selling to a family friend is one thing, but that friend selling to some complete stranger right after and making a bunch of money is another. If you hold for a few years before selling that's completely different.

If that's your plan, you need to speak with a loan officer ASAP so you can determine what you qualify for. Since you're still in school, I'm guessing you might not have the work history or income requirements needed for a loan, but perhaps someone in your family might be willing to co-sign for you if you can meet the monthly mortgage payment. If it's $300k with 5% down you're probably looking at roughly $2,000 per month.

Partnering on a deal with the current owner to fix up the property and sell it seems complicated and risky for you. Here's a mock-scenario to explain:

Let's say I'm your friend and now I own grandma's property free and clear. It could use some TLC and updating, but nothing too major. Maybe $30k or so. The property is currently worth $300k but will be worth $400k after the updates.

So, for $30k invested we'll have an extra $100k in value, for a +$70k net! Awesome!

Since I could've just sold the property as-is for $300k, there's no reason to split any of that profit with you since. So I'll just split the $70k with you 50-50.

If the cost for rehab is split 50-50, you'll spend $15k to make $35k. Not bad at all. But since you won't own the property during the rehab you're taking a huge risk. What if after it's all fixed up they decide to keep it? How are you supposed to get your investment back?

I know, it's your friend... but money changes people. And your friend might not be the ultimate decision maker. Perhaps your friend's Uncle Carl is, and he decides they should keep it in the family and now he wants to live in it. Uh-oh.

But perhaps instead you could partner with someone else here on the site or another investor you know who has the expertise and money to make the deal happen. Just be careful who you trust and make sure you read everything you sign. Twice.

After you speak with the owner and talk with a loan officer, come back and tag us to give some more details and we can help you try and put this deal together. Best of luck!

@Audrey Ezeh

I think part of the reason that the San Francisco, Oakland, and the rest of the Bay Area didn't make the list is because of the minimal sales growth expected this year.

If you take a look at Realtor.com's 2017 National Housing Forecast, San Francisco is only expected to have a growth in sales of 1.17%. So your basically going to have the same amount of sales that you did last year.

Sacramento on the other hand made the list, and we're projected to have an increase in sales 4.92%. We're still low inventory like you are, but we're expected to have 4 times the sales growth you will. And a large part of the reason for that is Bay Area residents are moving from your city to ours. Read more about it here:

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

California is a low inventory market in general. Simply too many people want to live here for how much housing has been built. And this is why housing in this state is high in price compared to the rest of the country. It's simply supply and demand.

San Francisco would've needed to build 13,287 homes per year for the last three decades to have housing prices on par with the rest of the country!

http://www.latimes.com/politics/la-pol-sac-california-high-housing-prices-20160414-story.html

The California Association of Realtors has predicted a mass exodus out of the Bay Area this year, either to more affordable surrounding counties (Sacramento and the Central Valley) or out of California all together:

http://la.curbed.com/2016/3/4/11161626/california-housing-costs-migration

Boomers who are sitting on a ton of equity realize they can move out of the Bay Area to retire to live like a king somewhere in the Midwest and purchase their house cash, and Millennials are entering their prime "settle down" years and think $650k for a 1950's tract home is a joke and they can't afford it even if they wanted it.

But, they can move to Sacramento and buy a $350k remodeled home in a nice area with great school districts and raise their newborn children. And that's too good of a deal to pass up.

There are surely some other factors affecting this, but if you ask me demand for the Bay Area is dwindling and the numbers show it. The prices got so high that it's forcing everyone out to places where their money goes so much further.

@Eric Lyles

Building off of what @Chris Mason has said, that car payment is really hurting your purchasing power. There are only 7 multifamily properties in Sacramento priced below $225k. But there are 31 priced under $310k. 

Depending on the rents you might possibly qualify for more, but you get the idea. Your options at that price range are going to be severely limited, and likely either in a state of disrepair (won't qualify for FHA) or not somewhere you'd want to park that pretty ride of yours haha.

But don't knock yourself for having an expensive hobby you were passionate about, we've all had those (and some still do!). You probably got a lot out of it since you started and made a lot of friends along the way too. 

If it's something you've outgrown or are no longer interested in, consider selling the car and getting rid of the expense. I know that's pretty drastic, but even if you could just sell it for what you owe you'd free yourself up of a lot of debt. 

In the book The Millionaire Next Door I believe there's a part that talks about the kinds of cars most millionaires actually drive. And the basic premise is why go spend $50k on a new car (depreciating asset) that loses value the very moment you drive it off the lot when you can get something used and reliable for under $10k? 

You could get a 10 year old Toyota with less than 125k miles on it for less than $5k and it's super reliable. Sure, it feels like you're driving a couch instead of a rocket, but it's already taken all the depreciation and you could probably buy it cash. So that makes for no car debt, and now you can drop down to liability coverage and reduce your monthly expenses even further.

I've found that the more you get into real estate investing, the more it becomes a lifestyle rather than just an investment. But you don't have to become a penny-pincher, simply make some better financial choices. If you do, your portfolio will continue to grow and one day when you have $10k per month in passive cash-flow you can drive whatever car you want :-)

@Tiffany Shan

I would try reaching out to @Grant Greene in Tuscon, AZ. He's the go-to guy for financing "unique" and "unusual" deals haha. Best of luck!

@Greg Leach

In my opinion the 2% Rule, as it was originally, is really only useful for lower priced properties in the $50-100k range. If you have a $50k property that rents for $1,000 that'd be a killer deal and meet the 2% rule of thumb. 

But, in California it simply doesn't work. You'd need to find a $400k property that rents for $8,000 per month! And the second you find one of those let me know because I'll be the first to buy it lol.

Once you get past a certain price point, SFR becomes out of the question. You'll need to start looking to 2-4 unit multifamily. That's the only way to make some decent returns on the monthly cash flow. Unless you get some once-in-a-lifetime off-market deal.

Here in Sacramento and the Central Valley (Stockton, Modesto, Fresno) you can expect 0.60 - 0.70% on average, with the better properties being in the 0.80 - 1.00% range. RARELY will you see something crack the 1% barrier (at least off the MLS) and usually it's gonna need some serious rehab and remodeling. Highest I've ever seen was like 1.33% on a fourplex in Stockton, CA.

Hope this information helps! Start looking into 2-4 units and you're sure to find some deals!

@Philippe Ty

My advice would be to narrow down what sort of deal you want to do first and the numbers involved, and then determine how to get the money you need for that sort of deal.

Are you doing buy-and-hold? Fix-and-flip? Working with a partner? In the Bay Area? Or the Central Valley? Or out of state?

All of those scenarios will have different financial requirements. Instead of seeing the maximum amount of money you can get for a deal, I would first determine the kind of the deal you want and then figure out the best way to get the amount of money needed for the deal.  Best of luck!