Sue's advice is right on target. Look for something that will cash flow now, but that offers a longer-term possibility of good appreciation. Her point regarding the cashflow analysis (and the opportunity costs) are especially valid.
Longer term, of course, your real profit is going to come from appreciation, not cash flow. But the cash flow will give you a reasonable return on investment now, and the appreciation will give you the major return at your end.
A couple words of caution: First, make sure you know what a property's real value is, not just what the discount might be from a few years ago. There are plenty of houses in Northern Virginia, for example, that were bought for $525,000 in 2006 that are being offered as short sales at $350,000 today...but which really aren't worth any more than $300,000.
Another word of caution. In your question you say your friend is optimistic that the market will go up "in a few years." You ask how much you can expect the market to rise "in the near future."
Few years? Near future?
Again, no one has a crystal ball. But the investors I know in California are buying with the anticipation that they'll be holding the property for 7-10 years. They hope it'll be less of course--maybe 3-4 years. But they're structuring their financing and doing their business models on the assumption it'll take at least 7 years for the market to bottom out, stabilize, then recover. Don't misunderstand: They think it's a fabulous time to invest in real estate. They love it. But they're not expecting big profits "in the near future."
Hope that helps.
I predicted the Sacramento real estate crash in the spring of 2005. I now predict a protracted (as in long drawn out and slow, with some fits and starts and the dead cat bounce. ) recovery. Values and prices will go up over years. Your friends house should be worth $700K again in about 2018, maybe as early as 2016.
I could get more specific, but I would have to dig my Ouija board and Tarot cards out of the closet.
Realtor, GRI, ABR, SRES
The Galster Group
As for cash flow, lenders require a minimum of 15% on a loan for non-owner occupied homes. I still calculate the cost of that downpayment into my cashflow analysis. (I would at least be making 2% if I had it sitting in a CD so there IS a cost to that downpayment money in lost opportunity) If you want more detail on analyzing cashflow, just ask. It's outside the scope of your question here.
Realtor, GRI, ABR, SRES
The Galster Group
Natomas is closer to downtown than Elk Grove which, in my mind, makes it a better investment. But as to when the market will turn around and you'll spot the sparkling appreciation rate many hope for, I wouldn't count on any of it. That's not investing in my book, that's speculation.
Investing is cash flow.
Basically, as soon as forclosure velocity and home inventories retrace 25 percent from recent levels, that will be the signal of stablizing home valuations. These indicators coupled with median price/income relativity will signal an uptick in sales overall.
I put my money where my mouth was.
Realistically, if you are thinking of buying a home to live in, you can figure it will cost you a hundred or two more in monthly payment than what you are paying if you are merely trading rental apples for ownership apples.
The truth is that anyone can buy property for 20 to 50% under peak value. One hoodwink is that a website promoter advertises inflated values as being "current market values" and then presents properties that are pirced in line with current values as if they were discounted. Another approach to the hoodwink is to collect auction priced listings that are priced FOR OPENING BID at a huge discount to market value.
While starting bids at auctions may be only a small fraction of market value, there are usually reserve prices that must be met, which prevents deep discounting, the final winning bids are much higher, in many cases at a premium to what a property would sell for through traditional buyer agent showings and negotiations.
P.S.--we have seen 50% median price declines in Natomas.
Hope this helps
First Team Real Estate