Home Buying in Sacramento>Question Details

Cu Nguyen, Home Buyer in San Jose, CA

Can I find any rentals with positive cash flow in Sacramento now?

Asked by Cu Nguyen, San Jose, CA Thu Dec 27, 2007

I look for some rental houses in Sacramento with positive cash flow. I plan to search for REO with some investor friendly real tors. Just let me know if you are an investor friendly real tor and know such deals existed.
Thanks in advance

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BEST ANSWER
Megan, Thank you for bringing this thread back to life...

32 months ago, I answered Cu Nguyen that there were 83 single family houses in Sacramento and 10 halfplexes, that were list priced under $100,000. Today those numbers are 958 and 66 respectively... That is a tenfold increase in the
cheap house inventory.

I have been following my own advice. I bought 4 of those cheap rentals under $100,000. The cash flow numbers worked out as I estimated, except better. (I do my own property management)

the interest rate went down to 3.5% because I took the adjustable rate (the lifetime CAP is 6.5%), I am saving $200 per month on interest, but we know that will change when rates go back up someday.

My insurance at $540 per year per unit is either $15 higher than my estimate (no flood insurance), or $15 lower than my estimate (These are not in flood zones).

I found that the City of Sacramento bills the property owner, not the tenant, for the following utilities: Water, sewer, garbage and greenwaste pickup, storm drainage and street cleaning. This costs me $110 per month.

I may have to expand my five year hold plan to a ten or eight year hold because the appreciation in value has not yet come to these properties. On the other hand, they have not lost value either.

So the average for these four is $900 Rent, $470 Interest and expenses. Monthly cash flow each $430. Setting aside reserves in a savings account for future maintenance, delinquency, or vacancy, our cash flow averages $335 per house.

That $335 works out to about a 20% return on our equity of $20,000 per house. Not glamorous. But it helps ease our retirement fund worries.
0 votes Thank Flag Link Mon Sep 6, 2010
Jim Walker, Real Estate Pro in Carmichael, CA
MVP'08
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Hi Cu

Clearly Jim knows what he is talking about.
There are plenty of such properties in Sacramento.

Good luck.
Perry
Web Reference: http://www.ruthandperry.com
1 vote Thank Flag Link Mon Sep 6, 2010
Good Answers. Jim does a great job of walking you through the initial investment analysis. In general, I discourage most investors from what you deemed the "war zones". Tenant relations issues and equity preservation being the main reasons. That said, there are successful investors working in the lower valued areas who are experienced at handling that type of rental property.
As an investor your goals should be two fold - 1) cash flow; and 2) equity appreciation. Some areas of the region will offer greater opportunities for equity appreciation than others. Your Realtor should help in identifying those areas for you. Those areas will be priced well above $100,000. And, you should be planning a minimum of a 5 - 7 year investment window for your ROI. Real estate works best as a long term investment with a focus on equity appreciation (while not forgetting cash flow).
Just my two cents!
1 vote Thank Flag Link Fri Dec 28, 2007
They were in 95838, I also look in 95815 but none of those offers were accepted.

Landlording is just a side business. I also work as a real estate agent for buyers. : - )
0 votes Thank Flag Link Wed Sep 8, 2010
Jim Walker, Real Estate Pro in Carmichael, CA
MVP'08
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I just bought one in 95828 and use Arbour PM manage my property. I hope I can buy a few houses in Sacramento. Jim, I wonder if you care to share the zip code that you bought your property.
Thanks in advance,
Ct
0 votes Thank Flag Link Wed Sep 8, 2010
Hey Cash flow investments in this area are back... you can get "cap rates" in the high 9's and sometimes the low 10's... depending on the area. You might consider Duplexes because they will give you a better cash flow return than a single family dwelling....

for some samples... I've put together some "cash flow" figures for some properties that I have seen... go to: http://www.sacto-cashflow.com/TheyCallMeMrEd and you'll see that I've got a couple posted there...

I have found that Duplexes are probably the sleeper investment in this area because there are fewer buyers looking to buy them then there are single family homes...
0 votes Thank Flag Link Wed Dec 17, 2008
I have three duplexes coming on the Market. One at $349,000 and the other two at $399,000 each. They are currently rented. Your cash flow will greatly depend on the amount of cash you put down. Have you considered a duplex? You can live in one and rent the other, or you have two properties in one to rent.
Web Reference: http://www.terrivellios.com
0 votes Thank Flag Link Tue Feb 5, 2008
There are several properties that were valued at over $150,000 last year which are now offered at $110,000 or less.

There are many REO houses for sale. Many are over priced, some are priced extra low to attract multiple offers (Creates an auction situation. - Buyers bid the price back up to market value)

A few are just priced to sell quickly for what they are worth.
0 votes Thank Flag Link Tue Jan 1, 2008
Jim Walker, Real Estate Pro in Carmichael, CA
MVP'08
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I really appreciate all the answers. Can I find any bargain in this market ? Let say the market value is 150K. Can I get it for 110K then the number might work out? or I need to wait for the end of next year. Do you see any bargain in REO house?
Thanks,
CN
0 votes Thank Flag Link Sat Dec 29, 2007
I agree with Jeff and Don that holding a property for five or more years, is the most likely route to long term wealth accumulation from a single property. There has been a tremendous amount of promotion of the flipping business, which is very risky for most new investors. Especially in the past two years.

Don pointed out the improbably low rate on the loan: The interest rate of 6.5% would adjust, it is not for a 30 year fixed rate loan. The triple A investor rate for a 30 year fixed will be closer to 7% for someone with excellent credit.

When you have a single rental, your vacancy or delinquency rate is either zero or a hundred percent. -
A five percent average vacancy delinquency rate is optimistic, a 20% vacancy /delinquency rate is pessimistic. Other investors in the market are optimistic, If you pencil out your proforma to worst case scenario every time, you will never buy an investment property, because no property will ever cash flow positive when using the worst case scenario.

We all agree that capital appreciation is an important consideration, Your question was about positive cash flow, so I addressed that in my answer. The fact is that the lowest priced properties are the least desired neighborhoods. Homes in the least desired neighborhoods can give you a positve cash flow with 20% down.

Triple the purchase price up to $300,000 for a median priced house, and you will find that market rent has not even doubled. So how is a $300,000 home going to flow positive cash? I challenge anyone to show the numbers (as I have with a house in a "zone") to pull a postive cash flow out of a $300K home in Sacramento. I challenge that it can't be done.

Don's sandwich theory is a creative and intriguing concept. REO's won't do lease options.

Finding an owner who is willing to lease a house to an investor at a rental rate below rental market value for an extended period of years would be a challenge, to say the least. . Owners who want to sell, want to sell. Owners who want to lease, want market value rents for their properties. Don suggests you find an owner who is willing to hold his property for up to five years, take no profit when the market rebounds in value, take the loss if it falls, be willing to continue to be on the hook for the mortgage payments, property taxes, and insurance payments, while being partially compensated for those costs by you, the investor.

Don didn't tell you how to find such an owner.
0 votes Thank Flag Link Sat Dec 29, 2007
Jim Walker, Real Estate Pro in Carmichael, CA
MVP'08
Contact
Jim presents a detailed scenario, and while I question some of his numbers, his basic premise is OK. That's what you'd do to try to find positive cash flow properties.

Admittedly, I'm not at all familiar with Sacramento, but you raised a good point about the quality of the neighborhood in which a house is priced below $100,000. (In areas of South Carolina, you can get a really nice house for that. In the Washington, D.C., area, you'd end up with a mobile home.) And, at least in the DC area, investor money costs more than 6.5%, the vacancy reserve is too low (you should, in your calculations, assume up to 2 months vacancy a year; this calculation assumes 1 month every two years), and there's no protection if property values decline. If they do, if housing prices decline, then it's likely that rental rates will decline accordingly.) Still....

Let me offer another possibility. Investigate the possibility of a sandwich lease-option. You'd lease the property from the owner for a set amount, with an option to buy at a set price. You then turn around and lease the property to a tenant buyer, giving the tenant buyer the option to purchase it. The amount you're charging your tenant buyer for the lease is slightly higher than the amount you're paying to the owner, and the purchase price you'd charge the tenant buyer is slightly higher than the price you have optioned it for from the owner.

Advantages: You don't have to put 20% down. You can sometimes do lease-options with no upfront option money (the value of the lease is the valuable consideration). Or, if you do put down an option fee, as an option fee it's credited toward the purchase price of the property. Typically, although everything's negotiable, some of the monthly rent you're paying is credited toward the purchase price. And you'll find that any upfront option fee plus the monthly rent credit builds up your equity a lot faster than an amortized loan will. If the market strengthens in 5 years or so (right now, your lease option in California probably should be for 5-7 years), you've locked in today's prices. And if the market falls further, at the termination of the lease, as with any lease, you just walk away. You haven't bought a depreciating asset.

What you have to do is negotiate a slightly below-market rent for the property from the owner, and then offer it for somewhat more to the tenant-buyer. The advantages to the tenant-buyer are many. He/she, too, locks in today's price when he/she buys. You'll typically credit some of the tenant-buyer's lease payments to the purchase price or closing cost, so there's some equity buildup for the tenant-buyer. And it's a way to offer the possibility of home ownership to someone who otherwise might not be able to afford it today.

Offer your tenant-buyer a shorter lease-option period than the one you have with the owner, so if the tenant-buyer doesn't purchase, you have time to find another tenant-buyer. Or, if property values have gone up, you can buy it and realize some instant equity. Or, with your option, you can sell your option to an investor or home buyer.

One other nice thing about lease-options is that you're not stuck looking for dirt-cheap properties that'll cash flow. Any property will cash flow if your expenses are less than your income. You could lease-option a nice home in a nice neighborhood, and so long as the lease is somewhat below market, you can make it cash flow.

Hope that helps.
Web Reference: http://solutions3dhome.com
0 votes Thank Flag Link Fri Dec 28, 2007
Don Tepper, Real Estate Pro in Fairfax, VA
MVP'08
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Hi all,
Thanks for all questions. I'm interested in single family home only. I 'm not ready for duplex/fourplex now.
Is it the house mention in this thread in the war zone? Happy New Year everyone.
Thanks,
CN
0 votes Thank Flag Link Fri Dec 28, 2007
There are 10 halfplexes and 83 single family homes in Sacramento that have list prices below $100,000.

The math for a moderately leveraged $100,000 purchase is this: $20,000 down plus $5,000 in closing and loan costs, plus $15,000 in rental home preparation costs* = Total out of pocket initial investment. = $40,000.




rental preparation costs* such as paint, lino, carpet, landscape, appliances and other repairs and decorating, initial advertising for tenant and tenant screening.

Loan $80,000 at 6.5% note rate interest (investor rate is typically higher than owner occupant rate)
Monthly interest expense = $433.00
Property taxes = $85
Hazard insurance $30
Flood Insurance $30 (not always required)
Maintenance reserve $50
Property management fee $60 (if not managed by owner)
Delinquency or
Vacancy reserve $45
Principal paid on loan $40

Monthly outflow (including reserves) $ 773

Market Rent $900

Positive monthly cash flow $127 per month. (plus unused reserves if any)

Return on $40,000 investment: 5% (plus property appreciation, plus tax savings)

These are not best case scenario figures. Your cash return could be much higher:
1. if you have no tenant delinquency or vacancy,
2. if your tenant preparation costs are low
3. if you are able to earn above market rents (such as by allowing a large pet for additional rental increment)
4. If your property doesn't not require much maintenance after the initial renter preparation.
5. If flood insurance is not chosen
6. if the owner manages the rental personally instead of hiring a management company.
7. If an interest only loan can be obtained at a favorable rate, there is no change to overall return; however this could result in a slight improvement to immediate cash flow.

At todays depressed real estate prices, positive cash flow is once again possible. More importantly, homes that are held for several years after the purchase will return handsomely in capital appreciation.
0 votes Thank Flag Link Fri Dec 28, 2007
Jim Walker, Real Estate Pro in Carmichael, CA
MVP'08
Contact
Hello Cu -
We are at the beginning of the curve for positive cash flow opportunities in Sacramento real estate. In December we've put a few investors into new or nearly new homes with positive cash flow potential on a proforma basis. The sweet properties are hard to find but with due dilligence and consistent research there are gems in our listing inventory. We've done some work building relationships with builders so that if an opportunity develops they call us first. REO's can offer some good pricing for you too, but we have not seen large discounts for REO properties yet. I expect this to change in the coming months. We market REO properties for some of the largest lenders in the area and as their portfolios grow we expect them to be more accomodating to potential buyers. REO properties are listing on the MLS like any other property, but you can get advance notice of the properties that come on the market by hooking up with a firm with contracts in place for REO sales. Natomas and Elk Grove are two markets that have worked well for our investors. Best advice I can give you is to build a relationship with a Realtor who is going to be in the field proactively looking for opportunities for you, who understands investment real estate, and with a firm that is building the relationships to get you in the door first. Then be patient and wait for the best opportunities as they develop in 2008. The rental survey Erin pointed you to is a great tool for evaluating potential rents. Also check SacBee.com and Craigslist to get an idea of rental values as you do your due dilligence. Best of luck to you Cu, and let us know if you have any additional questions!
0 votes Thank Flag Link Fri Dec 28, 2007
I have a 5-plex at a 4-plex price in Sacramento, fully rented, motivated seller. I also have a Carmichael duplex on a parcel with a tentatively approved lot split with the ability to build a single family home on the 1/4 acre lot behind the income property. Let me know if you are interested.

Ted
916 502-7422
Web Reference: http://www.ellprop.com
0 votes Thank Flag Link Fri Dec 28, 2007
I forget to add to the above question. I will put 20% down and I have an excellent credit score.
Thanks
CN
0 votes Thank Flag Link Thu Dec 27, 2007
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