Buying Rental Properties

Asked by WC, Alameda, CA Sun Jan 6, 2013

I am looking to buy one or more rental properties. My goal is to generate stable monthly income with spare cash and some equity line. I am thinking to buy low priced properties and target rental income ratio to be around 10 % (annual rental income / property price). Is this possible? Any gotchyas? The area I am thinking is Sacramento California. Any advice is highly appreciated. Thanks!

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Eddie Martini’s answer
Eddie Martini, Agent, Auburn, WA
Fri Mar 29, 2013
Why type of areas do you want to own in? What is your ideal Renter? Do you plan to use a Property Manager or handle the rent yourself? If you prefer a more private setting feel free to use or 530 320 3032
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Alex Amaro, Agent, Sacramento, CA
Thu Jan 17, 2013
Reading through all these responses I see you already got some pretty good advice. I'd just like to add a few more IMPORTANT considerations because I thing something big was over looked.

I am a numbers guy. The advice I give all the time is that any purchase of property has to be logical not emotional. The numbers have to work.
That being said, I think people get caught up on making the most income each month that they forget the best part of real estate. Appreciation. Appreciation is key.

For the home to cash flow, or come close, you will most likely be in a 30 year mortgage. Now the point of a rental is for the renters to pay off your loan over the next 30 years leaving you with a nice little income for retirement, right?
Answer: MAYBE.

Investors run into the same scenarios as primary residence buyers. Things happen in life such as death, illness, divorce, job transfers, paying for college, liquidating to invest in another business, etc.
My approach is to find a home that needs some work. Nothing major but something you can buy at a value. You invest a little to clean it up and gain some instant equity. Nice clean home in a nice clean neighborhood equals better tenants and a higher asking price for rent. Your plan is to hold but in the event you have to sell in 5 years, the option is there. (And to reiterate, in 5 years you would have paid down very little on the mortgage so your return will have to come from the appreciation)

So appreciation is key. Historically, that has been where most investors make there money.

Next there is leveraging. Why pay all cash for 1 home when you can but 2 or 3 with 25% down on each?
(If you pay cash then all your tenants are doing each month is paying you back your own money.)

You keep the rest of your money for reserves and to fix up these cosmetic fixers.

WC, I was contacted by an investor from San Jose area 5 weeks ago. We are closing on his first home in 2 weeks. These other agents are right about Sacramento. Many homes have multiple offers, prices are creeping up, and the real values are hard to find. However when you know what you are doing, it is very possible.
Like I said, I'm a numbers guy 'cause numbers don't lie.
I'd be happy to show you the numbers privately if you're interested more in our strategy.
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Erin Newingt…, Agent, Elk Grove, CA
Mon Jan 7, 2013
It is very possible to get a double digit return by buying Sacramento area cash flow homes.

I work with a lot of investors in the area and they are buying anything from condos to multi-family properties and getting double digit returns. It will really depend on your comfort level. Single family residences are easier to rent and in my opinion and generate a more stable tenant. I do have a lot of investors who focus on 4 plexs. They have better numbers on paper, even with the higher turnover rate.

There is plenty of opportunity to get a double digit return (before taxes) here in Sacramento. Our prices are going up and the better areas are appreciating, so the return does decrease because of that. My advise would be to take a little less in your return and invest in a good area. You will save yourself some headaches and you will attract a better renter. At the end of the day it's what you net from the property. I have investors who call me all the time wanting to go buy a $50k house in a really bad area. They see on paper they can make a "killing". Those areas will more than likely have a highturnover/headache rate. At the end of the day it's how much money was deposited into your account and how much time you had in the investment.

Give me a call and I can get you pointed in the right direction!

Erin Newington
Keller Williams Realty
(916) 585-3858
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Michael Cheng, Agent, San Jose, CA
Mon Jan 7, 2013
As a real estate broker and licensed financial advisor, I've helped investors pickup over $40 million in investment properties over the past 2 years.

Your goal is definitely attainable. The key is to work with a specialized real estate agent who knows how to analyze the properties with the highest net cash returns. (You don't necessarily have to work with a financial advisor, but it can help in your overall portfolio planning.)

In Sacramento, 10% gross rental returns has been pretty easy to find. You can even find those closer to you where prices are going up faster. The challenge is finding 12-15% deals, which has become quite scarce with prices going up so quickly.
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Tina Lam, Agent, San Jose, CA
Mon Jan 7, 2013
That is a great goal. Unfortunately, it's also very generic and thousands of investors in the area have caught on to that over the past year. With some many buying into the same idea, rental returns have dropped by 20-40%. Still, 10% annual returns are still quite achieveable, even in hypercompetitive Bay Area markets where equity gains have been very strong.
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Kylee Roe, Agent, Sacramento, CA
Mon Jan 7, 2013
John, given that most areas in Sacramento have property "flying off the shelves", your advice on "demand" and ability to resell is wrong. I"ll give you a break though, since you seem to be located in Palo Alto and this client wants to buy in Sacramento. No one knows the market better than an agent local to that market.

Even distressed properties in less than desirable areas are selling nicely. And in a rental use- buy and hold situation, WC cannot judge the ability to resell on this current market, nor the next wave of selling/buying trends.
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John Souerbry, Agent, Fairfield, CA
Mon Jan 7, 2013
Before you meet with an agent, I recommend you meet with financial and tax advisors to develop financial guidelines for your investments. 10% gross income may not pay all your bills, so a 2nd opinion from a financial planner is vital (DO NOT take the advice of a real estate agent on this).
One gotcha is that low priced properties usually earn low priced rents.
Another is that even though your plan might be to hold on to your rentals for awhile, you may eventually want (or need) to sell, so you should have an exit strategy developed before you sign a purchase contract. If you buy a low-priced rental that is low-priced because there is little demand in the area, you may have trouble selling it.
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Nancy Bergman, Agent, San Diego, CA
Sun Jan 6, 2013
As an investor, it is getting harder to find rental properties in good area with a 10% ROI or higher, but not impossible. There are properties out there but you will be facing multiple offers and others investors with cash in hand, no contingencies, and close within 15 days.

Look for 3 bedrooms, 1 or 2 baths, in zips 95820,95821,95825,95826,95838,95833, Citrus Heights, 95828 and parts of 95608 under $150K.

The average Sacramento rental goes for about $1 per sq ft depending on the area. I would strongly make trip here and speak to some property managers. They do have a list of people that are looking for rentals.

If you already have properties, you know that owning a rental is more complicated than buying a stock and letting the cash roll in. Even if you hire a manager there is a lot of issues to deal with, and it is especially complicated if you are out of town if the house needs work. I work with a few reliable people who can deal with most issues. I've worked with several investors, most of whom backed out on deals that I thought were good investments, because they decided it was more than they could handle.

Nowadays, with prices so low, many people with decent credit and stable income can afford to buy, so landlords need to be more flexible with tenants.

If you have any other questions, I'd be happy to speak with you.

Nancy Bergman
Realtor - Lyon Short Sale Certified
DRE # 01893550
Lyon RE Downtown
2801 J Street
0 votes
Ed Favinger, Agent, Folsom, CA
Sun Jan 6, 2013

Hi there...

I think your first step would be to determine how much cash and "equity line" you want to part with first and then come on up here and take a peek at the area to see what you get for the $$$. What you might think is a low priced area might be different then what we might think.

My suggestion to you, would be to learn a little about the area and the neighborhoods before you put your money down. Take what I call the "Chamber of Commerce" tour of the area and then you'll feel better and more confident about making an investment.

The reason why I say that is that some of the so called, "low" priced properties you might be thinking about will probably have "special needs" too and eat up some of the "paper" profits on a pro-forma cash flow analysis that you are reviewing.

In addition, while I know this is an "investment property"... please consider that folks who are looking to rent will want the same things a home buyer would want... amenities... safe neighborhoods for their kids.. schools and parks nearby along with other services and businesses for the price they are going to pay.

I'm not sure how you are calculating returns, that's why if you go to the links below this might help you in evaluating an investment. By the way... if you check out this site you will find examples of cash flow figures of various properties in the area that I've previewed and evaluated.

I hope this helps..

Make it great Day.
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Jim Walker, Agent, Carmichael, CA
Sun Jan 6, 2013
The gotcha is that a 10 to 1 ratio in single family homes is generally only available in zip codes 95838,95660,95815,95820 and a few in 95823, 95822,95824. Your thinking was spot on in 2010-2011, for a ten to one ratio Those days are gone - until the next great recession. .. Now that we have begun the values rebound we are headed to 12 to 1 ratios in 2013. by '14 it will be 14 to one. .
You could wait until the next great economic crisis. - Based on the timing of the last two -
I predict there will be another great recession in seventy years or less.

There are other areas such as Marysville, Yuba City and Stockton that might have some ten to one deals too.

You can find ten to one, and better, all day long, in mobile home parks. But that is not a passive business.
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Kylee Roe, Agent, Sacramento, CA
Sun Jan 6, 2013
I will add to Keisha's on target comment by saying if you can buy with cash, NO loan--as in your equity line is liquid before you start writing offers (as she said, make sure your down is liquid already, I am saying try to buy ALL cash). Cash is king!

Also, consider these market conditions, that I do not see changing anytime soon--there are multiple offers on just about every property. You have to be prepared to offer aggressively--i.e., that's usually above list price. Some properties are priced strategically low to draw multi offers/bidding wars, so be aware of a price that looks so low it's too good to be true--it probably is and with multi offers, will sell higher than list.

If you see a comment in the marketing section, that indicates the home is owned by Freddie Mac, Fannie Mae, or a "HUD" home (all foreclosures), those properties are open to owner occupied offers for a certain amount of days from list date. They usually get owner occupied offers, and accept one in the initial listing period. After that, investors can purchase, but our homes here go into contract so fast, usually these specific foreclosures do go to owner occupied buyers.

There are several areas where you can buy around 90-120K, and rent for 1000-1200 per month, which should meet your margins. It will take some patience, and a "nose to the grindstone" attitude of multiple shopping days--our market is pretty busy.

Good luck, let me know if I can help!

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Keisha Mathe…, Agent, Elk Grove, CA
Sun Jan 6, 2013
WC, Welcome to the club.

Get with a full-time, real estate agent (buyer's agent), make sure your down is liquid and have current evidence of it (bank statements, investment statements, etc), and have lots of patience. You will do well in any area with that plan. Also, don't undervalue property - prices have increaded over the past 12 months in most areas. In addition. the more cash you can put down, the stronger your offer will appear.

Hope that helps.

Happy house hunting!

Keisha Mathews, REALTOR®
CDPE®, HRC®, HAFA® Certified
"The Short Sale Lady"
Century 21 Landmark Network
(916) 370-1803 cell/direct
(916) 405-3886 fax
lic#: 01439130
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