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That's probably the difference between sophisticated and instutional investors and Joe Small Time Landlord. SFH as rentals seldom have positive cash flow, at least for the first few years. That's why the more astute investors generally stay out of that market and go towards apartment buildings and commercial where you can actually make money. Condos are kind of mixed. Something like a semi-rundown '70s condo building may mostly be rentals. You can buy them cheap and rent them profitably without the barriers of entry to pricey apartment and commercial properties. On the other hand, fancy new condos usually you can't rent for enough to offset. You can buy a rental condo in Sacramento for $70-80k for a 2bd unit for example and rent it for $700/mo or so. You're not going to be able to rent the $200k 1bd in The Mills for $1,750. Not even close. One makes some sense as an investment, except you still need to deal with tenants which mostly suck especially for that type of property, and one is for suckers. If you want to pay a premium to live somewhere yourself, fine. But as investment it's really reserved for idiots.
There's exception to that of course. During the real estate bust a lot of condos went apartment because they didn't want to take the hair cut and real estate was so cheap you could potentially make more money renting than selling the units. At the same time you had a lot of astute investors coming in and buying up SFH as rentals. There's nowhere near as much of that going on now in 2015
Pretty much. Most savvy investors use the "1% 2% 50%" rule. General rule of thumb is 50% of rental income will go towards expenses and maybe a bit less if self managing (expenses include taxes, management fees, vacancies, repairs etc) then after taking into these expenses the general rule of thumb is you should be getting back 1-2% of home value a month. Thus, if market rent is $1,000 for a 1 bedroom apartment then you figure $500 of it will go to expenses. Thus you should spend no more than $25,000 to $50,000 for such unit. Is this possible in Sacramento market or California in general? No.
I always get confused as why multi-family homes generating $2,500 of income are selling for $400,000 plus in places like Midtown, East Sac and Land Park. The math simply doesn't work out for an investor unless one is willing to live in one unit and rent the other and even then I don't think the math works.
Most people also do not take into opportunity costs when buying a home. A general rule of thumb is home prices tend to increase with inflation while the S&P has averaged much more than that. Even in the latest market where prices have rebounded since 2012 the S&P 500 has averaged around 17%-18% returns in the past 3 years.
Point being renting vs buying is much more complicated question then the common belief held by most that "Buying is always better." It's not always better and in the sacramento market where rent is relatively cheap compared to home values the opposite might even be true from a financial perspective.
Sure, who doesn't love living next to construction sites? The benefits are innumerable.
The whole project is a giant construction site and will be for while. If that's a problem for a buyer, they should stay away from infill projects. Im better the folks who will inevitably end here will be okay with it.
Pretty much. Most savvy investors use the "1% 2% 50%" rule. General rule of thumb is 50% of rental income will go towards expenses and maybe a bit less if self managing (expenses include taxes, management fees, vacancies, repairs etc) then after taking into these expenses the general rule of thumb is you should be getting back 1-2% of home value a month. Thus, if market rent is $1,000 for a 1 bedroom apartment then you figure $500 of it will go to expenses. Thus you should spend no more than $25,000 to $50,000 for such unit. Is this possible in Sacramento market or California in general? No.
I always get confused as why multi-family homes generating $2,500 of income are selling for $400,000 plus in places like Midtown, East Sac and Land Park. The math simply doesn't work out for an investor unless one is willing to live in one unit and rent the other and even then I don't think the math works.
Most people also do not take into opportunity costs when buying a home. A general rule of thumb is home prices tend to increase with inflation while the S&P has averaged much more than that. Even in the latest market where prices have rebounded since 2012 the S&P 500 has averaged around 17%-18% returns in the past 3 years.
Point being renting vs buying is much more complicated question then the common belief held by most that "Buying is always better." It's not always better and in the sacramento market where rent is relatively cheap compared to home values the opposite might even be true from a financial perspective.
I am not going to reply to the other guy's comment, because it is full of too much crap.
First of all, no investor purchases rental property to turn a profit on a month to month basis. If that is your goal, you are engaging in an ordinary business such as a hotel. It's very difficult to generate income from rental properties for the following reasons;
(1) You have to recoup your initial investment to buy the property. In accounting, this occurs through depreciation over the life of the asset. However, you figure it, your net outlay to purchase the property has to be factored in to whether you are earning any money month by month. If you leave that out, you are not correctly calculating your income. It does not appear that anyone posting here has done that.
(2) Taxes, insurance, maintenance, LLC fees, interest expense, vacancies etc make it extremely difficult to earn money on a rental property.
What a couple people here are doing is confusing "cash flow" with "profit". Sure, if you take $500K out of your retirement fund and buy an old rental building, you are going to have positive cash flow each month from renting the property. However, a good portion of that is simply a return of the money you pulled out to buy the property. Your profit is minimal, if at all.
Savvy investors look for properties that they can either improve or those which are located in an area where some economic event will occur to increase the value of the property. They then hold the property and try to minimize losses as its value increases. This is how all investments work, regardless of the industry. It's all about forecasting and expectation of increase in value.
That's probably the difference between sophisticated and instutional investors and Joe Small Time Landlord. SFH as rentals seldom have positive cash flow, at least for the first few years. That's why the more astute investors generally stay out of that market and go towards apartment buildings and commercial where you can actually make money. Condos are kind of mixed. Something like a semi-rundown '70s condo building may mostly be rentals. You can buy them cheap and rent them profitably without the barriers of entry to pricey apartment and commercial properties. On the other hand, fancy new condos usually you can't rent for enough to offset. You can buy a rental condo in Sacramento for $70-80k for a 2bd unit for example and rent it for $700/mo or so. You're not going to be able to rent the $200k 1bd in The Mills for $1,750. Not even close. One makes some sense as an investment, except you still need to deal with tenants which mostly suck especially for that type of property, and one is for suckers. If you want to pay a premium to live somewhere yourself, fine. But as investment it's really reserved for idiots.
There's exception to that of course. During the real estate bust a lot of condos went apartment because they didn't want to take the hair cut and real estate was so cheap you could potentially make more money renting than selling the units. At the same time you had a lot of astute investors coming in and buying up SFH as rentals. There's nowhere near as much of that going on now in 2015
You did not factor in tax benefits or pay down of principal balance on the loan. In your example that totals about $400-500 per month. This money obviously goes back into your pocket when you sell, or immediately if you want it to (increase of exemptions per tax return, equity line of credit). So in your example, one would only need to rent the $1,750/mo unit for about $1,300/mo to break even. Pretty sure a 2 BR apartment within 1 mile of midtown, Curtis Park and the stadium is rentable for at least that much.
And "sophisticated" investors do not buy old apartment buildings and attempt to earn a profit by collecting rent month by month. That's akin to an ordinary business, such as a hotel. Plus, unless you own hundreds of such properties, it's a flat out stupid business model. Sophisticated investors improve assets or hold them for appreciation. The vast majority of them lose money in the process while the asset appreciates. I will not tell you how I know this, but trust me it is true at least 80% of the time.
Finally, I made it clear that I intended to buy as a home first, an investment second. As MOST people do when they are considering a place to live. I need only to experience a 2.2% rate of appreciation over the entire time I own the property to recoup my closing costs and break even. Again, pretty sure I'm going to earn that and a hell of a lot more.
Sophisticated investors improve assets or hold them for appreciation. The vast majority of them lose money in the process while the asset appreciates. I will not tell you how I know this, but trust me it is true at least 80% of the time.
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I need only to experience a 2.2% rate of appreciation over the entire time I own the property to recoup my closing costs and break even. Again, pretty sure I'm going to earn that and a hell of a lot more.
With a sophisticated prospective first-time investor such as yourself who's pretty sure he's gonna make a "hell of a lot" in returns, what could possibly go wrong? I suppose you might ask yourself why this 'hold and rent' strategy at the Mill was so egregiously overlooked by the multimillion dollar developers who are constructing it. No doubt their naive strategy of throwing up shoddy townhomes (as cited in the WSJ) and selling at peak market rates to first time buyers is foolish business. If only those corporate puppet masters had your business acumen they'd be as successful as you.
With a sophisticated prospective first-time investor such as yourself who's pretty sure he's gonna make a "hell of a lot" in returns, what could possibly go wrong? I suppose you might ask yourself why this 'hold and rent' strategy at the Mill was so egregiously overlooked by the multimillion dollar developers who are constructing it. No doubt their naive strategy of throwing up shoddy townhomes (as cited in the WSJ) and selling at peak market rates to first time buyers is foolish business. If only those corporate puppet masters had your business acumen they'd be as successful as you.
Why are they not holding the buildings they are constructing? Because, well, they are developers. Developers build and sell. FYI, most developers (or all) have a combination of lots that they are developing for sale, lots developed for rent (which they LOSE MONEY ON IN THE SHORT TERM - don't argue it - you have not seen 1/1,000th of the info I have on these developers), and raw land which they hold for future development. LOL I couldn't make up the crap you are posting if I tried.
FYI again, I am not going to disclose my business, but I can guarantee you that a LOT of big time developers have either filed for bankruptcy or claimed insolvency in the past couple of years. Why? Because by and large they guarantee the construction loans that they use to fund their business. So, when the market tanked, they tanked individually along with it, having owed millions beyond the value of their own assets. If you are going to avoid every developer that filed for bankruptcy, you may as well not buy at all.
How many effing times do I have to post that (1) I am buying because I like the LOCATION, (2) It's better than renting anyway you slice it, (3) It's an investment in the sense that ANY person's home is an investment. I am not attempting to flip it (by the way, how the hell do you flip a brand new home??) or rent it immediately. If it does nothing at all, I STILL make money, because the unit has built in appreciation due to buyer incentives. Didn't know that did you smart guy. Bet you never thought of trying to buy in home a presale event before construction was finished, as the list price is often LOWER than what it is offered once the property hits the market. This is often how people START $30K+ ahead on the day they move in. You're so effing smart, but you don't even know the basics.
Didn't consider the tax benefits, the principal pay down, the built in equity, the location or the price relative to other areas. You don't know jackshyt, and I have no idea why I've wasted my time informing you or even the guy that started this thread of all this info when neither of you have even bothered to spend 5 minutes researching this project.
Why are they not holding the buildings they are constructing? Because, well, they are developers. Developers build and sell. FYI, most developers (or all) have a combination of lots that they are developing for sale, lots developed for rent
You managed to both not answer my question and then contradict yourself in a very short span here.
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You're so effing smart, but you don't even know the basics
I don't know why you think tax benefits and equity building are secretive concepts only you are privy to but everyone is well aware of all the obvious homeowner incentives you listed. I can't help but wonder if you'll LOVE the location as much this winter if El Niño hits as hard as predicted. Maybe you'll find yourself underwater both literally and figuratively. Never any downsides to buying early right?
I can't help but wonder if you'll LOVE the location as much this winter if El Niño hits as hard as predicted. Maybe you'll find yourself underwater both literally and figuratively. Never any downsides to buying early right?
That's true for all of that part of Sacramento and hardly unique to The Mill. And if they opposed Auburn Dam, well, Karma.
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