Current REI Strategies in CA

[ajackson]

Ginasands - are you finding its worthwhile to do the short sales in Sacramento?  When i drive through there is SO much newly developed property that is vacant and for sale - are you hearing that the value of these houses is going to reach even current short sale prices any time soon?   What I haven't figured out about Sacramento also, is with all this inventory - is there any market for rentalers of SFHs to generate some income?  Obviously - as a bay area resident myself - Sacramento is an ideal location - I just can't figure out if it will be a good investment a few years down the line - or if the boom up there was just a phase that fizzled in 2003.

[MikeInCali]

Rents in Sacramento are far below what's needed to cash flow SFH's, unless you want to put 100k down.  The boom just fizzled this year so I wouldn't buy for holding anytime soon.  The consensus I've heard is that this winter will be bleak for sellers and prices will decrease further.  Some say it will continue for a couple years, others say next spring things will level off.

I don't think the banks are ready to short sale at too much of a discount yet.  I've seen a couple short sales listed with realtors where they list the house very cheaply, like 200k with a date to accept offers, then let the investors come in and bid it up, then counter and counter until some overpays.

[aak5454]

The consensus I've heard is that this winter will be bleak for sellers and prices will decrease further.  Some say it will continue for a couple years, others say next spring things will level off.

I saw this kind of thinking back in late 2000 (re: semiconductor industry; hey, the market is just pausing and it will be better next year).  I think thats a rather optimistic viewpoint (IMHO).  Particular in this case since the time scale that the housing market operates on this very different (longer) than equity markets.  Thus the "correction" and associated reboudn will take longer play out.

[ginasands]

Hello ajackson:  I think Sacramento has a long dry haul in the future.  Some agents think that the housing prices are 59% higher than they should be so prices are falling and falling fast.  Some developers have
pulled out of deals to build more SFH.  We are overbuilt and overpriced so the future looks a little bleak.  However, the foreclosure market is ramped up because with the the last few years appreciation, homeowners took all they could out of the house and now for a lot of them there is no more to get and the mortgage is too high to pay.


I think its time to get into multi-dwellings for cash flow because cashflow in SFH is not going to be there for a while here in Sacramento.  There is going to be a glut of houses for rent and the rental prices will become more competitive.

[Funder]

     Gina, I believe that you are mistaken about Sacramento.  The paranoia is going to end when people begin to realize that the economy is quite good in many ways.
     California has more people than any other state.  The second runner up is Texas, which has about half as many people as California.  The population in California is increasing at a faster rate than any other state.
     The value of real estate is affected by the overall economy, jobs, and inventory.  Corporate profits in American companies are at an all time high.  Personal wealth for the citizens of America is at an all time high.  The 1990s flattening -and that's all it was- came to pass with the perfect storm of a statewide recession, local military base closings, job losses and higher costs of borrowing.  In contrast to that, California's current economy remains strong, unemployment declined to 4.2% in May, minimum wage is going up, and there is still a healthy migration from the bay area and the silicon valley where inventory is low, demand is high, and prices are still comparitively much higher than Sacramento.
     The market may flatten due to the combination of uncompromising prices and rising interest rates,  but the consensus is that interest rates are high enough to control unsustainable growth in real estate.
     The combination of paranoid sellers and a 4 year high in inventory in the Sacramento area has inspired a new trend of seller carryback which was unheard of 2 years ago (try getting 80 15 5s with the 15 as a due and payable carryback 5% fixed for 5 years)
     Before you complain about cash flow, be sure to calculate depreciation for rental properties, which is the improved value of the land divided by 27.5.  You can reduce your taxable income by that number, which can put you into a lower tax bracket.  You may reduce your taxable income by $30,000.  Of course, you should check with an accountant before assuming anything, but I believe that you will see that what initially seems like a sea of red ink acutually cash flows.
     REI strategies in CA?  Buy real estate, even if you take a negative cash flow, and have multiple exit strategies.  Frankly, if people study their loan options, I'll bet they could find properties in CA very affordable for a positive or only slightly negative cash flow.  The real money will come with appreciation which WILL happen in CA.

[ginasands]

Well, my friend is indeep paranoid. He was written up in the Sacramento Bee concerning his short sale for two houses that became upside down rather quickly.

He has been doing flips for about 4 years and doing quite well and then the movement of the appreciation changed
not suddenly but too quickly for him to recover.

I understand your analysis and tax strategies et. al but you have to have the money to allow negative cash flow or no cash flow.  For the new investor that's not an easy obstacle to overcome.

With the average house coming in at $300,000 and that's a dump. Your rental payments aren't going to cover much
of your mortgage payments unless you do the 1.95 ARM which I always advise for rental properties.

I applaud your positive outlook and am sorry if I sounded all gloom and doom. But the values are going down primarily because they were artificially inflated.

Sacramento is still in the dark ages in a lot of respects.  (i.e.)with wages/salaries.  There are some good salaries in specific industries but this isn't the Bay area and people who work for Kaiser here versus those who work in the Bay area are way underpaid.  The Bay area residents who moved here are still commuting to the bay to maintain their salaries because Sacramento doesn't pay the same.

Houses are staying on the market past 4 months which was unheard of 8 months ago. Multiple offers? a thing of the past.  I'm in a wait and see mode but I see foreclosures in record numbers.  

But thank you for your insightful and well researched information.  We will just wait and see.

I'm advising clients to use their money to buy an Internet Business! or just hold on for the turn around
 

[turborocket]

It's going well for us. We bought in the Portland/Vancouver area. You can still get SFH's there around the 200k mark that will cash flow. Appreciation is solid, lots of demand for quality rentals, property management is affordable. What's not to like?

We were also smart enough to do our homework and identify growth markets. We didn't chase the dream into AZ or Las Vegas. We're also looking at North Carolina and Arkansas for future investments. They may not sound sexy, but we like the market indicators in those areas.

Hi Archer,

Do you have people/acquaintances/partners in the cities in which you are buying, or are you just using professional help (realtors/property managers)?  I would think it would be somewhat nerve-racking trying to manage a rental 4 states away.