Checking on the Sacramento Real Estate Market as a Buy and Hold Investor

For months, the real estate market in Sacramento was one of the hottest and most competitive in the country. Interest rates hovered at historically low rates and that inspired buyers to be aggressive with their offers. It was that environment which led me to turn my attention away from Sacramento and instead pursue out-of-state real estate opportunities during the first quarter of 2022. But it is now December and the housing market in Sacramento has slowed significantly from its rampant pace a year ago. As the market has transitioned to this new normal, I’ve made sure to keep a close eye on local opportunities. Mortgage interest rates have come down from their peak and it is time for me to check whether there are any solid buy-and-hold opportunities in Sacramento as the year comes to an end.

I start my process by casting a wide search net via the MLS. I am focusing on Sacramento county, and I’ve decided that I am only interested in homes with 3 bedrooms and 2 full bathrooms with an asking price below $400k. There are roughly 75 homes on the market today that match that criteria, and after skimming through those I realize that I’d like to further refine my search. So I add in the required criteria that the homes must also have a 2 car garage. I prefer attached, but detached is not a deal breaker. This small change reduces the number of potential homes down to roughly 50 properties.

At this point, I take more time with each of the 50 properties - I’m looking at the curb appeal, the general location, and the days on market. If there is any noticeable neglect and deferred maintenance that I can see in the primary photo that the listing agent is using for the property, I reject the property. If the general location is on a busy street with a lot of exposure to passing cars and pedestrians, I reject the property. And if the days on market exceed 100 days, I reject the property. In about 10 to 15 minutes, I’ve cast my wide net and whittled the results down to 13 potential properties.

I now take an in depth look at each of the remaining 13 properties. I learn that a few are either facing very busy streets, or are on corner lots which are immediately adjacent to very busy streets, and I rejected those properties. I find that two properties have neighbors that do not take care of their homes and yards, and so I reject those properties as well. There is one property that I plug into my rent estimator and it came back with an estimate rent that is a few hundred lower than the other remaining houses, so I reject that one. After all was said and done, I have 5 potential properties that are priced between $350k and $400k, and any of them should rent out for somewhere between $2,400 to $2,500 a month.

I just checked current mortgage rates for a single family investment property. I plugged in my details that I would be purchasing it for $400k with 25% down. Because of the hit to the rate due to it being an investment property, the interest rate quoted was 7.625% at an $1,100 cost. The resulting monthly principal and interest payment at that rate is nearly $2,125. Adding in an additional monthly expense of $415 for taxes, and another $75 for insurance and the resulting PITI (principal, interest, taxes, and insurance) payment is $2,615. In short, the property does not pencil - at least not yet. And with most experts predicting a stagnant market in 2023, I don’t like the idea of taking on a new investment that does not cash flow.

But if I can get the seller to credit me $10,000 towards a rate buy down, the numbers are a lot better. The new mortgage rate would be 5.82% and my principal and interest expense is now $1,764. The taxes and insurance portion of my monthly mortgage payment stay the same, and my new PITI payment is $2,254. I estimate that any of the remaining 5 properties would rent out for at least $2,400, which means each should cashflow about $150 or more a month if I can get the seller to agree to the $10k concession. Considering the current market conditions and the risk that prices will continue to go down next year, I think I have a good chance of securing this sort of concession from a seller.

This is promising news to me and I’m excited by the opportunities that the current market is presenting real estate buyers and investors. Over the next weeks I’ll be working on my goals for 2023, and I think adding at least one new rental in the Sacramento area over the next 12 months will be one of those goals. Feel free to reach out to me with any questions or interests you have as they relate to real estate.