Do SFR's in the Sacramento Area Still Pencil

As property values for single family residences have gone higher and higher, it has lead me to question whether or not SFR’s will still pencil on a month-to-month basis before write-offs. As an investor in real estate, I prefer to keep things as simple as possible. The simplest equation is whether or not the rental income will exceed the expenses of mortgage, property taxes, utilities, maintenance, etc. each month. In 2005-2007, it was very common for an investment single family home to not pencil. The bigger play was appreciation - the investor was willing to overlook the monthly loss in order to capture the fast appreciation of value which was occurring in the market at that time. Once that market appreciation stopped occurring, many investors jumped ship and sold off their real estate investments because those SFRs were losing them money each month. The bursting real estate bubble that occurred in 2007-2010 was multifaceted, and this was one of those facets.

Taking a look at Sacramento County, the current median price for a detached single family home during the past six months is $440,000. The median statistics for our generic Sacramento County property is 3 bedrooms, 2 full bathrooms, and a little more than 1,600 square feet of living space with a decent sized yard (0.16 acres). Rental rates in Sacramento will vary depending on where the property is located within the county. For general purposes, I estimate rent to be $1.25 per square foot of living space and in this example, a 1,600 square foot home would generate $2,000 a month in rent.

For an investment property we’ll be looking at a conventional loan where we’ll be putting 20-25% down. I always put at least 25% down, so for this exercise that is the amount I’m going to use. At a purchase price of $440,000 the down payment will be $110,000. The loan amount will be $330,000 and current rates indicate an interest rate in the 2.99% range. The monthly principal and interest for this scenario would be $1,397.25. Taxes and insurance would be $520.84 a month. The monthly PITI payment (principal, interest, taxes, insurance) will be $1,918.09.

There are three additional expense categories to consider - utilities (water/sewer/garbage), yard maintenance, property management. With just our PITI payment ($1,918), we are already bumping up against the threshold of our monthly rental income ($2,000). . To keep things simple, let us estimate that each one of these three categories adds an additional expense of $100 per month. Utilities: $100, Gardener: $100, Property Management: $100 for a total additional expense of $300 per month. This $300 expense, plus our PITI of $1,918.09 puts the total monthly expense of the single family home rental property at $2,218.09. This scenario is resulting in a net loss of $218 each month.

One important factor that we have not yet included is property repair and maintenance. Property repairs can be as inexpensive as having a plumber snake a drain line, to as expensive as needing to repair a sewer line or replace expensive HVAC components. Because these expenses can vary so widely, you’ll want to be budgeting a rainy day fund for just in case. I recommend setting aside $25-$50 a month to go towards this rainy day fund. Unfortunately, this brings our monthly numbers to a net loss of $243-$268.

The numbers seem to indicate that the significant increases in property values that we have experienced over the past 10-12 months have made investing in single family homes less appealing than it once was here in Sacramento. I’ve started to give more attention and focus towards duplexes, triplexes and 4-plexes as potential investment opportunities and hope to blog about that research in the future. Feel free to reach out to me with any questions you may have or to simply brainstorm ideas of where we can best put money to work.