House hacking in high priced areas CASE STUDY – Los Angeles

What if I told you that there was a fairly easy, low risk, high-reward way to break into real estate investing?

What if I told you that you could buy a rental property with as little as 3.5% down, reap sizable tax benefits, lower your monthly rent expenses and do this with far less risk than your peers investing traditionally in rentals with 25% down?

It is called “house hacking”.

You may not have heard of this specific term before, but you’re probably familiar with the practice. House hacking is when you buy a multifamily property, live in one unit and rent out the other units. House hacking can be a great way to start buying rental properties because you can buy with low-money down owner occupant loans and still collect rent right away.

Different Ways to House Hack

• Buy a multi-unit property and live in one of the units that isn’t rented
• Rent out a room in your single-family house
• Rent out your main home and live in the guesthouse
• Rent out all the rooms in your home and live on the couch or in the garage
• Rent out your place via Airbnb or HomeAway
• Buy a fixer, improve it and sell it 2 years later avoiding capital gains tax

Due to high cost of living in Los Angeles I always recommend to my clients, who don’t own any properties yet, to buy a duplex. It’s the easiest,and in my opinion, the smartest way to break into real estate investing.

Here’s how the math works:

Address: North Figueroa St, Los Angeles 90042 (Highland Park area)

3 bedrooms + 2 bathrooms = 1266 SF (building total)

Escrow closing date: September 2017

Original listing price: $679K (Apr 2017)

Purchase price” $450K

The smaller unit (1 bedroom + 1 bath) is renovated and rented at $1075/month

The 2 bedroom unit needs a lot of work and is currently rented out at $1019/month. Current tenant lived on the property for 20 years.

Zillow Zestimate: $722K (as of Nov 2017) Do you still believe Zillow value estimates? 

In theory this duplex could be purchased with 3.5% down payment as a FHA mortgage, but unfortunately due to debt to income ratios (DTI), this wasn’t possible in this case. At the end my client had to come up with $61K cash to close on this purchase. There was additional cost of $15K that had to be dedicated to relocation costs for one of the tenants. Both units are currently occupied and in order to move in, buyer of the property needs to evict for owner occupancy. Rent control in Los Angeles is brutal thing to new property owners / accidental landlords.

Tenants of the 2 bedroom unit received 60 days eviction notice. After they vacate, the new property owner will be able to move in. Total monthly payment of principal, interest, property tax and hazard insurance is about $2400/month. Considering that the tenants of the smaller unit will move out next year with the end of their lease, new property owner will be able to rent this unit out through AirBnB. Potential monthly income from vacation rental in this hot spot area is anywhere from $2400 to $3000. Which means this new happy homeowner will not only live rent free, but actually can make a small monthly profit.

Happy house hacking everyone!