House-hacking vs Renting in a hot market

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My wife and I are looking to buy our first home and want to make use of the house-hacking method to lower our expenses and start to build real wealth. We would love to stop renting and paying someone else's mortgage. We work in Los Angeles, so trying to find a deal in a hot market has been challenging. Assuming we qualify for an FHA loan with 3.5% down, with a tenant living in one unit, all the duplexes I've run numbers on have come up with a negative cashflow of about $1,000/mo for the first 7 years on average. Is negative cashflow a bad thing if we occupy one unit? Now starting to wonder if continuing to rent while investing in an out-of-state market would even be a better option! I'm keeping my mind open, looking for any advice!

That's a really good question. I also live in a quite expensive market (San Francisco Bay Area) and I think I'm in a similar situation. Here are my two cents:

The way I like to approach such scenarios is to look at the numbers assuming that I rent out all units and that I pay a property manager to manage the units. If the numbers don't make sense that way, they will make even less sense if I live in one of the unit. In that case I could just find a comparable unit, rent it and come out ahead. Otherwise, if the numbers do make sense, you would be your own tenant and hence still come out ahead because your "rent" goes into your own pocket.

How would the cash flow look like if you were to rent out both units and also include cost for a property manager?
I don't know how much you are paying for rent right now but I'm guessing that it is likely more than $1000/mo. If that is the case, buying a duplex and house-hacking it would already bring down your monthly spending on housing. You also want to consider your return on investment assuming that you are paying yourself rent.

In the end, it's really hard to compare two properties that are the opposite about appreciation and cash flow. Properties in LA probably have a lot of potential for appreciation and maybe only cash flow a little bit whereas some properties out of state could cash flow a lot but never see any appreciation.