House hacking in Los Angeles, CA
Los Angeles, CA · Member since 2020 · 7 posts · 2 votes
Hi all! Newbie, prospective investor here. I'm hoping to house hack a duplex in Los Angeles County for my first investment property, but my mortgage banker (who's also an investor) said it's pretty much impossible to find a property where the generated income covers all, if not any, of the mortgage. He also said it will take years to see cash flow. I understand I live in an expensive, competitive market - but are those realistic expectations? Is house hacking - or at the very least, seeing positive cash flow in the first year - absolutely impossible in LA County? Thank you in advance for the insight and advice!
Hi all! Newbie, prospective investor here. I'm hoping to house hack a duplex in Los Angeles County for my first investment property, but my mortgage banker (who's also an investor) said it's pretty much impossible to find a property where the generated income covers all, if not any, of the mortgage. He also said it will take years to see cash flow. I understand I live in an expensive, competitive market - but are those realistic expectations? Is house hacking - or at the very least, seeing positive cash flow in the first year - absolutely impossible in LA County? Thank you in advance for the insight and advice!
Sophie,
I'm going to echo the previous posters here and say your mortgage banker is correct but wrong.
It is basically impossible to find a house hack in which the income covers all of the mortgage. However, it's entirely possible to find a house hack that significantly lowers your cost of living.
I house hack a duplex in Hancock Park. It's kind of a unique situation: I live with my wife and toddler in a beautiful 1932 building in an amazing neighborhood. My tenants pay $4975 for the downstairs units (they have a 3/2, and we have a 3/3). The most recently single-family-home sales on my block (like, literally on my block!) were for $2.29M and $2.68M. And I pay about $2100/month to live here. For a cost of a crappy two-bedroom in Koreatown, my family lives large in a beautiful neighborhood. Like I said, it's not your typical house hack, but it demonstrates the power of the concept.
When I was looking for my duplex last year, I built a spreadsheet that runs the numbers and estimates when you can move out and see cashflow. That's the most important metric as far as I'm concerned: when can I move out and see positive cashflow? For me, because of a large down payment, I can move out of this duplex anytime and cashflow. But I've also found properties where with a 5% or 10% down payment, you can move out and see cashflow in 1 or 2 years. I'm happy to share my spreadsheet with you.
Final thought in this rambling post: we all have our version of your mortgage banker who tells us our idea won't work. You should *definitely* do your own investigating before taking anybody else's insistence!
All the best,
Jon
Hi Sophie, in LA areas it is difficult to find a good cash flowing property. However, there is more to investing than just cash flow. Look at all the numbers, especially Cash on Cash, ROI and Property Value increases in the area. House hacking is a great way to start investing. And, in the LA market, if you're paying half or less than you normally would for your mortgage, and your property is gaining value, then you will come out ahead in the long run, especially, if you will be there for 5 years or more. It's more challenging to do if you plan on moving within 2 years, but you'll be saving money because your tenant will be paying most of the rent.
You can also consider renting out a room in your residence or AirBnB to make up the difference and to help you cash flow. There are options, you just have to be creative, make a plan, and get a great deal. Just some things to think about and consider.
I've taken a glimpse of the local market the past few weeks as I'm spending time in the area, and have not seen much. Speaking more to OC, but even looking in LA county, the numbers just don't make the cut.
Now, if you're willing to look at the alternative and see that it may be more beneficial to house hack considering principal, potential appreciation (don't bank on this), and just a lower or comparable payment vs. renting, then it could be an option. It could also be a good way for you to get first hand experience into the RE world.
If you're up for an adventure, maybe find something that needs major value add work, foreclosed + work, off market, multiple bedrooms, etc. This is where you can add some value to your equity realized when you improve the property.
I've actually noticed prices to rent have come down considerably, especially fully furnished Airbnb's that I was looking to stay at a few months. May not be a bad idea to downsize or get into a monthly agreement as you wait to find an opportunity.
Overall, seems pretty tough in this region, but I'm sure local agents may have more details. I'd be curious too if anyone's found pockets worth exploring. i will say that trucking companies have been extremely backed up with most places I've called, for what it's worth.
@Sophie Latapie I support what has been said but by looking at this market in a different light you can see the benefit. You can finance an owner occupied duplex in LA county at 5% down. Rent out the other side for help paying the mortgage. Your mortgage banker is correct that a cash flow property is very difficult to find BUT, if you are paying less than market rate then you are saving that money. Example below:
Current rent in LA for a 2/1 800 sq ft: 2500-2900/month
Duplex you find is 2 x 2/1 800 sq ft for $700,000.
Down payment is 35,000 (5%)
total loan costs approx 10,000
All in cost to acquire this property is 45,000. You rent the other side for 2500. PITI at 2.99% (going rate now for high FICO borrwers) is about $4000.
4000-2500= 1500.
You are saving $1000/month by owning long term, once you take into account the costs to acquire ($45,000) you break even at 45 months (just shy of 4 years). You can write off the interest on the loan, the asset is appreciating as you live in it, you can raise rents 3% annually. In the cash flow markets like the midwest this deal does not work, but in LA, this would provide immense benefit. It may seem like a lot but RE is the long game. Getting a property in a HCOL will appreciate over time and get you started on your investing career.
Just a different approach and things to consider.
Hi all! Newbie, prospective investor here. I'm hoping to house hack a duplex in Los Angeles County for my first investment property, but my mortgage banker (who's also an investor) said it's pretty much impossible to find a property where the generated income covers all, if not any, of the mortgage. He also said it will take years to see cash flow. I understand I live in an expensive, competitive market - but are those realistic expectations? Is house hacking - or at the very least, seeing positive cash flow in the first year - absolutely impossible in LA County? Thank you in advance for the insight and advice!
Sophie,
I'm going to echo the previous posters here and say your mortgage banker is correct but wrong.
It is basically impossible to find a house hack in which the income covers all of the mortgage. However, it's entirely possible to find a house hack that significantly lowers your cost of living.
I house hack a duplex in Hancock Park. It's kind of a unique situation: I live with my wife and toddler in a beautiful 1932 building in an amazing neighborhood. My tenants pay $4975 for the downstairs units (they have a 3/2, and we have a 3/3). The most recently single-family-home sales on my block (like, literally on my block!) were for $2.29M and $2.68M. And I pay about $2100/month to live here. For a cost of a crappy two-bedroom in Koreatown, my family lives large in a beautiful neighborhood. Like I said, it's not your typical house hack, but it demonstrates the power of the concept.
When I was looking for my duplex last year, I built a spreadsheet that runs the numbers and estimates when you can move out and see cashflow. That's the most important metric as far as I'm concerned: when can I move out and see positive cashflow? For me, because of a large down payment, I can move out of this duplex anytime and cashflow. But I've also found properties where with a 5% or 10% down payment, you can move out and see cashflow in 1 or 2 years. I'm happy to share my spreadsheet with you.
Final thought in this rambling post: we all have our version of your mortgage banker who tells us our idea won't work. You should *definitely* do your own investigating before taking anybody else's insistence!
All the best,
Jon
All of this is beyond helpful and has certainly allowed me to re-frame my approach. Thanks all!
@Jon Schwartz What you described in Hancock Park is exactly the type of deal my husband and I are looking for! Thank you for the offer to share your spreadsheet - I will most definitely take you up on that. Based on all the feedback, I understand that's the smartest way to find deals and measure success. Additionally, I noticed you're a realtor in the area. Would you be amenable to a virtual coffee? Would love to run some questions by you on how you found and analyzed deals (as that's my next step!).
Thanks again everyone!
Sophie
Hi Sophie,
I am in the same exact situation. Trying to crunch numbers that are viable for house hacking is rather daunting in LA. I was quoted for a 3/3, 3/1.5 duplex of 715k on an FHA loan. The down-payment plus closing costs would be 37520.69 with a monthly note of 4402. The 3/3 on the low end can rent for 3200 while the 3/1.5 can rent for 2600 also on the low end. So say I live in the front unit while renting the rear at 2600. 4402-2600= 1802 or I can live in the back unit and rent the front for 3200 making my rental cost 1202 a difference of 600 dollars. Personally I'm terrified of carrying large debts and would probably focus on paying that unit down to gain some equity. Also thinking creatively, my wife and I are considering cohabitating with another married couple to drive those cost lower. I'm not too sure.
LA... such beauty, excitement, diminishing air quality– I love it all. ha
I'm right there with you shopping for the same situation. I found that the best deal might come from a page of David Greene's BRRRR mantra: Add a room, square footage, units, etc. to add value.
I'm shopping for a duplex with a 2 car garage for cheaper ADU convert. It requires more capital, loans, or creative thinking, but will easily cashflow immediately once completed. And minimal holding costs since the other units are rentable right away (unless you want to update them).
@Quaid Cde Baca I definitely want to try the BRRRR method eventually, but not for my first property. Are you planning on renting both units in the duplex or living in one unit to offset costs? And then are you planning to turn the 2-car garage into a 3rd unit? Interesting idea to get the cashflow right away...
@Roosevelt Townsend Those are some decent numbers! What neighborhood(s) in LA are you looking in?
@Sophie Laramie I'm looking in the Hawthorne, Lawndale, South Bay area
@Sophie Latapie I'm planning on BRRRRing my first deal, but the back-up is a house-hack, with a back-up back-up being a sale, and the last option is foreclosure and rock bottom bankruptcy.
I'm planning on rehabbing the units immediately minor within a month > renting both units > ADU construction over many months while I stay in my current housing or move in 1 unit, but now with minimal holding costs. Yes, planning to move into the new construction garage-ADU convert (new) 3rd unit (but technically not a triplex).
A David Greene tip I heard: Add square footage/ rooms/ bathrooms/ units to exponentially add value.
@Sophie Latapie I support what has been said but by looking at this market in a different light you can see the benefit. You can finance an owner occupied duplex in LA county at 5% down. Rent out the other side for help paying the mortgage. Your mortgage banker is correct that a cash flow property is very difficult to find BUT, if you are paying less than market rate then you are saving that money. Example below:
Current rent in LA for a 2/1 800 sq ft: 2500-2900/month
Duplex you find is 2 x 2/1 800 sq ft for $700,000.
Down payment is 35,000 (5%)
total loan costs approx 10,000
All in cost to acquire this property is 45,000. You rent the other side for 2500. PITI at 2.99% (going rate now for high FICO borrwers) is about $4000.
4000-2500= 1500.
You are saving $1000/month by owning long term, once you take into account the costs to acquire ($45,000) you break even at 45 months (just shy of 4 years). You can write off the interest on the loan, the asset is appreciating as you live in it, you can raise rents 3% annually. In the cash flow markets like the midwest this deal does not work, but in LA, this would provide immense benefit. It may seem like a lot but RE is the long game. Getting a property in a HCOL will appreciate over time and get you started on your investing career.
Just a different approach and things to consider.
PITI is not all expenses in a rental. Cap ex, maintenance, PM fees, vacancy, miscellaneous. I want to point this out so that newer investors can be cognizant of true rental expenses.
if an RE costs $700k and one unit is renting at $2500, there is a good chance that the cost to live there is about the same as the rent. To put it other way, if both units were rented at $2.5k, the rent would be $5k. The rent to value ratio would be 0.71%; way below the 1% rule. In my similar market, I have positive cash flow at 0.75% and on some properties at 0.7%. There is no way the owner is saving $1500/month over owning the first year.
I therefore calculate living in such a unit would be about cash neutral versus renting the first year. As the rent increased, the advantage of house hacking increases.
Your calculation on the return starts significantly too optimistic, but with a historical ~5% rent appreciation, the cash flow numbers improve with time. In addition, there is the equity pay down and the property appreciation.
Hi Sophie,
I am in the same exact situation. Trying to crunch numbers that are viable for house hacking is rather daunting in LA. I was quoted for a 3/3, 3/1.5 duplex of 715k on an FHA loan. The down-payment plus closing costs would be 37520.69 with a monthly note of 4402. The 3/3 on the low end can rent for 3200 while the 3/1.5 can rent for 2600 also on the low end. So say I live in the front unit while renting the rear at 2600. 4402-2600= 1802 or I can live in the back unit and rent the front for 3200 making my rental cost 1202 a difference of 600 dollars. Personally I'm terrified of carrying large debts and would probably focus on paying that unit down to gain some equity. Also thinking creatively, my wife and I are considering cohabitating with another married couple to drive those cost lower. I'm not too sure.
Roosevelt,
The large note is daunting. It's important to have some reserves in the bank so you can cover the full mortgage payment yourself for 2-3 months. That's how my wife and I are comfortable with such a large mortgage payment.
You may also want to target properties that have one large and one small unit, like a 3/2 front house with a 1/1 back house. That would allow you and your wife to live alone (who doesn't want that?) in the 1/1 while renting out the larger 3/2. If you're planning to have kids soon, then you'll want a 2/1 (and you definitely won't want housemates!).
In fact, a house with a guest house in the back might be ideal. Though, the FHA lending limit is lower. So, trade offs...
Best,
Jon
@Jon Schwartz I liked what you said. My wife and I like many on this thread are looking to do the same. Would you be willing to share your calculator with me as well?
@Dan H. I see where you are coming from and the simplified example was to shed light on looking at house hacking in a HCOL as an option and how there is benefit to it but you cant cash flow at the beginning. Its a long term appreciation play, property and location dependent.
Is it difficult to find a cash-flowing 2-4unit multi in LA County? Sure. Is it impossible? No.
Within the last year, I've helped a couple purchase a fixer duplex in Pasadena that was 1/1 on each side which they managed to rework into 2/1s on each side. They currently have one side rented and live in the other side. They are in the process of refinancing and will most definitely cash flow on this property once they leave and get the other side occupied which they are in the process of doing now.
I'm also working with another couple who is in escrow on a duplex in Pasadena as well and their property will cash-flow as well after a little bit of owner-occupation and improvements to the property should we decide to close. We're in the inspection period now...
Pasadena is a bit more pricey in terms of initial investment but the rents are nice. You could also look at Long Beach and find some cash-flowing 2-4units there as well. Hawthorne, Lawndale, San Pedro.... all worthy places to investigate.
It will most likely be a situation where you will need to owner-occupy so units must be vacant and you must be willing and able to make improvements.
Also, people on BP tend to be cash-flow focused and I think that is just part of the equation. When I find you a duplex where you're only paying half of the mortgage, that is a win over the long haul.
Cash flow is important but it's not the be all and end all.
Hi all - this has all been so helpful, thanks for chiming in.
One more question to chew on...in an effort to build my investment portfolio as quickly as possible, we're trying to house-hack 2 duplexes over the next 2 years (one duplex/year, roughly). However, it is unwise to move out of the first property before it cashflows? Understand there are other factors to consider like CoC ROI etc., but do house-hackers typically live in the property UNTIL it cash flows positive, or can they get around that? How much does that matter with respect to moving out, getting a renter in, and purchasing another house-hack deal?
Thanks in advance again for your insight!
Sophie
@Sophie Latapie, in Southern California it's going to be difficult to find a residential multi that will cashflow if the owner is occupying one of the units. After all, the owner will be eating up 1/2, 1/3, or 1/4th of the potential rental income each month. The more units, the more chance the property will have at cash flowing while owner-occupied. It will also depend on the configuration of the multis. For example, let's say you were to purchase a property with 3 units and the bed/bath counts are 3/2 (3bed/2bath), 2/1, and 1/1. If you were to occupy the 1/1 then the chances of it cash flowing right away would be higher than if you were to occupy the 2/1. In my experience though, in Southern California, the aim is most likely going be to cash flow once you move out of one of the units and fill all the vacancy.
I know several people that bought and within 6 months: were cash flowing a gross of $900 per month (so after all calculations I would say about $400/ $500 net per month).
The end result will depend on city? Purchase price? Rents compare to purchase price? are you willing to sacrifice distance for more cash flow (meaning can you commute? or not?)
How much capital do you have on hand? Do you have enough for just the down payment and closing costs? or do you have enough for renovations and potential additions?
What is the end goal? and are you willing to put in some effort now to be in a better position in 1,2, 5 years?
(food for thought: adding sq footage will always give you a great return on investment): you can add square footage for a range of $150 to $200 per sq ft: where in many of the cities you mentioned: the value added would be between $400 to almost $1,000 per sq ft. (even more in places like hancock park or los Feliz etc. )
Main questions to ask yourself and husband:
1. What do we eventually want to own in the future (10 years from now).
2. How do we want to get there? (Monopoly style: meaning- do you want to buy small first, grow, learn, add value and capital to your net worth: then sell and buy your eventual investments to keep for the long haul?)
* there are many, many, many different vehicles that can take you to each bench mark in your investing journey and uncovering these to set a path for yourself will be your first step!)
@Sophie Latapie if you are good with people, and are comfortable with the adventure of living with roommates, I'd go for the best SFR deal with many bed rooms and bathrooms, and rent it to students and professionals. You will get the best rate and resell value will be higher than multi unit buildings. Also you may meet awesome people if screening is successful. It will also teach you what property management and problem solving is all about.
Hi all - this has all been so helpful, thanks for chiming in.
One more question to chew on...in an effort to build my investment portfolio as quickly as possible, we're trying to house-hack 2 duplexes over the next 2 years (one duplex/year, roughly). However, it is unwise to move out of the first property before it cashflows? Understand there are other factors to consider like CoC ROI etc., but do house-hackers typically live in the property UNTIL it cash flows positive, or can they get around that? How much does that matter with respect to moving out, getting a renter in, and purchasing another house-hack deal?
Thanks in advance again for your insight!
Sophie
Hey Sophie!
I'd love to know if you've thought more about this (whether to go for a second house hack ASAP or not) and come to any conclusions over the past few months. I found this post while going back and forth on this question myself and would love to know any thoughts or conclusions you landed on!
Personally I am on my first house hack in South LA, and while I know I likely won't cash flow if I move out at the one year point, I see value in owning rental property in LA in the long run, and I have a good savings rate and reserves, so I'm leaning toward the idea of getting a second house hack ASAP but haven't landed on a decision. Thanks!