San Diego House Hack vs. Out Of State Investing

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San Diego House Hack vs. Out Of State Investing

Dillon C Morgan
Member since 2018 · 1 post · 1 vote

Hello BP! I hope everyone is doing well & staying healthy this fine Monday night!

I am writing this post to hopefully get some tips and opinions on my situation. Also, it might help someone in the same boat, somewhere down the line. 


I have been super interested in real estate for a few years now but it was never the right time. This year, I finally feel like I am in a place financially to make something happen. My goal is to buy some type of real estate in 2021. 

For the past 6-8 months or so, my goal for 2021 was to do a house hack here in San Diego. I have been keeping my eye on the multi-family market here, and was hoping to get into a triplex/fourplex for around 900k-1.1M using my FHA. Well, as I started to talking to lenders I became aware of the self sufficiency rule, and pretty much every 3-4 unit property is a no-go now. So, that leaves me with only one option - house hack a duplex, which are going for around $850k, which is hard for me to stomach considering you can find a 3-4 unit for $100-150k more. (anyone know a way around the rule? Beside putting more money down?)

Fast forward to a few weeks ago, (after finding the news about duplex as the only option) I started going down the rabbit hole - out of state investing in Midwest. I spent hours researching LLCs, finding property managers, and cash flow vs. appreciation. 


It seems like everyone I talk to has a different point of view. Some people are on the cash flow side - "you can go play craps in Vegas for much less work if you want to gamble". And some people are on the appreciation side. Anyway, I write all this to get peoples point of view and maybe some tips from people have been in the same boat? (I know their is probably not a right or wrong answer and it depends on the situation, but any help/opinions are much appreciated)


Here is the pros/cons list of each that I have compiled: (feel free to check my work haha)

SD House Hack Pros:
- FHA low money down (not that big of a loss even if the value goes down)
- can manage myself
- can later refinance out of PMI once equity is built
 
SD House Hack Cons:
- rents will most likely not cover the PITI, when moving out
- not living for free, still paying monthly (but at least mortgage and not rent)
- California landlord laws (covid)
- makes getting financing for out of state rentals harder if done



Out of State Rentals Pros:
- immediate cash flow, can potentially get enough units to support mortgage in CA
- market less volatile 
- better laws


Out of State Rentals Cons:
- a lot more work, need to start a whole new business




Some bonus questions to get your brain firing:
1. Anyway around the self sufficiency rule? (seller carry?)
2. Is something like BRRR strategy possible in San Diego?
3. Is it worth looking at SFH's and maybe adding an ADU?




Thank in advance for any help!

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Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
5y

Some comments

  • Brrrr is definitely possible in San Diego but it is very challenging to extract the full investment.  
    ADUs typically add a value substantially less than the hands off costs of building the ADU. This implies that a hands off ADU addition typically start with a negative position. The initial cash flow goes to recovering this initial negative position. A hands off ADU addition is typically one of the worse real estate investments.
    relying on property appreciation in the short term is risky (akin to gambling), but long term San Diego historically has been as sure as the sun rising.  Research the statistics on 10 year holds.   What you will see when is that the appreciation in every 10 years window varies from modest to outstanding with a lot more being outstanding than modest.  
    there is a difference between initial cash flow and actual cash flow.  Actual cash flow is the cash flow over the hold period. Historically San Diego has outstanding actual cash flow in tha absence of extracting value.  
    you should be able to find rents on a duplex that easily cover PITI.
  • If you go off market, you can find quads that meet sustainability. We just bought a quad at investor (non OO) LTV that the primary unit covers PITI. off market take more effort to find, but realizing the possibilities that option can provide may make it worth pursuing.
  • The RE Market is an efficient market.  This implies that the price is based on many variables but the two primary variables are expected return and the expected risk.  The low appreciating markets are such because they typically have expected low return and/or high risk.  

Good luck

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  • Dale K Poyser
    Rental Property Investor · Laguna Niguel, CA · Member since 2019 · 175 posts · 116 votes
    5y

    Dillon,

    Just looking at the way you wrote your post, it seems like you are leaning towards Out of state investing. The con you listed is probably something you would deal with if you were to invest in state and at some point decide that you want to grow your portfolio. It's not a strong enough reason to NOT do OOS investing.

    I have a friend that started Real Estate by house hacking, he was telling me to do the same but I wasn't ready to be locked down to a place or have roommates.

    He bought a large duplex, rented out one unit, lived in the other and rented out each room in that unit. From there he slowly did renovations, increased rents every time he got a new tenant, and then started buying other places out of state and in other cities in CA.

    In lieu of getting a duplex, get a 3-4 bedroom house and rent the rooms individually OR get something with a floor plan that allows you to convert it into separate units - think something with multiple (front and back) entries.

    You could also look at other cities in California in lieu of going out of state. For example Taft is a pretty cheap city, there are many others. just accept that you will be in the middle of nowhere. So you could rent an apartment for now and then buy a house in a cheap city like Taft. That cashflow will put you in a better position to qualify for SD.

    I'm looking into out of state investing as well. I'm finding that I can get a nice 3-2 for 140k or less that will cashflow well. I think when first starting out priority should be placed on cashflow. Ideally, you should try to get both cashflow and appreciation, but if a place will not cashflow don't do it.

    I'm debating renting my place and moving into an apartment, just to get the mechanics (of managing a rental property) down. But I am seeing that I could also easily just get a cheap place out of state which will FORCE me to learn how to put processes in place.

    When I watch a lot of Youtube videos I notice that most of the rehabbers ultimately decide to outsource and put processes in place to allow them to "scale" their portfolio. Otherwise you can burn out.

    To answer your other questions



    1. Anyway around the self sufficiency rule? (seller carry?)     - you can look into Subject to or Seller financing, or get some private or personal loans to make up the difference.

    2. Is something like BRRR strategy possible in San Diego? - I'm sure it is, you'll have to do some digging for off market deals. Keep in mind most hard money lenders will want something with at least 30% equity ARV and they may want you to put some money in. If you have good credit you can get a personal loan for that amount.

    3. Is it worth looking at SFH's and maybe adding an ADU? - That is an option but I have seen ADU additions run as high as 120k on the forums. So run the numbers to see if that works for you, or shop around. Just make sure it is properly permitted.

    That's all I have for now, good luck!

    1Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    5y

    Some comments

    • Brrrr is definitely possible in San Diego but it is very challenging to extract the full investment.  
      ADUs typically add a value substantially less than the hands off costs of building the ADU. This implies that a hands off ADU addition typically start with a negative position. The initial cash flow goes to recovering this initial negative position. A hands off ADU addition is typically one of the worse real estate investments.
      relying on property appreciation in the short term is risky (akin to gambling), but long term San Diego historically has been as sure as the sun rising.  Research the statistics on 10 year holds.   What you will see when is that the appreciation in every 10 years window varies from modest to outstanding with a lot more being outstanding than modest.  
      there is a difference between initial cash flow and actual cash flow.  Actual cash flow is the cash flow over the hold period. Historically San Diego has outstanding actual cash flow in tha absence of extracting value.  
      you should be able to find rents on a duplex that easily cover PITI.
    • If you go off market, you can find quads that meet sustainability. We just bought a quad at investor (non OO) LTV that the primary unit covers PITI. off market take more effort to find, but realizing the possibilities that option can provide may make it worth pursuing.
    • The RE Market is an efficient market.  This implies that the price is based on many variables but the two primary variables are expected return and the expected risk.  The low appreciating markets are such because they typically have expected low return and/or high risk.  

    Good luck

    2Reply
  • Twana RasoulBusiness Member
    Real Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
    5y

    @Dillon C Morgan Definitely should house hack before considering out of state investing.  You get alot more bang for your buck (3.5% down payment) and much safer investment, buying in a place like San Diego vs somewhere in Midwest. Higher cap rates exist due to higher risk factor of the asset. 

    I have closed on several duplexes this year that you can get rents from both units to cover PITI. There's not many but they do exist.

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  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    5y
    Originally posted by @Twana Rasoul:

    @Dillon C Morgan Definitely should house hack before considering out of state investing.  You get alot more bang for your buck (3.5% down payment) and much safer investment, buying in a place like San Diego vs somewhere in Midwest. Higher cap rates exist due to higher risk factor of the asset. 

    I have closed on several duplexes this year that you can get rents from both units to cover PITI. There's not many but they do exist.

    Saw one this weekend as public listing (not off market). Triplex in OK area for $790K. Market rent was ~$5500, PITI at 96.5% LTV, 30 year, 3.125%, 1.2% prop tax, and insurance at $1400 would be $4,172. That leaves $1300 for expenses not including PITI to be cash neutral. My pro forma, that many would consider conservative, shows this as cash flow negative, but a big reason is that real high LTV. At 75% LTV, my pro forma shows this as cash positive but not enough to meet my current buy criteria (there were other reasons I was not interested besides the financials did not meet our criteria).

    At least the market rents easily cover the PITI.

    I suspect the actual selling price will be closer to $760K.  I will see in 30 days or so.

    Note this triplex would not work for FHA due to sustainability criteria on triplexes, but is provided as an example that there are properties that have rents significantly more than PITI.

    Good luck

    0Reply
  • Twana RasoulBusiness Member
    Real Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
    5y

    @Dan Heuschele you are absolutely right. I’m pretty sure you are talking about the one on Juniper. Not a bad one indeed.

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  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    5y
    Originally posted by @Twana Rasoul:

    @Dan Heuschele you are absolutely right. I’m pretty sure you are talking about the one on Juniper. Not a bad one indeed.

     Correct, it is on juniper.  It is about 2 blocks from 2 of my properties.  I saw this morning that it is pending.

    In addition to the finances not meeting my threshold, two of the units are 1 br.  I am not a fan of 1 br units.  In addition, the seller wanted a rent back at around $1k/month below market rent of the primary unit.  

    In the current market, those financials are considered pretty good which is why it went pending so quick.  

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  • Twana RasoulBusiness Member
    Real Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
    5y

    @Dan H.  the additional unpermitted unit made it more attractive overall but yes it was extremely attractive in this market.....there is no inventory....there is 1/6th as many homes listed on market now than there were at same time in 2019.

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  • Ricardo Paredes
    Investor · Gardena, CA · Member since 2016 · 41 posts · 14 votes
    5y

    @Dale K Poyser

    Good point about there being a number of small cities in California with the potential to cashflow. I own a couple of rentals in Taft and would caution that there's currently very little inventory and it's it's tough to find properties that will help your DTI even if you have positive cash flow on paper. It's been my experience that for the purpose of calculating DTI the bank is going to take 70-75% of your gross rent and subtract PITI from that when calculating your net rental income. A 3 bedroom renting for around $900 with PITI in the $500-600 range is going to improve your DITI, but not by as much as you might think. It can also be challenging getting contractors out to smaller cities if they're more than 15-20 miles away from where they live. Even getting quotes for work has been challenging.

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