Buy a House in SF or Buy Multiple Properties Elsewhere?

Question

So I need some advice on what to do.

My current goal: to invest and build cash flow through my investments The dilemma: My husband and I live and work in SF. Right now we are currently living in a 2b2b condo in Potrero Hill (owned by his sister). We pay about $2000 in rent per a month to share one bedroom together and rent out the other bedroom to cover the rest of the mortgage.  To me I feel like it's a waste of money. Yes, it is going towards his sister, whom is family, but we aren't gaining too much out of it except for a place to live. So I want to get our own place, but the cost is really high in SF. For a point of reference, 1b1b condos are going for 800+ in good areas and HOAs are around 500-800$.

For me there are currently two options for me to reach my goal and resolve the dilemma:

1.  Get our own place. Refinance on a property I have and add the amount needed to make the 20% downpayment needed. Essentially we're looking at about a 200k DP.  Then what would happen is we would rent out one of the bedrooms and continue to pay what we're currently paying for rent (well a little extra), but at least it gets applied towards our mortgage/equity.

The problem: If I refinance the other property that I have and add in the other portion needed to meet the 20% downpayment, I wouldn't be able to purchase a smaller / cheaper investment property for about a year or so, when the SF placed is seasoned and I can refinanced again or wait until we have enough savings.

2.  Save the money that we currently have and re-invest this into *multiple* other properties in different cities that are more inexpensive (250k under).  In my mind, this would be a good option, but I need to actually FIND those properties first and for them to really have a good return to outweigh the rent that we're currently paying ($2000) so that it *balances out* our loss, I feel like this may be really difficult to do and may take a lot longer than.

The problem: I continue to pay rent and have a roommate.

What are your thoughts on this and how would you approach this situation on a logical financial standpoint.

FYI - FHA loans with a 3.5% down is a very unlikely option. SF market is hot and with multiple offers on the table for units, sellers are not interested in 3.5% down when they are getting over asking, 20% down or all cash offers.

Susie C. · Answer

Thanks everyone for the insight and advice.

I think in the end, we're going to try and get a place of our own in SF. Yes, it's a hefty price, but the longer we wait the more expensive it'll get. Some people had suggested house hacking outside of SF, but I don't think this is possible. We both work in SF and don't want to have to deal with the commute. I own a business where I meet with clients at our home so I think overall it's just worth it to pay a lot extra for this convenience instead of moving further out and renting an office in the city for a good chunk of money.

Susie C. · Answer

@Ryan Landis thanks for the insight. Unfortunately, FHA or anything less than 20% offers will most likely be left unseen or considered. Was looking at a house with an offer date for next Thursday, then got a call and found out there was an all cash offer that was too good for the sellers to pass up. This is before the offer date or even before the showing today and this weekends showing. In a market like SF, FHA's arent a viable option.  It's just too competitive of a market.

Gotta go back and strategize and re-evaluate things! yikes!

Zack Karp · Answer

Account Closed

I have a borrower that just won a multiple bid over a cash offer in the San Jose area using 90% 1-loan financing on a house over $1MM.  The Bay Area is hot, no question, but there are many factors, and every transaction is different.  As a lender, I will call the listing agent on the buyer's behalf and help seal the deal by reassuring the seller that the buyer is well qualified, and that my company closed 99.84% of our loans on time in 2015, and that the buyer smells like roses, etc, etc, etc.  Little things like this are what win in affluent, competitive markets.  You need to have a superior agent and lender in your corner, especially in that market, to help you win a multiple offer situation.

As a guy, I live by the motto, happy wife, happy life!  So for me, living in the right home with my family is more important than short term gain.  If your goals are aligned with that, then you know you need to go with option 1.  If you can bear to keep living in your current situation, then option 2 could set you up for more financial success later on.  For me personally, success is not only measured by my wallet, but also quality of life, and time freedom.

But from a logical financial standpoint, as you asked, that's tough.  Investing outside of your market can be great and can also be a disaster.  Obviously you need to have partners (realtor, property manager, etc) that you can trust and that perform.  There are many people here on BP that have had great success, and also many that have not been very successful.  Another point is that if property values continue to skyrocket like they have in the Bay Area, waiting to buy a $1MM property, that same property might be $1.05MM-$1.1MM in a year.  That appreciation may outperform investing that money elsewhere into rental properties.  You never know.  Too many variables, hindsight will always be 20/20!

Hope that helps!

Logan Allec · Answer

Account Closed, I would recommend you keep looking for a 3- or 4-unit property you could house hack.  I believe that this is the best way for someone with limited means but time on their side to get into real estate investing. You'll be patting yourself on the back in 30 years for getting into California real estate in 2016 for only 3.5% down.

You may have to look outside the city center to find a deal on a 3- or 4-unit property you could purchase using FHA financing. I recently did the 4-unit house hack in the Los Angeles area (not as expensive as the Bay Area, but still up there), but I had to head 50 miles outside Downtown.  The cash buyers weren't looking way out there.  It was off their radar.  He probably doesn't know this, but when I was considering using FHA to jump into Los Angeles real estate, I was encouraged by J.M., who got his start with an FHA house hack in Richmond.  It's obviously a far cry from Potrero Hill, but be honest with yourself: do you really financially deserve the place where you live right now?  Unless you've attained financial freedom, I would say not.

So has my house hack off the beaten path been worth it?  Of course.  I only have to live there a year, and it's better than throwing money down the drain every month in rent.  Frankly, I don't think anybody who has high financial goals for themselves has any business throwing away $2,000/month paying off someone else's mortgage.

One thing to keep in mind when looking for an FHA owner-occupied triplex or fourplex is that 85% of the market rents on all the units need to cover your monthly payment (principal, interest, taxes, insurance, and mortgage insurance). This is known as the self-sufficiency rule. It only applies to 3- and 4-unit properties (not SFRs or duplex) bought using FHA financing. I put together a spreadsheet here to help potential house hackers quickly analyze whether or not a property qualifies. There are other FHA requirements concerning which you should contact your local lender, but determining whether or not a triplex or fourplex meets the self-sufficiency rule is a good place to start as this rule will immediately eliminate many properties from your search, especially in expensive markets like ours.

Good luck!

Susie C. · Answer

@Tom Ott Thanks Tom! How do you typically go about finding your turnkey properties? Do these people do the leg work for you as well in terms of making sure the math on the property is realistic and able to meet rent expectations as well as securing those rent expectations when hired to managed?

My worry is just that you're buying properties at a premium when they are turn key (despite a low cost), but that the cash flow may not be as high or may just break even if the managing isn't good since they don't have as much skin in the game.

Tom Ott · Answer

Hi Susie,

Due to the rules of BP I can't give you TOO much information about the company I work for. Feel free to send me a message and I can answer any questions for you.

Jerry Padilla · Answer

Account Closed

In the end you have to do what works best for you! You can use the equity to purchase investment properties in the future.

Chris Mason · Answer

You're going to owner occupy initially... what if we just did a Jumbo 80/10/10?

What purchase price are you looking for? If you're only looking for a million or 1.2, keeping that $100k in your pocket is a pretty damn large DP on a modest rental property.

Jeff McCaskey · Answer

Account Closed

Some thoughts:

1) it really depends on what your long term goals are. If you want to build a large portfolio vs own a few properties.

2) I don't invest in CA and have actually never been in the state, but judging by all the reading I've done here on BP about SF and the Bay Area it seems very difficult to plan on building a large portfolio there based off of investing there due to such high purchase prices and in many cases low to even negative cash flows. Basically this asks the question, if you are investing for cash flow there, then how long will it take you to reach your goals?

3) I can't speak for other areas of CA obviously as I stated above having not yet even so much as visited the state - BUT - that same money you are talking about for a down payment on one property in SF could be used in many many other parts of the country to buy handfuls of property or decent sized apartment complexes (20-40 units), which very seriously will produce returns high enough to pay for that 2000$/mo mortgage and then some. So you can buy there and spend it all on a down payment for one property OR you can buy outright or leverage that same amount of money to own many many properties in another part of the country, creating equity in those properties and making enough to easily pay that mortgage in SF AND having money left over as well.

4) to give an analogy this sounds like - you are hungry and have one seed to plant at the moment. If you plant the seed you have two choices 1) grow the plant and harvest more seeds which you can plant and then eat as well as harvest and plant more seeds OR 2) grow the plant and eat it and be out of seeds with little to no means to have any in the future.

If you want more than just a couple of properties in your lifetime then perhaps a long review of your options would be the most prudent choice to make if you have access to 200-250k. That buys a lot of property in other areas of the country and produces far more than the equity pay down on an 800k house/condo. I'm sure you can find someone to disagree with me but if I had 200-250k I would not park it in a 20% down payment situation when I could use it to multiply that amount elsewhere.

AND - why would you want to spend 200k as down payment on a 1M property just to turn around and still have to rent a bedroom out and have to live with someone else in YOUR home??? Very few people would be willing to make that deal.

Jerry Padilla · Answer

@Julia Tse

Great post. You are absolutely right with conventional lending.

Account Closed You may want to start with getting pre-qualified and then decide where you want to go from there. Maybe the outskirts are a better option? Maybe staying out and purchasing in other areas of California are a better option. I have seen a lot of other investors  posting about profiting in LA and Sacremento and several other areas of CA.

Buy a House in SF or Buy Multiple Properties Elsewhere?

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