How to be cash positive using an FHA 203k in LA

Question

I own properties out of state since the cost is considerably less than LA. In fact I rent. So I'm a double agent. :-) I am looking at multi units in LA with the intent of using an FHA 203k to do the deal. What I'm finding here is sales prices barely work when using all cash (ROI, CashOnCash, 2% CAP Rate WooHoo!). I get that LA is more the land of property value appreciation vs monthly cash flow. OK. I'll accept a neutral cash flow in exchange for that appreciation. When I run a sales price through the spreadsheet calculated as an FHA (3.5% down) the numbers are very negative. As a FHA I would occupy one unit for 1 year. That's fine, I accept that. That also gives me the opportunity to rehab a unit while the other is rented out.

What have the LA investors done to handle a negative cash flow that justifies buying at these prices? An example would be a 2 unit bldg., sales price $600k, lets say the front unit is a 3/2 that rents for $2200 and back unit is a 1/1 for $1400. Factor in property tax, insurance, maintenance, cap ex and vacancy. I'm more interested in the long term math than the year or two of me occupying a unit so for arguments sake, you can consider that both units are rented at market rate.

Nicole Jones · Answer

I don't have much input but I am in the same boat looking into the same type of deal within the next year. For me I'm looking at it in the way @Zach Quick is describing. I can't imagine house hacking out there in a way where you even break even, let alone coming out cash positive. Some investors are extremely crafty so I wouldn't put it past some.... but for me, I will definitely plan on paying some out of pocket. Depending on where I purchase short term rentals such as airbnb may be something I look into. But that's just my uneducated (at this time) plan. I'm hearing that done right this can bring in more and get you closer to that break even/profit area. Of course there are more expenses and time to consider. BUT long term, I really believe it's a solid investment. Definitely not part of the get rich quick investment portfolio.

Thomas S. · Answer

They rely entirely on appreciation and supplement their tenants rent from their own pockets to gain that appreciation. It's mainly speculators riding on the appreciation freight train.

Without positive cash flow investing for most people is unaffordable. You need to be already rich, in most areas out there, to be successful.

Keep looking there are cash flow positive areas.

Zach Quick · Answer

@Steve Karp I am not in your market, but if you are doing 203k and updating an entire property then this should give you a huge opportunity at gaining a lot of equity. This assumes you buy right of course.

If you are getting appreciation, rents are only going to raise, you have a fixed loan, and you also have a ton of equity on a newly updated property, and you are cutting your living expenses by house hacking so to speak (I'm assuming since you rent)...Those are all the things I would think about. Of course it won't be easy to find this property but just think longterm about it.

How to be cash positive using an FHA 203k in LA

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