Should I house hack or invest out of state?

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Should I house hack or invest out of state?

Oleg Serdyuk
Rental Property Investor · San Diego, CA · Member since 2018 · 15 posts · 4 votes

Hello guys. 

I live in San Diego in 1 bedroom condo. My loan payment including HOA is around $1,700.

If I rent out this condo for, let's say same as my loan payment, and buy another property where my loan payment would be $1,500 (or anything below) should I consider it a good deal? 

I am thinking about to buy multifamily (2-4 units), live in one and rent out others. 

But the problem is the prices (too high) 

Multifamily here 2-4 units approx $500 - $800K. So my down payment (5%) + closing costs will be around $50K.  Plus paying mortgage insurance of approx $400 a month is not my favorite thing.

Here is my options:

1) buy multifamily (if I find a good deal), spend all my cash and pay $200-$300 less than my current loan and be a landlord

2) Buy turnkey property out of state and get $300-$400 monthly cashflow

3) Implement BRRR strategy and buy rental properties out of state. I don't have any experience doing that, so it requires time, effort and boldness.

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

Hello guys. 

I live in San Diego in 1 bedroom condo. My loan payment including HOA is around $1,700.

If I rent out this condo for, let's say same as my loan payment, and buy another property where my loan payment would be $1,500 (or anything below) should I consider it a good deal? 

I am thinking about to buy multifamily (2-4 units), live in one and rent out others. 

But the problem is the prices (too high) 

Multifamily here 2-4 units approx $500 - $800K. So my down payment (5%) + closing costs will be around $50K.  Plus paying mortgage insurance of approx $400 a month is not my favorite thing.

Here is my options:

1) buy multifamily (if I find a good deal), spend all my cash and pay $200-$300 less than my current loan and be a landlord

2) Buy turnkey property out of state and get $300-$400 monthly cashflow

3) Implement BRRR strategy and buy rental properties out of state. I don't have any experience doing that, so it requires time, effort and boldness.

Historically the ROI in San Diego is new the top in the nation but some things to point out:

  • If your payment is $1700 and your collected rent is $1700 this is clearly a cash flow negative property.  Other expenses include vacancy, maintenance, cap expense, and miscellaneous expenses.
  • Turnkey OOS that actually provides $300 to $400 monthly cash flow after all expenses is not an easy find. I think more realistic it $100 to $200 a month. Beware of cash flow projections provided by turnkey providers. Learn/remember the 50% rule; I find it is semi accurate for lower rent locations. I have seen OOS turnkey providers cash flow estimates ignore cap expense with the excuse that everything has just been rehabbed. It is BS. Items start their lifetime as soon as they are put into service. The cap expense estimate needs to be accounted for every month otherwise your cash flow analysis will indicate artificially high. My belief it that the only way OOS cash flow in low appreciation markets makes sense is in commercial Multi-family (5+ units). In SFR to quad, the return is too low for the associated risk.
  • Doing a BRRRR local as a first BRRRR is not easy. Most people do not achieve their projected returns even when performed local. Doing a BRRRR OOS is even more challenging. I definitely would not recommend a first BRRRR be OOS.
  • If you are looking at the BRRRR strategy why not consider local. Ideally you refinance at 80% with no PMI and get almost all of your invested money out. The issue here is good BRRRR properties are not easy to find. There are a lot of investors looking for these properties.
  • Why limit yourself to BRRRR? If you open up to any good value add you increase the potential investment RE a little bit. There are still a lot of people looking for these. So it would still be challenging.

It is my belief that in the current market (it was different just a few years ago) there is not an easy path for new investors.  This does not mean that any of the paths are impossible.  They will take work and have associated risk.  You are competing against RE investors that have experience, likely deeper pockets, likely more knowledge, likely a better network.

The house hack is not available to most of these more experienced investors.  It is a path largely used by low experienced RE investors.  It allows low down payment and has lower rates.  My recommendation to new investors is to start with a value add house hack.

Good luck 

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

    Hello guys. 

    I live in San Diego in 1 bedroom condo. My loan payment including HOA is around $1,700.

    If I rent out this condo for, let's say same as my loan payment, and buy another property where my loan payment would be $1,500 (or anything below) should I consider it a good deal? 

    I am thinking about to buy multifamily (2-4 units), live in one and rent out others. 

    But the problem is the prices (too high) 

    Multifamily here 2-4 units approx $500 - $800K. So my down payment (5%) + closing costs will be around $50K.  Plus paying mortgage insurance of approx $400 a month is not my favorite thing.

    Here is my options:

    1) buy multifamily (if I find a good deal), spend all my cash and pay $200-$300 less than my current loan and be a landlord

    2) Buy turnkey property out of state and get $300-$400 monthly cashflow

    3) Implement BRRR strategy and buy rental properties out of state. I don't have any experience doing that, so it requires time, effort and boldness.

    Historically the ROI in San Diego is new the top in the nation but some things to point out:

    • If your payment is $1700 and your collected rent is $1700 this is clearly a cash flow negative property.  Other expenses include vacancy, maintenance, cap expense, and miscellaneous expenses.
    • Turnkey OOS that actually provides $300 to $400 monthly cash flow after all expenses is not an easy find. I think more realistic it $100 to $200 a month. Beware of cash flow projections provided by turnkey providers. Learn/remember the 50% rule; I find it is semi accurate for lower rent locations. I have seen OOS turnkey providers cash flow estimates ignore cap expense with the excuse that everything has just been rehabbed. It is BS. Items start their lifetime as soon as they are put into service. The cap expense estimate needs to be accounted for every month otherwise your cash flow analysis will indicate artificially high. My belief it that the only way OOS cash flow in low appreciation markets makes sense is in commercial Multi-family (5+ units). In SFR to quad, the return is too low for the associated risk.
    • Doing a BRRRR local as a first BRRRR is not easy. Most people do not achieve their projected returns even when performed local. Doing a BRRRR OOS is even more challenging. I definitely would not recommend a first BRRRR be OOS.
    • If you are looking at the BRRRR strategy why not consider local. Ideally you refinance at 80% with no PMI and get almost all of your invested money out. The issue here is good BRRRR properties are not easy to find. There are a lot of investors looking for these properties.
    • Why limit yourself to BRRRR? If you open up to any good value add you increase the potential investment RE a little bit. There are still a lot of people looking for these. So it would still be challenging.

    It is my belief that in the current market (it was different just a few years ago) there is not an easy path for new investors.  This does not mean that any of the paths are impossible.  They will take work and have associated risk.  You are competing against RE investors that have experience, likely deeper pockets, likely more knowledge, likely a better network.

    The house hack is not available to most of these more experienced investors.  It is a path largely used by low experienced RE investors.  It allows low down payment and has lower rates.  My recommendation to new investors is to start with a value add house hack.

    Good luck 

    2Reply
  • Andrew Neal
    Real Estate Professional · Brentwood CA / Dallas, TX · Member since 2016 · 185 posts · 146 votes
    7y

    @Oleg Serdyuk I too feel your pain of living in an expensive market up north in the Bay Area. Something that my wife and I sort of fell into was a live in flip. We got the house we wanted in the town we wanted, made some very minor upgrades and benefited from good ol' fashion California appreciation.

    Also if wanting to reduce your risk and exposure on your first BRRRR you could partner with a friend/family member.

    Lastly there are some more affordable parts of California or for your perhaps AZ that while long distance may be close enough for at least a few drives to the area to meet face to face with folks and get a feel for the market.

    0Reply
  • Chris Grenzig
    Property Manager · Orlando, FL · Member since 2016 · 479 posts · 277 votes
    7y

    @Oleg Serdyuk so being from Ny, kind of similar due to the high costs. I looked at house hacking, but ultimately decided not to because I would still be coming out of pocket every month to cover expenses, or I'd have to live in a worse neighborhood which I didn't want.

    Instead I rent a place that is nice, but is below my means, and I invest all my extra capital into stock market and our own deals. House hacking is an awesome option and could have worked very well for me, but ultimately didn't fit what I wanted for my personal life and goals.

    Therefore, I think looking at additional properties instead of trying to house hack is definitely a possibility if that is what you would prefer. At the end of the day it's all about what is best for you, and not necessarily maximizing every dollar you have.

    0Reply
  • Corby GoadeBusiness Member
    Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
    7y

    As an investor, the key really is to find a nice blend of cash flow and appreciation. In my opinion. most newbies get really caught up in obsessing over cash flow, but that's only one piece of the equation. Do you have equity to leverage in your condo? There may be great value there in ways beyond just using it as a rental. I've had (and have) properties that don't cash flow all that well, but my equity position in them allows me to buy properties that DO cash flow well. When devising an acquisition strategy, it's important to look at the big picture, even from the start. 

    0Reply
  • Casey Murray
    Investor · San Diego, CA · Member since 2015 · 290 posts · 80 votes
    7y

    @Oleg Serdyuk I agree with @Dan H. that the BRRR method is a great option considering your current situation. Expensive housing market in San Diego also means a great landlord market allowing the opportunity to raise rents on properties with value add opportunities. It's a great way to lock in a 30 year loan at historically low rates, take advantage of tax benefits and save money by self-managing your property. Let me know if I can help with anything. Cheers.

    0Reply
  • Pamela Sandberg
    Realtor / Attorney · Phoenix, AZ · Member since 2018 · 388 posts · 265 votes
    7y

    A few thoughts for you to consider on AZ ...

    * MF units are hard to come by here. They exist, but they are rare, and usually in rough parts of town. 

    * That said - housing is MUCH more affordable here than in Cali. Take a look at some of our available investory and see what you think!

    Happy to help with any questions you might have about the AZ market!

    0Reply
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