Los Angeles, CA · Member since 2016 · 1 post · 0 votes
I’d love some advice on making my first property purchase and whether I should look to buy a duplex and house hack in my current HCOL city or instead focus on finding an investment property out of state.
Here’s some context: I currently rent in west Los Angeles with my partner who is doing a PhD at UCLA. We (unfortunately) need to continue living relatively close to campus, in very HCOL west LA, till she graduates in ~3-4 years. Once she graduates, we will likely move from LA, though we’re not sure where to. I’ve been toying with the idea of buying a duplex and house hacking in west LA mainly for the financial incentives that house hacking can yield, but also because I’d obviously feel much more comfortable living close to (or in) the first property I buy and being able to learn first-hand from being there. Yet, it seems to me like the sheer expense of properties in the area, as well as our short time horizon in LA makes buying here an imprudent option.
The other option would be finding a property OOS--turnkey or otherwise. This feels much more intimidating to me as a first time investor but, at the same time, also feels like less financially risky (at least in terms of the property cost / down payment outlay). Going this route would obviously rule out the advantages of house hacking.
Pros of buying in LA:
Could leverage house hacking and live in half of the duplex--saving on rent while also potentially getting space for a work from home office (which I’d really like)
I’d be able to manage the other unit myself and could save on property management
Living in/near the property seems like an ideal introduction/education to REI
Cons of buying in LA:
We would very likely be moving in 3-4 years and may need to sell the property when we move
Very high prices in LA (I could get the money together for a downpayment but it would take all my savings and I'd rather start my REI education with a smaller purchase).
Pros of buying out of state:
Lower prices (would be dipping a toe into a first property purchase rather than throwing all my savings into it).
Potentially higher returns (though maybe not considering house hacking as an alternative)
Cons of buying out of state:
All the difficulties of purchasing / managing an investment property at a distance--especially as a first time investor
Having property management fees (and maybe turnkey costs) eat away at the return
My main question is: Should I even consider buying a duplex in LA with our (potentially) short time horizon? Would it make sense to buy a very expensive property if we’d need to sell it in 3-4 years when we move?
Should I HH in a duplex in LA? Look for an income property OOS? Simply keep my money in the stock market and reassess when we move in 3-4 years?
Real Estate Agent · Columbus, OH · Member since 2020 · 1k+ posts · 1k+ votes
5y
It already looks like you have thought out everything pretty thoroughly. In my opinion, house hacking is one of the best ways to learn and dive into real estate. It is going to be more than just a numbers game but will depend on if you think buying a duplex locally might have some appreciation in LA. If you break even that is just 3-4 years of equity built up.
On the other hand OOS isn't nearly as impossible as people think and establishing your core 4 and a great team of connections can streamline the whole process for better returns and appreciation. I would think of what options might match your more present goals better. Good Luck! @Shane McQuerter
Real Estate Agent · Columbus, OH · Member since 2020 · 1k+ posts · 1k+ votes
5y
It already looks like you have thought out everything pretty thoroughly. In my opinion, house hacking is one of the best ways to learn and dive into real estate. It is going to be more than just a numbers game but will depend on if you think buying a duplex locally might have some appreciation in LA. If you break even that is just 3-4 years of equity built up.
On the other hand OOS isn't nearly as impossible as people think and establishing your core 4 and a great team of connections can streamline the whole process for better returns and appreciation. I would think of what options might match your more present goals better. Good Luck! @Shane McQuerter
Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
5y
@Shane McQuerter
You've thought it over. I was in the same boat as you. I went out of state to buy rentals and I'm happy I did it. You DON'T want to HH in LA on a duplex due to tenants rights. Do it on a SFH with extra bedrooms if you're going to do it. Keep in mind the conforming loan limit in LA is 765k. So if you want a low DP option of 5 or 10% then you're looking at a PP 840k or under. Take a look at your target purchase area, what can you realistically get below 840? If the answer is not much considering going out of state. I live in LA and invest in Kansas City. I now also invest in LA but I don't do the house hacking thing. I don't confuse living in real estate with investing in real estate. If you are just looking at pure investments it's easier to be objective. I don't live in my investments, so they are purely investments. Also, even if you do HH here consider also investing out of state for rentals!
I’d love some advice on making my first property purchase and whether I should look to buy a duplex and house hack in my current HCOL city or instead focus on finding an investment property out of state.
Here’s some context: I currently rent in west Los Angeles with my partner who is doing a PhD at UCLA. We (unfortunately) need to continue living relatively close to campus, in very HCOL west LA, till she graduates in ~3-4 years. Once she graduates, we will likely move from LA, though we’re not sure where to. I’ve been toying with the idea of buying a duplex and house hacking in west LA mainly for the financial incentives that house hacking can yield, but also because I’d obviously feel much more comfortable living close to (or in) the first property I buy and being able to learn first-hand from being there. Yet, it seems to me like the sheer expense of properties in the area, as well as our short time horizon in LA makes buying here an imprudent option.
The other option would be finding a property OOS--turnkey or otherwise. This feels much more intimidating to me as a first time investor but, at the same time, also feels like less financially risky (at least in terms of the property cost / down payment outlay). Going this route would obviously rule out the advantages of house hacking.
Pros of buying in LA:
Could leverage house hacking and live in half of the duplex--saving on rent while also potentially getting space for a work from home office (which I’d really like)
I’d be able to manage the other unit myself and could save on property management
Living in/near the property seems like an ideal introduction/education to REI
Cons of buying in LA:
We would very likely be moving in 3-4 years and may need to sell the property when we move
Very high prices in LA (I could get the money together for a downpayment but it would take all my savings and I'd rather start my REI education with a smaller purchase).
Pros of buying out of state:
Lower prices (would be dipping a toe into a first property purchase rather than throwing all my savings into it).
Potentially higher returns (though maybe not considering house hacking as an alternative)
Cons of buying out of state:
All the difficulties of purchasing / managing an investment property at a distance--especially as a first time investor
Having property management fees (and maybe turnkey costs) eat away at the return
My main question is: Should I even consider buying a duplex in LA with our (potentially) short time horizon? Would it make sense to buy a very expensive property if we’d need to sell it in 3-4 years when we move?
Should I HH in a duplex in LA? Look for an income property OOS? Simply keep my money in the stock market and reassess when we move in 3-4 years?
I don't get into the you should do this vs that game. However if going out of state is what you end up deciding to do you'll wanna follow the punch list below to mitigate your investment risks as much as possible.
Don't buy in the roughest neighborhood in the urban core. Pick a solid B-Class suburban area. Perhaps a nice 1950's built bungalow.
Always hire a 3rd party property inspector to give you an unbiased feel for the home. The reports are 40-90 pages long and go through the entire house in great detail.
Get an appraisal. If your using financing the bank requires this. This is good. The bank isn't going to let you blow their money. They have more skin in the game then you do.
Make sure you get clear title. If using a lender this is a non issue. They will make you do this. It's those maniacs that buy homes cash via quit claim deed off of craigslist that really get screwed.
Make sure your property manager is a licensed real estate brokerage.
Google Clayton Morris and/or Morris Invest for a cautionary tale of what not to do when buying turnkey real estate
Understand you can not eliminate all risk, only mitigate it. If you are risk averse, real estate, (especially out of state) is not for you.
I’d love some advice on making my first property purchase and whether I should look to buy a duplex and house hack in my current HCOL city or instead focus on finding an investment property out of state.
Here’s some context: I currently rent in west Los Angeles with my partner who is doing a PhD at UCLA. We (unfortunately) need to continue living relatively close to campus, in very HCOL west LA, till she graduates in ~3-4 years. Once she graduates, we will likely move from LA, though we’re not sure where to. I’ve been toying with the idea of buying a duplex and house hacking in west LA mainly for the financial incentives that house hacking can yield, but also because I’d obviously feel much more comfortable living close to (or in) the first property I buy and being able to learn first-hand from being there. Yet, it seems to me like the sheer expense of properties in the area, as well as our short time horizon in LA makes buying here an imprudent option.
The other option would be finding a property OOS--turnkey or otherwise. This feels much more intimidating to me as a first time investor but, at the same time, also feels like less financially risky (at least in terms of the property cost / down payment outlay). Going this route would obviously rule out the advantages of house hacking.
Pros of buying in LA:
Could leverage house hacking and live in half of the duplex--saving on rent while also potentially getting space for a work from home office (which I’d really like)
I’d be able to manage the other unit myself and could save on property management
Living in/near the property seems like an ideal introduction/education to REI
Cons of buying in LA:
We would very likely be moving in 3-4 years and may need to sell the property when we move
Very high prices in LA (I could get the money together for a downpayment but it would take all my savings and I'd rather start my REI education with a smaller purchase).
Pros of buying out of state:
Lower prices (would be dipping a toe into a first property purchase rather than throwing all my savings into it).
Potentially higher returns (though maybe not considering house hacking as an alternative)
Cons of buying out of state:
All the difficulties of purchasing / managing an investment property at a distance--especially as a first time investor
Having property management fees (and maybe turnkey costs) eat away at the return
My main question is: Should I even consider buying a duplex in LA with our (potentially) short time horizon? Would it make sense to buy a very expensive property if we’d need to sell it in 3-4 years when we move?
Should I HH in a duplex in LA? Look for an income property OOS? Simply keep my money in the stock market and reassess when we move in 3-4 years?
Shane,
I'm a househacker in a not-inexpensive part of Los Angeles, and I love it. The financial benefits over renting or owning a house are awesome, and you're right that living beside your rental unit is an excellent way to ease into landlording.
That said, I wouldn't recommend househacking in your situation because the time horizon is so short. A lot of your gains in LA come from appreciation. I made a long YouTube video discussing how to properly include appreciation in your underwriting, and the bottom line is this: over the short term, appreciation returns are too volatile to bank on.
Actually, let's get into the numbers, shall we?
These numbers are based on the FHFA's home price index for LA, which tracks prices quarterly going back to 1975. So we're looking at 45 years of data here.
Over that span, the median annual appreciation rate on a 4-year hold in LA is 6.9%. That's an annual, compounding appreciation rate. That's awesome, right?
However, the full range of outcomes is -10% to 21.4%. That's a really wide range. The 80% confidence interval -- that is, the range in which 80% of outcomes fell -- is -4.8% to 17.9%. That's still quite wide.
You'd need to hold a property in LA for 10 years for the 80% confidence internal to be entirely positive.
So if you bought a duplex or even a house with the intent to sell in 3-4 years, chances are you'd make some gains in appreciation, but there's also a chance the property wouldn't appreciate, and then you also have to overcome the costs associated with buying and then selling the property.
Given that we're in a really weird spot economically and at least some economists are predicting a recessionary environment next year, I'd recommend against househacking right now.
That said, let's explore a scenario in which it might make sense to househack...
If you were to househack in LA right now, you'd firstly want to find a property that lowers your cost of living. Your monthly out-of-pocket would need to be a few hundred dollars less than you pay on rent right now. For example, if you can save $400/month from what you pay in rent now, over 4 years, that's $20K. That's a cushion against the property not appreciating well.
Secondly, you'd want to buy in an area where the cards are stacked in your favor, an area that's rapidly developing right now. Given you're not Daddy Warbucks, probably the closest areas to UCLA that fit this bill are Inglewood/Lennox/Hawthorne or West Adams/Crewnshaw/Mid City. Some of these areas are still transitioning, so you'd need to be comfortable with that. If you do have more resources, then you could explore Westchester to the south or Mid-Wilshire to the east, both of which have plenty nice duplexes.
Thirdly, given the eviction situation right now, you'd have to find a duplex with a vacant unit.
If you explore the househacking route and decide it's not best, I'd start investing out-of-state. I don't think there's any downside in pulling your money from the stock market right now and getting started on your real estate portfolio. Investing out-of-state has its challenges, but there are plenty of good markets and, in a few, really great agents to help your journey. I'm happy to make a referral on that note!
Investor · Bothell, WA · Member since 2015 · 214 posts · 104 votes
5y
I house hack in LA in a SFR. It's more affordable than duplex, and you can probably get into better neighborhoods. I have a 3 bedroom SFR, rented 2 out until I met my fiancé. Now my fiancé and I take up the master and use one bedroom as our office, the other bedroom is still rented out. You will sacrifice on privacy but with the right roommate, it's really not that big of a deal. We are in the process of converting the existing garage to ADU. When that's complete, we will be able to rent out the ADU instead and have the whole house to ourselves. We may also move out of California in 5 years, by then, we can either keep the house and rent out the front and back house separately (which will yield impressive cashflow for LA). Or we can sell the house. Being a SFR with an ADU, we can market it to ppl who are looking for a family home or investors seeking additional income.
I would really run the numbers on that househacking theory. Determine how much that's going to cost you compared to what it would cost you to rent here. (I'm in Venice, so close to you) I'd be surprised if you could pin where the profit was going to be, exactly. But that aside, I would say the only way I'd consider the LA househack would be if you planned to hold the property for the long-term regardless of whether you move or not. Because it would have to be an appreciation play, you wouldn't see that in 3-4 years, for several reasons.
The best thing you can do is look for properties that meet both options, run the numbers on everything you find, and see what picture that paints. One of the options will then certainly jump out at you.
Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
5y
@Shane McQuerter you have to run projected numbers on both scenarios that are going to include all sources of returns including cash flow, appreciation and principle paydown. House hacking can be a good way to go since you are right there, but it comes down to numbers. If you do a house hack, will you have any cash flow or will the rental income just cover your mortgage, taxes and insurance and you break even. If you just break even, what kind of appreciation can you expect. How does this stack up against the cash flow, appreciation and mortgage paydown out of state. You'll need strong appreciation to cover the loss of cash flow on a house hack.
Rental Property Investor · Torrance, CA · Member since 2016 · 263 posts · 132 votes
5y
@Shane McQuerter It looks to me like you've really thought this through and you have some amazing feedback. I particular appreciate @Jon Schwartz's analysis... very impressive. At the end of the day I think you would be fine going either way. I started house hacking in 2018, then bought out of state in 2019 and now invest in LA full-time. From my perspective, it's more important that you look at the numbers, make a decision, and take action. In both situations you'll learn a lot and put yourself in a position where you will probably be able to do the other option down the road.