Santa Monica, CA 路 Member since 2017 路 52 posts 路 27 votes
馃憢
I live in LA and I know this market is a different beast. Currently I live in a great location with a a low market rental price, but I am renting.
My wife and I are starting to dig around for deals, though it seems like people are irrationally buying up things via speculation and banking on appreciation.
I know that a residence is not an investment, but if we house hack with an FHA loan we can keep lower rent in an up and coming neighborhood, and we aren't paying our landlords mortgage.
So my question is it better to get in the game on a house hack that might not completely cover our unit, building that equity while we mine for a deal, or to hold out for that deal?
Lomita, CA 路 Member since 2017 路 18 posts 路 39 votes
9y
Hi Lucas,
Welcome to BP. It would all come down to the deal you get and what the numbers show. Make sure you are buying a true DEAL. Purchasing your own residence can bring your emotions into it and cloud your judgement. If you are able to secure a good property that you can build equity while paying the same amount you are now for rent, then it may not be a bad plan.
My main issue is the debt to income ratio. After purchasing an expensive property in LA would you be able to qualify for any other loans or investments? You wouldn't want to cripple your purchasing power of other future investments by putting most of the money available to you (i.e loans) in one property that you would still have to pay out of pocket for. If your goal is to establish cashflow now then I would only consider deals that just that. There is always private funding and hard money but that is typically harder to secure.
I am in this exact situation myself and have shifted to looking out of state. For me personally it would be better to purchase many less expensive deals that instantly provide positive cashflow than one here in CA that may or may not. Just something to consider.
Here in NJ, the cost of living is very high and so I know investors here who are currently house hacking in order to reduce their housing expense. They are okay with paying a couple hundred of dollars a month because they look at it as 1) they are able to save more money monthly because they reduced their normal housing expense by at least 75% and 2) when they eventually move out, the property will cash flow.
Make sure you run the numbers both ways, as it being owning occupant with you paying the least amount of money possible and as the property strictly being an investment once you fully move out. If you're able to achieve your desired ROI when the property is strictly an investment property, it might be worth house hacking given your situation.
So if the deal cashflows when we leave, it might be worth going this route? Say The mortgage is $5000 on a 3 unit that rents for $1800 a unit, and we pay only $1400 a month while in it (lower living costs + $16800 of our living costs going towards equity instead of rent), but cashflows $400 when we leave, it might be sensible?
Lomita, CA 路 Member since 2017 路 18 posts 路 39 votes
9y
What about all the other expenses involved with the property? We need to account for maintenance, vacancies, CapEx, and others which will could very easily put you into negative cashflow territory. CA has great appreciation, but that is a variable you have no control over. Plug the ALL the numbers into Rental Property calculator on here and see how it well it would do with and without you living there.
I think maybe you might have misunderstood what I said.. I'm not saying that if the deal cash flows it automatically makes perfect sense to purchase the property. There's a lot more information needed to make that decision but say with my example above about the NJ investors who house hacks.. They know that the average rent is $1,350/month. The investor saw this triplex that they could buy but it was listed at $375,000. This investor knows that all three of the units can rent for $1,350/month bringing in $4,050/month when fully occupied. When he calculates how much it would be to purchase this triplex, he comes up with a number of $3,000/month. That number includes everything though PITI, Cap Exp, repairs, etc. Well if he was to house hack, he would only get $2,700 in rent from 2 of the 3 units. He realizes that he'll only have to pay $300/month to live there. By buying this property, he's not only saving $1,050/month by reducing his living expenses but when he moves out he will cash flow $1,050/month. In a situation like this, the investor wouldn't mind spending the couple hundred dollars a month to live.
In your example above where you said by house hacking you'd still be paying $1,400/month to make up the difference, that might not be a good deal. I would think that when house hacking, ideally someone would only want to pay max. a couple hundred of dollars per month. I guess though this is all relative because if you're in a market with monthly rents of say $5,000/month then only paying $1,400/month doesn't seem so bad.
I hope I might of cleared up any questions you might of had. I just wanted to clarify that I'm by no means saying go buy something if it cash flows.
Santa Monica, CA 路 Member since 2017 路 52 posts 路 27 votes
9y
@Christopher Giannino I appreciate your perspective. I'm not taking it as a green light to buy, my perspective is of someone who currently pays rent and what is most advantageous?
To put it another way: I am currently an asset on my landlords balance sheet.
It seems more advantageous to me, to get off my landlords balance sheet and partially pay some rent to myself and my equity, than to apply the full cashflow from an investment towards my current rent.