How to buy your first duplex in San Diego, CA with FHA loan!

7 Replies

We are looking into buying our first duplex/triplex in San Diego, CA with an FHA loan (3.5% down payment). We would like to live in one unit and rent out the other unit. I have used the bigger pockets calculator to figure our the monthly cash flow and the CoC ROI. However, I usually end up with a negative monthly cash flow of -$900 and CoC ROI of -20% for a property that costs around $1000000. I looked into duplexes with each unit having 3 bedrooms and 2 baths. Can someone please explain what my error is? Is the problem that I am paying around $900 mortgage insurance per month because of the FHA loan with 3.5% down payment? What is the average monthly cash flow and CoC ROI in San Diego for a duplex/triplex? What criteria is important when buying your first duplex in San Diego using an FHA loan with 3.5% down payment and you would like to live in one of the units? Any help is highly appreciated!

@Stelios Andong Yes many owner-occupied 2-4 units will cash flow negative, for my duplex I include in my calculations my rent and principal pay down, knowing in a year or two when I move, it will cash flow positive with equity. Also you will have very little likelihood of using a FHA loan on a 3-4 unit because of the self-sufficiency rule.

1)There is no problem paying $900 mortgage insurance, if it means you have the opportunity to purchase your first property and learn a lot through the process. 

2) I can't really give you an average, it wouldn't be fair because not all variables are equal 

3) Just like with any househack, the criteria needs to fit your needs, goals and expectations. Most importantly price/costs, location, condition, lifestyle. 

Some comments:

  • I suspect you initial cash flow estimate is more likely to be too optimistic than too pessimistic.  Rental expenses are significant.  Especially maintenance/cap expenses are under estimated.
  • The higher the class of neighborhood, typically the more cash flow negative it will be at purchase.  Best cash flow is achieved in working class areas  
  • 3/2 duplexes are much harder to find than 2 BR.
  • San Diego has great historical long term rent appreciation.   Long term appreciation seems likely to continue long term.   However, short term rent appreciation is far less certain.  During the Great Recession, rents were flat for quite a few years.   San Diego’s 2020 rent was flat   To expect short term rent appreciation is risky.   My last pro form I ran with both a 5 year flat rent and a 10 year flat rent.  

Good luck

@Stelios Andong

You won't able to go FHA on a 3-4 unit because of the self-sufficiency rule.

Negative cash flow is expected in the beginning. I'd double check w/ a local lender about PMI. $900 may be a bit high.

3/2s will be considerably tougher to find than 2/2s and 2/1s. 

When factoring in principal pay down & tax savings (along w/ CF & Appr) your returns should start looking pretty good after only a couple years. From then on out count on compounding interest to accelerate your gains. 

For critiera: Look for a duplex w/ value add opportunities on the lot. Renovations, some sort of ADU play, and leveraging non optimized zoning, alley access. etc..

Why would you expect a duplex or triplex to cashflow if you’re living in it rent free? Nobody buys a small multi thinking they;re going to leave one unit empty forever and make money. 

If you’re moving in and your rent is over $900/mo your cashflow positive. If it isn’t I probably wouldn’t buy it. Buying a property in San Diego that can’t demand $900/mo doesn’t sound very good.

@Stelios Andong  

Yes, it is common to see negative cash flow on a house hack when purchasing with FHA, 3.5% down payment, but that doesn't make it a bad investment. The key to minimizing the negative cash flow for an FHA house hack is to identify properties with unlocked potential or are undervalued in some aspect. This will typically require some work on your part to add value and unlock this potential (i.e. renovations, additions, exploring more profitable rental strategies, etc.)

Don't be deterred by the short term negative cash flow and be mindful of the long-term potential and your long-term investment strategy. With some work and planning, you can eventually create appreciation and refi out of your FHA loan to eventually achieve better cash flow. One of my clients, who I helped purchase a duplex with FHA just last year, is already in the process of refinancing to a conventional loan as we speak. So it is very possible.

Hope this helps!

@Stelios Andong   When you are buying a $1M duplex with 3.5% down you are going to have a significant amount of mortgage insurance, but that's not necessarily a deal killer.  Also, the number of bedrooms/baths doesn't necessarily matter as much, they matter more when you are comparing different properties in the same neighborhood.  For example, if you have a property out in East County that's a duplex with both units being 3/2 and for the same price you have 2 units each with 2 bedrooms in a more central neighborhood that has more to offer, such as Hillcrest....the right answer is not necessarily the bigger units.  I get as much if not higher rents in my small 2/1 units in better locations than I do with my large 3/2's further out.

I have several duplex's in contract currently between areas around balboa park as well as some a little further east....a couple of them are being purchased with fha, feel free to shoot me a pm and I can give you an idea what each of those look like.

@Stelios Andong

Hey Stelios, I am in San Diego too! I’ve been considering the same plan. Something you may be able to try to increase your cash flow a little bit might be to rent by the room. I’m a newbie in the space and haven’t gotten into my first property yet. I’m in the process of planning out my pursuit of my first two properties in SD within the next 5 yrs. Hopefully I’ll be in my first one by this time next year. I have read on other threads that renting by the room versus renting by the unit may offer some increased income. Just throwing an idea out there. Im not aware of this works in Cali or SD but putting it out there. Good luck! Can’t wait to hear how your plan works out.