Considering moving from SFH to house hacking in SF / Bay Area
Hello Bay Area house hackers,
Hope you're doing well. My wife and I currently own a SFH in Sunset, San Francisco. We've been reading up on house hacking and have been considering selling our SFH and buy a duplex / triplex in SF Bay Area so we could live in one, and rent the other unit(s). Typical house hacking stuff. Weather is another consideration for us. As much as we like our home and the Sunset, we wouldn't mind moving to a neighborhood that gets a bit more sun. We would prefer staying in SF, but open to considering other neighborhoods in the peninsula south of Palo Alto. Not considering East Bay at the moment.
On the financial side, we have two goals:
(1) build more equity, faster
(2) not increase our monthly mortgage from what we currently pay (in other words, we are fine paying what we currently pay for our SFH, as long as the rental income covers the incremental mortgage)
I would love to chat with you if you have been through a similar journey, or have thoughts on what to consider in making such a move. A few things we are looking to get insight on:
(1) what do you typically give up moving from a SFH to multi-family? And while I understand it's different for everyone, what mattered most to you if you've done it? Full transparency, my wife is concerned we're going to be "downgrading" substantially.
(2) any thoughts on what are some of the areas outside SF which lend themselves nicely to what we are trying to accomplish?
(3) if we were to pull the trigger on this, we would likely want to do a Section 121 to preserve our equity gains, as much as possible, and pour it back towards the downpayment of the multi-family. Are there other financial considerations we should take into account in doing so? I know the right answer here is to talk to a CPA but looking for someone's perspective who has been through it.
(4) any other considerations we might be overlooking?
Would appreciate any inputs!
Thanks,
Varun
- Realtor
- Oakland, CA and a Real Estate Investor with Multi-Family Units and a Self Storage Facility
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Am I missing something? If you already have an SFR in the City why not keep it simple and start renting out a room or two in your house? That's what a lot of folks do.
Presumably you work or have an office on the peninsula which is why you're ruling East Bay out? If you are remote, Oakland gives you a lot of inventory with great lifestyle (food, accessibility, etc) and a bette price, but the schools are lackluster (although changing).
We did the live-above-tenants thing for a year, and enjoyed it because our tenants were incredible but candidly were ready to move.
You definitely give up on a few things - complete privacy (multi-families are old, with thin walls and creaky floors), sharing a backyard (we never felt comfortable having friends over and having too many beers on weekends or holidays), and we were always in landlord mode mentally (let us know if you need anything! oh wow ok I'll take a look at the dryer etc). Even if your tenants are practically perfect (which ours were!), this dynamic always existed for us - your mileage may vary.
I'm glad I don't have to live above tenants again. I will unlikely live above tenants again unless I need to.
After a 20 second review, there's way more inventory in San Jose than any other part of the Peninsula but there are cute exceptions. The million dollar question (quite literally) is- what are your numbers/budget? Did you purchase your SFH for $1M and it's now $2M and you're hoping to keep PITI around $5k/month after rental income? If so, you could purchase something for $2.2M ($1M down, PITI at 3.1% for $1.1M would be ~$7k/m, rent inlaw unit out for $2k/m so your nut is $5k/m) or purchase something for $2.5M but you'll need at least a 3bed unit (PITI would be closer to $9k/m but if you can rent out a unit for $4k/month, you're good). Here's an example of the latter - https://www.redfin.com/CA/Menl...
Hope this helps! Understanding your budget/numbers would be helpful.
@Brian Garlington thanks, and great question. We are reluctant to rent rooms due to lack of privacy. We figured going the multi-family route would give us the benefit of having tenants (and the rental income) without compromising on the privacy, as much.
@Stephen G. thank you! You hit a ton of great points - really appreciate it.
Why are we ruling out East bay / Oakland? My wife works in the south bay and I work in the city. We'll both likely need to go back into office next year. Plus, we have been in the city for ~5 years and like it here.
What are our numbers? Actually, you were pretty close with your estimates :) We are looking to get ~$2 - $2.2m for our current house, and that would put us at ~800k - 1m in equity (after sales costs). If we put that towards the down-payment, that would present two scenarios.
(1) buy a duplex up to $2.5m - assuming we rent out one unit for ~$4500 / mo / unit.
(2) buy a triplex up to $3.2m - assume we rent out two units for ~$4500 / mo / unit.
In both scenarios, our monthly outflow towards mortgage will be similar to what we're paying today for our SFR.
So yes, pretty similar to what you called out in your post. Thanks for sharing the example. I know my wife is quite open to moving to peninsula / south bay, so she would appreciate it! :)
Wow great numbers!
Triplexes are going to be harder to find but I’m of the mind that you should go as big and expensive as possible since debt is cheap and you are (assuming) a dual income high earning household.
Those rental estimates seem high but they might not be for markets like Palo Alto or San Mateo. Is Craigslist showing you they exist? Is Zillow? One thing I did to “test” the market before buying was copying all the pics of a unit I was considering buying, then posting an ad on Craigslist/zumper to get a pulse on demand. That gave me a far better indication of reality than anything else.
Your wife is CORRECT!!! You would be downsizing and IMO ... no way will a MFH appreciate the same as Bay Area SF. You'll regret it!!! San Jose should have a lot of triplex's as a friend bought a unit back in the 70's his first home.
This is what I would do ... refi your SF and pull out as much cash as possible. I just refi'ed with First Republic. They had a program
where we pulled out $215k on a $420k new loan & only paid $27 in closing costs. Our payments stayed the same at 2.5%.
Rent out your present home don't worry about having positive cashflow. Any negative can be deducted from your taxes and your home will continue to appreciate making you more $$$$!!! Take your cash and buy what ever you can afford. Now you have two properties appreciating. If you do buy the duplex and hate it you still have the home.
Google for a future value calculator. Determine the appreciate rate for your area/home over the last 20, 30 yr's. Calculate what it'll be over the next 10 - 20 yr's and get EXCITED!!! NEVER sell Bay Area property unless you have too!!! It's the Golden Goose that just keeps on giving as my first home in Oakland only me $32,500 back in 73 zero down GI bill.
I just used loopnet for MF in San Jose. They're CHEAP. A 6 unit building for $1.6m. Another one was 7 units for $2m. near the college. That should be EXCITING!!! :)
After refi of present home ... look to by a home in Union City around $1.25m. Wife is closer to San Jose you aren't as far away from SF. They offer ranch homes, warm weather, large lots. Put an ADU in back yard!!! Now you own two homes & A ADU rental plus renting your present home. Your yearly appreciation should be approx $300 - $400,000 total for both homes!!! That ADU will offset any neg in present home. After a yr ... rent out UC home and buy another with a large lot. Now you own 3 homes & 2 ADU's. It won't be long before you are earning $1m / yr in appreciation!!! NEVER SELL Bay Area property!!! I learned the hard way!!!
@Stephen G. great suggestion. thank you! On second thoughts, the expected rents I mentioned do seem high. I'll try the craigslist test before we make a move - sounds promising to get a pulse on rental income in any market! Thanks for sharing.
@Paul Merriwether thanks for sharing your thoughts. The appreciation question for a SFH vs. MFH was playing on my mind as well. Thanks for clarifying that for me! I'll be sure to look into the future value calculator.
And thanks for sharing the plan! I'll spend some time studying it to see how / what we can make happen. The maneuver of getting additional properties without selling our current SFH is very compelling to me!
I may be the oddball out here, but why don't you pull a HELOC and buy more rentals out of state?
Your dollar will go waaayyy further. You keep your equity. You don’t have to move. AND you generate more income.
Varun - what are your goals?
Do you want to plant roots in a better school district with better weather? Do you want to retire in 10 years off of passive income? Do you want to be worth $10M by the time you're 60?
Each of these goals require very different strategies (buying a Fremont/UnionCity SFH for #1, buying out of state income-flowing property for #2, buying a Menlo Park SFH for #3).
Folding a SFH into MFH will pay down the debt service faster through rental income but your equity won't appreciate as fast as a SFH in San Francisco, so it might net out. And then you'll be living in a 100 year old duplex and your wife is going to be asking you for a backyard for your kids and tell you to turn down the music when you're cooking dinner on Sunday night. I don't love this strategy, tbh, because it doesn't really spike on any single strategy (cash flow or equity).
Really think through your goals and build a strategy around it. For my wife and I, we are focused on retiring in 10 years so we can be full-time parents and volunteer. In order to accomplish that, we have a blended portfolio of an Oakland duplex that appreciates but doesn't cashflow, a SFH that appreciates (and wouldn't cashflow if we moved), and a low-income apartment complex in South Chicago that cashflows (15-25% cash on cash return if you do or don't factor in the debt service being paid down) that is unlikely to appreciate more than 1% YOY. We will likely acquire a new cash-flowing building every 1-3 years over the next decade and hope to retire off of the rental income while our stock portfolio grows until we are 50, then we will untap those until we are 60, then we will untap retirement accounts, etc.
I don't disagree with Paul, fwiw. I would not sell a SFH with that much equity in SF, especially since HELOCs and refi's are dirt cheap right now. If your goal is #1 or #3, just borrow cash for a down payment and don't sell.
quick tip: Check out 1670 Kirkwood Ave, SF. It’s a great house hack option, per the listing info on it.
A $2mil SF SFR at 6% appreciation will be worth approx $3,581,695.39 in 10 yr's. A tenant will pay the note or most of it
depending on how much you pull out. AT 10% appre. it'll be worth $5,187,484.92!!! Talk about easy wealth building!!!
The hardest part ... how do I get my money out with out selling!!!! I'm thinking long term people will be buying Bay Area property through some form of shared equity. Or some land trust deal where they buy/lease the home long term but don't own the land. You're in the money!!! NEVER SELL!!! :)
This thread opened our eyes to so many options other than selling our SFR, that we just hadn't considered. Heartfelt thanks to you all. Selling the existing SFR sounds like a pretty sub-optimal idea now :)
@Austin Largusa investing out of state is absolutely on the table! In fact, we are looking into investing out of state as well albeit we weren't exploring the possibility of taking equity out of our current home to pay for it (my ignorance). I started this thread assuming we would have to sell our house to use the equity, but given the generous advice on this thread, it's pretty clear that HELOC / HEL might be the way to go, which in turn means we don't need to sell our current home to use the equity, and thus opens us wide to using that equity to fund our investments anywhere, not just bay area (sorry for the long run on sentence).
@Stephen G. a mentor like you is what I need :) But seriously, unless I am missing a nuance, our goals sound quite similar. Looking to retire by 40 (both of us are 32 now). Which means two things for us by then:
(1) build towards "enough" passive income (~10k / mo after taxes)
(2) reach net worth ~$10m - including debt pay down across all assets - stocks + RE
Honestly, hadn't though past that, but your plan beyond 50 sounds like a pretty solid strategy to strive for. So thanks so much for sharing that. One question for you if you don't mind - for your appreciation goal, were there factors you considered to decide whether to invest in the Bay Area vs. outside? Asking as I am in that situation right now, but I am probably evaluating that with a somewhat narrow lens of "where will I get most appreciation?" Happy to take this on the DM as well.
@Amit M. thanks for sharing the tip! Will look into it.
Hello @Varun M.
Another viable option for you would be to purchase another SFH along the peninsula and then add an "ADU". Current laws allow for pretty large units, 1200sqft, if I'm not mistaken. You also could build it towards the rear of property to keep your privacy. In reality it's a true house hack, as you get multi-family rent without the privacy loss of a multi family.
Also SB9 was just signed which allows you to split a lot and build two duplex per lot. I'm considering demolishing the entire main home and building a duplex in its place with two ADU attached. Then spilt lot with current detached ADU and have technically 5 unit passive income. All wishful thinking.
check out my post/build. It's located in the nicer part of South San Francisco. Lot size is 6800sqft somewhat deep lot for neighborhood, 50x136. Purchase price for a comparable is 1.5mil-1.9mil, one currently for sale actually. Take your equity from home sale as a down payment and then build an ADU. Better weather and a 10min drive to the Sunset District sounds like a no brainer. I spend a lot of time in SF and feel like I live there without the headache of living there, you should understand me. Ha.