House hacking SFH in Orange County
Hi
I'm a new investor from the Bay Area looking to buy a SFH in Orange county. I was thinking of using the FHA loan to buy the house and rent out the other rooms. Does anyone have any advice or experience house hacking in OC?
Hey @Lawrence Ng typically when folks house hack they are referring to buying a primary residence and renting out the other bedrooms - were you planning on doing that or just buying a SFH in OC and renting out each room while you don't live there? The reason is because these are 2 different financing vehicles.
As a primary residence, you are entitled to the absolute best financing - but you have to live in the property if you were going to use an FHA loan or 3% - 5% down conventional.
If you were planning on just buying a home, not living there and renting out each room, this would require you to put down 20% -25% as an investment property. Additionally, the loan has higher interest rates vs. a primary residence.
Also, as a lender, I advise folks that want to house hack to make sure you have 2 things: Leases for each room and also record your rental income on your taxes (Schedule E). Completing both of these items unlocks other benefits on your future investments.
Good luck!
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Lender
- (707) 595-7574
Hey @Erik Browning
I was planning using the FHA loan and living there for a year. I was under the impression that CA is not a great place to invest in due to the negative cash flow. It seems that after the first year that I live there, I may be able to break even renting by the room. What are your thoughts on breaking even/ having a loss first few years ?
Quote from @Lawrence Ng:
Hey @Erik Browning
I was planning using the FHA loan and living there for a year. I was under the impression that CA is not a great place to invest in due to the negative cash flow. It seems that after the first year that I live there, I may be able to break even renting by the room. What are your thoughts on breaking even/ having a loss first few years ?
This really is property specific. Also, if you are purchasing properties on the MLS, your cash flow margins are likely razor thin. I recommend you learn about both the 1% rule and 2% rule prior to beginning this journey. This will put the entire picture into scope that will include things that you may not be aware of - like capital expenditures, monthly costs, and property management expenses just to name a few. You can be successful, but it's essential to analyze some properties prior to making the leap!
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Lender
- (707) 595-7574
Quote from @Lawrence Ng:
Hey @Erik Browning
I was planning using the FHA loan and living there for a year. I was under the impression that CA is not a great place to invest in due to the negative cash flow. It seems that after the first year that I live there, I may be able to break even renting by the room. What are your thoughts on breaking even/ having a loss first few years ?
I would look at house hacking in CA as building the large appreciation that California is known for and also knowing that you would get some cashflow soon after you buy it (one-two years or sooner). This means that buying it has a house hack you can get at least a portion of your property expenses paid for (usually about 2/3s or more). This reduces the costs and allows you to invest more money into other real estate or save for that next purchase in 12 months. There is cashflow and when you get creative thinking outside the box you will make the cashflow happen since we are not in the midwest or other areas that allow you to buy a rental and cashflow day one with it.
Quote from @Peter Mckernan:Cool thanks for the advice. That was the plan to build equity while house hacking
Quote from @Lawrence Ng:
Hey @Erik Browning
I was planning using the FHA loan and living there for a year. I was under the impression that CA is not a great place to invest in due to the negative cash flow. It seems that after the first year that I live there, I may be able to break even renting by the room. What are your thoughts on breaking even/ having a loss first few years ?
I would look at house hacking in CA as building the large appreciation that California is known for and also knowing that you would get some cashflow soon after you buy it (one-two years or sooner). This means that buying it has a house hack you can get at least a portion of your property expenses paid for (usually about 2/3s or more). This reduces the costs and allows you to invest more money into other real estate or save for that next purchase in 12 months. There is cashflow and when you get creative thinking outside the box you will make the cashflow happen since we are not in the midwest or other areas that allow you to buy a rental and cashflow day one with it.
@Lawrence Ng. Rent by the room HH'ing is an excellent REI strategy and works excellent out here in Denver, CO with the high cost for rent (very similar to CA). I like to call it recession proof investing. Numbers are different in CA but for Denver, a conservative approach is about $800/month for a room with a shared bathroom and $900/month for a room with its own private bathroom. And these are just standard run-of-the-mill 10x12 rooms. Nothing fancy.
So a few tips and tricks for RBR HH'ing:
1). 4+ bed house. Anything less does not see to do well after moving out in the Denver metro market.
2). Egress widows. For basement rooms, do not rent out any room that do not have proper egress. Others may disagree but my opinion, not worth the risk.
3). No more than two tenants sharing one bathroom. For example, if you have a 4bed/2bath and one of the bathrooms is connected to the master bed. That means the other 3 rooms are sharing a bathroom. May not be the best option at 6:30AM when everyone is wanting to shower before work :)
4). And the secrete sauce is not furnishing living room with a TV. This will keep the tenants hanging out in there room and keeping to themselves. = less tenant headache.
One other thing you mentioned is cash flow. Cashflow is not everything when it comes to REI. You still have the other 3 pillars of the quadrant (appreciation, depreciation, debt pay down).
For example, here is a screen shot of an analysis I was running the other day on a HH. From purely a cash flow prospective, this does not look like an outstanding deal. But if you look at the entire investment, returns look much better than anything you would get out of the stock market.
@Ben Einspahr thanks for the list and that quadrant.
Do you recommend furnishing the room ? Also regarding the quadrant, let's say it cash flows negative, how will it be scalable to buy new properties?
@Lawrence Ng. These are great questions. I do not recommend furnishing the rooms. Only common areas and basic kitchen utensils (pots/ pans/ cups/ plates/ etc).
Let's say you analysis shows $1000/year negative cashflow after the first year. When running your analysis, you are planning for worst case scenario. In the analysis, thats paying 10% of rent for maintenance, 4% for vacancy, etc. When applying for HH#2 your investor friendly lender will look at your actual expenses incurred. So maybe your vacancy is lower than 4% or maintenance was only 7%. But still $1000/year negative cashflow will break your DTI when applying for your next HH loan.
Also, when applying for your next loan for HH#2 your lender will also want to see signed lease for the room you were living in to show that it is a stabilized rental.
But these are all great questions to ask your investor friendly lender. I always say lending first, analyzing second.
@Ben Einspahr thanks for your thoughts. I will keep these points in mind when I buy my first house hack