Is live-in-then-rent in San Francisco feasible?
New to Real Estate · San Francisco · Member since 2023 · 2 posts · 2 votes
Is live-in-then-rent in San Francisco feasible?
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Real Estate Agent · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
3yI tend to agree with @Becca F., I think there are better markets. I grew up in Alameda and I would tend to lean there if possible.
As someone who is now in Los Angeles, I used house hacking here to fund future properties and now have properties out of state (still house hacking here). When in an expensive market, there are two major benefits:
1. Bigger cash appreciation. A 3% increase on a $1,000,000 home is more money than 3% on a $100,000 home.
2. Bigger loan buy downs. We often overlook this aspect of real estate but it is so important because we leverage. Using the $1,000,000 example, your loan buy down is pretty significant each month in comparison to lower priced properties.
Both of these points build wealth quickly over the long run. Then you can do HELOCs and buy elsewhere. For example I used a HELOC on my existing property and bought 50/50 with a partner on a fourplex in Nashville. I used the HELOC and money from the sale of my first house hack (1031 Exchange) that was in LA. This means I effectively bought it with $0 down.
Another option you could explore is buy in the Bay Area, house hack it, then move on while renting the previous purchase. Then wait 2-3 years and sell. If you lived in it 2 of the last 5 years, the first $250K (if you file taxes as single) or the first $500K (if you file jointly) is still tax free. But you had tenants who paid down the loan. This means even if there is no appreciation, you still net more money that didn't cost you.
There is many right ways to build wealth. It is just preference.
7 Replies
- Rental Property Investor · San Francisco Bay Area · Member since 2022 · 1k+ posts · 1k+ votes3y
Hi Jase! Do you mean live in the S.F. property for a few years then move and rent it out or house hack (e.g live in one side of a duplex and rent other side or rent out rooms in a single family home (SFH) or condo while you're living there)?
San Francisco is having tough time as far as sales prices from the people leaving the city. You could probably negotiate on the price but it's still at least $800,000 for a condo and $1 million for a SFH. I'm trying to find additional tenants for one tenant on my rental house to bring it up to market rate rent....long story. Many remote tech workers have moved out to the suburbs or out of state. I would suggest looking at other parts of the Bay Area unless commute is a factor for you. For $800,000 I would buy a house out in the suburbs vs. condo with HOA fees in S.F. The East Bay is less expensive than the Peninsula.
The other option is to rent as cheaply as you can (live with roommates) and buy rental properties in other areas: Sacramento, Nevada, Arizona (my choices if I can build up more capital), Midwest and parts of the South. For $160,000 (the 20% down payment on $800,000) you can buy several turn key homes or long-term rentals that needs work in the Midwest. I also invest in Indianapolis metro area.
Google "San Francisco Doom Loop." I can also send you local real estate agents contact info. Have you talked to any lenders yet to have them run numbers for you?
- Real Estate Agent · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes3y
I tend to agree with @Becca F., I think there are better markets. I grew up in Alameda and I would tend to lean there if possible.
As someone who is now in Los Angeles, I used house hacking here to fund future properties and now have properties out of state (still house hacking here). When in an expensive market, there are two major benefits:
1. Bigger cash appreciation. A 3% increase on a $1,000,000 home is more money than 3% on a $100,000 home.
2. Bigger loan buy downs. We often overlook this aspect of real estate but it is so important because we leverage. Using the $1,000,000 example, your loan buy down is pretty significant each month in comparison to lower priced properties.
Both of these points build wealth quickly over the long run. Then you can do HELOCs and buy elsewhere. For example I used a HELOC on my existing property and bought 50/50 with a partner on a fourplex in Nashville. I used the HELOC and money from the sale of my first house hack (1031 Exchange) that was in LA. This means I effectively bought it with $0 down.
Another option you could explore is buy in the Bay Area, house hack it, then move on while renting the previous purchase. Then wait 2-3 years and sell. If you lived in it 2 of the last 5 years, the first $250K (if you file taxes as single) or the first $500K (if you file jointly) is still tax free. But you had tenants who paid down the loan. This means even if there is no appreciation, you still net more money that didn't cost you.
There is many right ways to build wealth. It is just preference.
- 3yCorby GoadeBusiness MemberInvestor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
I've gotta disagree- IMHO owning is always better than renting. You can buy something with the intention of eventually renting and if that doesn't work out, you can sell and keep the gains tax free.
You can also leverage 90% of the value of your primary.
And you aren't paying someone else's mortgage.
- Lender · Seattle, WA · Member since 2022 · 482 posts · 768 votes3y
HI Jase, it really depends on what your long term goal on investing real estate. You want to invest just to have a place to live and potentially offsetting your mortgage payment by renting out the vacated rooms or having x amount of cashflow in the future? Looking into single family houses or multifamily, as there is an actual land that you own and potentially build ADU/DADU in the foreseeable future. However, if you build the ADU and not condomise it, they appraisal will only view it as a SFR and give you the rent as SFR at 75% if lease agreements is being used. If you want to maximize your max rents then if might be a good idea to condomise it so that you can get rents as two separate units.
Also, the beauty of FHA is that it allows you to put 3.5% down payment to invest in 1-4 units. However if you plan on buying 3-4units, there is a trigger rule for FHA, it is called the self sufficiency test. In order to past this SS test, your appraised market gross rental income at 75% has to be more/equal to your monthly mortgage payment (PITIA). These are something to be considered. Feel free to DM and we can talk more about it @Carlos Valencia @Albert Bui - 3yScott AllenBusiness MemberReal Estate Agent · Columbus, OH · Member since 2020 · 449 posts · 471 votes
You should always try to house hack in your local market to start if you can but, if it doesn't make sense at all numbers wise - then look into different markets like in the Midwest where you can start a portfolio
- San Francisco is historically an outstanding market for RE Investors.
Quote from @Jase Strasburg:
Hello!
I am ready to start my real estate journey, but buying in San Francisco is daunting.
I would be a first time home buyer, and ideally I wouldn't sink too much capital into it so that I am able to purchase an investment property with better cash flow in a location that is more landlord friendly than SF.. but I figure while I'm living here I might as well try to build equity.
I am curious if a live-in-then-rent strategy in San Francisco is feasible or if I'd be better off spending my time looking for deals in other markets and continuing to rent in San Francisco?
Would love to hear people's thoughts and connect with a local realtor. Thanks!
however, this does not mean that I believe it is necessarily always a good investment. I believe if you plan to hold at least 10 years it is virtually guaranteed to be a good investment. At less than 5 years of hold, RE often will perform worse than other investment options some of which are more passive than residential RE. Between 5 and 10 year hold varies on if RE is a good investment. For the last decade, over 5 years in most markets RE would have been a good investment but historically this hold period often does not produce good returns due to buying and selling costs and not enough years to rely on good appreciation.
Good luck - 3yScott ScovilleBusiness MemberReal Estate Agent · Sacramento, CA · Member since 2019 · 502 posts · 276 votes
Hey Jase,
I work with a lot of investors from the Bay Area, who are now investing in Sacramento. It's close enough to go and view properties, and even self manage if you choose to. It's a great rental market, low vacancies, and the entry point is much more reasonable than the Bay Area. I'm an agent and investor in Sacramento. Let me know if you ever have any questions about the Sacramento market. Best of luck.
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