California House Hacking?

Question

So recently I asked for help looking to do Out of state investing for multi unit renting. I live in CA and I am also interested if I should try house hacking here.

My questions are,

1) Is it worth it to try house hacking here with such high California prices? if not should I continue with out of state markets?

2) What are some good places to consider house hacking in California?

3) What are some of the most important things to know when getting into house hacking in CA?

My goal is to create cash flow. I currently live at home for free and have a good amount of money saved up to make a down payment.

Becca F. · Answer

Your post shows one reply but for some reason I can't see it...strange.

Some of the forums don't get a lot of traffic. I notice that the "General Real Estate Investing" and "Starting Out" forums seem to get the most replies.

I personally haven't house hacked (but I did rent out my primary home instead of selling it when I moved) but I do know a few people that do in San Francisco:

- One person bought a single family home (in reality two main levels, the lower level with a small kitchen) and an ADU. She is living in the 400 sq ft ADU and renting out 2 levels of the main house on AirBnb. For context she isn't a tech worker earning $400k. Her salary is closer to $150k (not a super high income by Bay Area standards). The AirBnb stays booked most of the year and generates a good amount of rental income.

- Other person bought SFH and is renting out the ADU as mid-term rental. People that do MTRs include: travel nurses/medical workers, business people, construction crews, people who are temporarily displaced from their home either their own renovation or from fire, water damage, etc.

Other ways to house hack would be to live in SFH and rent out the rooms, maybe to trusted friends (have a legal lease written up, run credit checks, verify salaries) or if you don't mind living with strangers, vet them thoroughly. The idea of house hacking is to help offset some of your own mortgage payment, not generate lots of cash flow, at least initially. Your tenants or roommates are helping you pay your mortgage. You'd have more privacy with a 2 to 4 unit but there don't seem to be as many of those as a SFH.

If you're open to moving out of the Bay Area, Sacramento is a lot more affordable.

Dan H. · Answer

@Noah Mac

House hacking in ca can have some cash flow if you use alternative to traditional LTR tenant.  STR, MTR, rent by room.   What do these have in common besides the potential for increased revenue over LTR?   They each take more time than LTR.

For a move-in ready purchase off the mls using traditional LTR with standard financing, it will initially have negative cash flow when properly allocating for all sustained expenses.  The cash flow will improve most years (possibly not 2025 due to high insurance increases on rental properties in CA).

For traditional move-in ready purchase off mls to LTR my view is a 10 year hold is almost guaranteed to produce a good return.  Holds of less than 5 years typically will not produce a return worth the effort.  The 5 to 10 years is the sometimes works (worked from 2010 through 2021 in most markets) but other times will not (I believe at current rates, prices, and rent point a purchase today is unlikely to produce a good return significantly sooner than 10 years.

Some alternatives

- alternative financing.  Sub-to is too risky for me but NACA, assumable, seller financing may work and 2 of those are typically only available owner occupied (OO).

- off market: a very large percentage of these require work and/or have risk.  I personally recommend against this route for most new RE investors.   To much risk.

- value adds: this has been my go to choice.   I have done well, but the current market is more challenging than the recent past.   Start small.  Maybe partner with someone that has experience.   It can work but it is typically not without risk (at least not in this market, I have done some in the past that seemed to have virtually no risk).

As for out of state, it is full of risk.  The cash flow is typically not worth it when properly allocating for sustained expenses.  Building and maintaining a quality team is not as easy as some people imply.   The actual cash flow is typically negative when properly allocating for sustained expenses despite what those in the market state/imply.  At low rent points, 50% rule is aggressive and rents must far exceed 1% at current rates for sustained cash flow.  Even if you see a couple hundred dollars of actual cash flow on an OOS RE (which is unlikely), it is not worth if.  Five to make $12k.   10 to make $24k.  I invest in RE to have it make a positive difference in my life.  How many units would that require?  By the way I have made ~$1m on my last RE investment in a high cost market.   ~$700k on my second to last RE investment.  Both of these I used accelerated depreciation providing me hundreds of thousands of write offs.  One before that I am approaching $1m made.

I likely see double as many posts on BP from struggling OOS RE investors than i see from struggling investors in their home market.

I definitely want to warn the market has more challenges today.  However, I believe you hold for 10 years in your market and you are very likely to achieve an exceptional return.

Good luck

Scott Scoville · Answer

Hey @Noah Mac, house hacking is a great way to get started in real estate in CA, as the barrier to enter the investment market is challengin do to high prices. I like getting a bit of cash flow, with a some price appreciation over time, and I don't think there's many places that have the track record that CA real estate has. I currently invest in Sacramento. The barrier to enter is less than the Bay Area, and the region is growing. We have a lack of housing, and it's the number one place people are relocating to from the Bay Area. Happy to jump on a call anytime and discuss the Sacramento market.

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