House Hacking in Orange County, CA - First Real Estate Deal

Orange County, California
House Hacking
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House Hacking in Orange County, CA - First Real Estate Deal

Dylan S.
Member since 2021 · 13 posts · 7 votes

Hi Everyone - 

I've been looking to do a house hack for a while as my first real estate deal. I'm 24 and have taken the last few years since I graduated college to get a job, save for my first investment property, and become lendable. I've worked at my current job for the past two years so have had steady employment and have built up some savings over the years. I'm fortunate not to have any student loans and have a stable income. Now, I'd like to put my money to work to do a house hack. Below are my financial stats:

Income: $120K/yr (gross income)

Cash: $3K

Savings: $23K

Investments: $44K

Debt: $1.8K (just credit cards, and all are paid in full on time each month)

After selling some of my investments, I'd have around $60K for a down payment. Currently, I'm looking at a triplex for $1.2M. I could potentially have my sister come in on the deal with me and be able to put down $116K total (10% down if we offer $1.16M). The monthly payment would come to around $8,870/mo (30yr at 6.646%). We could rent out one of the units for ~$2500/mo, bringing the monthly payment down to $6370/mo. Then we could split that payment equally at $3,185/mo. It's still a little steep at that price, but I'm thinking it would be a good piece of property to have for the long term, with it being in a highly desirable area in OC, with some rehab potential.

I've also heard in this real estate market, you can work with the seller to have them buy down your rate. So if we could have the seller buy down the rate 1 or 2 pts, that brings the monthly down to $8,194 (5.646%) or $7,551 (4.646%), making our payments more reasonable. There are also some potential down payment assistance programs since I'm a first-time homebuyer and other financing solutions I haven't really looked into, but does this seem like a reasonable investment opportunity? What would you do in my situation?

Also, as a comparison, it'd probably be around $1.5-2K for me to rent in the area. I know there are obvious risks with homeownership (vacancies, repairs/maintenance, capex, etc.), but I'd think it would be a better alternative to pay a little more each month to own a property and build equity rather than rent. Any advice is greatly appreciated.

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  • Lawrence Potts
    Real Estate Agent · Member since 2018 · 459 posts · 414 votes
    3y

    This is a pretty good strategy and you have great stats going off of what you've provided. My suggestion is to speak with a lender that owns real estate and has experience working with house hacking like yourself.

    There are a few things to consider:

    - Depending on what loan you use, you are limited in how much seller credit you can utilize to do a rate buy down. Some people right now are doing a 2/1 buy down to help. But if you're maxed at seller credit at 3% of sale price, you may need to come out of pocket to cover the rest. I am finding better help for clients utilizing the seller credit to cover closing costs as some house hackers are simply limited in liquid cash. That can be anywhere from 3-6% of sale price. I'd rather see a buyer's money go towards equity than closing costs.

    At 3% sale price of $1,200,000, you're looking at a total of $36,000 in seller credit.

    - Typically you can only owner occupy 2-4 units using either FHA 3.5% down or going conventional at around 15% down. However, each county/city/municipality has a FHA limit on how much they can lend. A good lender will have that information for you. I am not entirely sure where FHA limit is for you in your local market but my assumption is that it's very high compared to the rest of the country.

    - If going FHA, anything 3-4 units utilizes what's called the "Self-Sufficiency" test for lending requirements. It's an equation that uses the current/market rent against the cost of the mortgage to see if it can "self-sustain". If it does not pass the test, it won't qualify. When you get connected with your lender, you'll need to send the listing to them to run this test to see if the property would pass.

    I encourage you speak with @Grant Schroeder, he's done a lot of work with house hackers and is very familiar with FHA guidelines in the multifamily space. I've done several deals with him with my house hacking buyers and have had great success. He's also a house hacker and knows exactly what to look for. Connect with him and he can help you find an agent.

    Hope this helps! Again, I think this is a great strategy. Consider your long-term play: By owning this triplex, the value of it will continue to increase over time. 20 years from now, you'll have a very valuable asset that will have more demand than a duplex or single family home and you can liquidate your equity to buy something bigger and better. Your exit strategy is very important to keep in mind. I think this is a great idea. Best of luck and let us know if you have any other questions or if there's a deal you want us to analyze with you.

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  • Wale LawalBusiness Member
    Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
    3y

    @Dylan S.

    House hacking a single-family home or small multifamily property follows the same general steps:

    1. Understand financing options
    Conventional loans, along with FHA and VA loans, are three common ways to finance a primary residence through a traditional lender like a bank or credit union.

    Interest rates are often attractive, even for borrowers with lower credit scores, and down payments may be 5% or less. VA loans backed by the Department of Veterans Affairs even allow veteran borrowers to obtain 100% financing on a home.

    According to the Consumer Financial Protection Bureau (CFPB), before shopping for a mortgage a borrowers should:

    Check their credit report
    Assess how their spending habits will change with a mortgage
    Budget for additional or changed expenses
    Determine how much of a down payment is needed
    Decide on a purchase price of a home
    Create a loan application package with personal and financial information including pay stubs, W-2 forms, copies of recent tax returns, bank statements, and proof of identity
    2. Search for a good property to house hack
    A property that is a viable candidate for house hacking may have characteristics that are slightly different than a home that the owner will live in year after year.

    That’s because eventually, most house hackers will turn the primary residence into a rental property as they grow their rental property portfolio. So it makes sense to choose a home that will make a good rental right from the start.

    Common factors that real estate investors consider when choosing a good rental property include:

    The neighborhood, which will influence the type of tenants the home will attract and the rent they can afford to pay.
    Property tax rates, which vary widely from one place to the next and can have a significant impact on the total return of a rental home.
    School district quality, crime rate, and overall neighborhood ratings affect occupancy levels and the overall value of the home.
    Job market and population growth are two indicators real estate investors consider to help predict the future demand from tenants for rental housing.
    Housing Price Index (HPI) and Housing Affordability Index (HAI) are two other metrics investors use to anticipate rental property demand, because when home prices are unaffordable more people may choose to rent rather than own.
    Average rents and rent growth also affect where to buy a home to house hack, since the rental income will be used to pay for part of the mortgage and other expenses. Good tools to use to learn about market rents include Rentometer, Zillow Rent Zestimate, and Zumper.
    The number of rental home listings and vacancies in the area also indicate how strong or weak the demand for rental property is, because high vacancy rates may lead to lower rents and poorer investment returns.
    3. Crunch the numbers before making an offer
    Before making an offer on a home to house hack, investors crunch the numbers to get a better idea of the potential amount of income the home may generate.

    Even though a home being house hacked won’t be used entirely as a rental at first, investors often look forward to the day when the property can be refinanced and the equity turned into cash to use as a down payment to purchase another rental property.

    This simple spreadsheet by Roofstock provides an easy way to view the potential financial performance of a given property. You can use it to forecast the potential return of a property. Simply enter some information to view projected key return on investment (ROI) metrics, including cash flow, cash-on-cash return, net operating income, and cap rate.

    4. Close escrow, move in, and make repairs
    Closing costs on a primary residence normally run between 3% and 5% of the loan amount, in addition to the down payment. Fees to close escrow on a home include costs such as origination charges, appraisal fee, home inspection, title search and lender insurance, prepaids (such as homeowner’s insurance and prepaid interest), and title insurance.

    After taking title and moving in, the part of the property being rented out will need to be made ready for a tenant.

    The amount of repairs and updating required will vary depending on whether a bedroom in the home is being rented, a basement or attic is being remodeled into a studio apartment, or extra units in a multifamily property are being updated.

    5. Find a good tenant
    People who are house hacking and being landlords for the first time should take care to understand the state landlord-tenant laws and the Fair Housing Act to avoid breaking the law or discriminating against a tenant.

    When the space is ready to be rented, these are the general steps investors follow to screen tenants:

    Determine minimum tenant criteria, such credit score or income-to-rent ratio
    Pre-screen tenants by discussing requirements such as the monthly rent, security deposit, rental application fee, and background check up front
    Gather and review applications from prospective tenants and get permission to run a credit report, conduct a background check, and contact current and previous employers and landlords to verify tenant information
    Decide on the best tenant and sign a lease agreement

    All the best!

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