House Hack in Very Tenant-Friendly Los Angeles Area or Rent To Avoid Risks

[Tom T.]

I read a lot about why tenant-friendly places can be so bad e.g., strict rent control, just-cause evictions, months long eviction process, relocation fees, etc. It has me a bit hesitant to house hack there with a multi-family where I could have up to three separate tenants. That leads me to contemplate renting for myself (and invest elsewhere), but that is also a bad idea because my largest expense is going into another landlord's pocket, and I don't benefit from all the wealth makers of owning my primary residence.

One possible solution I thought of is purchasing a large single family home and doing short-term rentals for each room with Airbnb. This should minimize the risks of any eviction chance, especially if stays are less than 30 days. It will require more time, but will make me focus on developing a good team & processes (eg cleaner/maintenance). However, there is a strong correlation between tenant-friendly and more red tape and regulations on short-term rentals. So I will need to jump through some licensing hurdles as well and pay additional fees/tax.

What would you do in this situation? A multi-family where it can be more passive (and I can even Airbnb out part or all of my owner-occupied unit eg when traveling). Or, a SFH (stronger demand, easier to sell) and go all in on STR with a more active approach?

I also noticed there's some variations between LA city, LA county, Orange County, etc. Let me know if people have thoughts on optimizing there too.

[Rick Albert]

I have house hacked twice in LA (I'm actually a case study in the BP book, The House Hacking Strategy). 

1. STR is tricky in LA. There are limitations to how many days you can rent in a given year. Last I read it was 120 days a year and you may ask for an exception. I would not bank on this strategy. Plus STR was a very "it" thing to do. This created a lot of competition.

2. You are correct, the rent control laws are tricky. Studies have shown though that because of rent control, it keeps vacancy low and rents high. This can help with future cash flow if done right. The rent between my current tenant to the previous one is up 18% (3 year span). Out of state my increase in rents are not coming close to that.

3. Vetting is key. Most of the time when a landlord has a bad tenant, it was probably red flags during the vetting process. Not always, but many times.

4. It's really about appreciation. I'm up to 19 doors including my personal residence between a few different states. 15 of those doors I bought with no money out my own pocket (or if I did I got it back via BRRRR). It was all because I started with house hacking in LA.

Do the math:

You have $50K to play with. You can buy a $1M property with 3.5% down (plus the closing costs). You now have appreciation on a $1M asset. 

First year if appreciation is 3%, that's $30,000. That's a 60% cash on cash return on your equity. This doesn't include tax benefits, loan buy down, and higher rent per room.

Using that same $50K, you are buying say a $200,000 property. 

Using that same 3% appreciation, you make $6,000 in equity, which is a 12% Cash on Cash return on your equity.

I don't have all your information, but I would look into mid-term rental.