House Hacking: Los Angeles/Out-Of-State?

Question

Hello! I am writing for some clarity --

I know that the LA/SoCal area is difficult to find value right now, and that house hacking is not all that likely to do here, so I've been researching other out-of-state areas. The problem I'm running into, (potentially because I am trying to start out), is that unless you intend to purchase to occupy for at least a year, the banks don't offer good loan options. BUT, I am not able to move to an out-of-state area like, Denver for example.

So, I feel like it's impossible to start to house-hack. Does anyone know of good ways of buying out-of-state for value and return of investment with ability to house hack, while living in LA/SoCal? Am I missing something here?

Really look forward to hearing from you guys!

Joe Timko · Answer

@Matthew Montemaro Matthew, you can do it in the LA area. I recently found a duplex for my daughter in LA. She purchased it with 3.5% down FHA. She moved into one of the units and rents out the other. It’s not positive cash flowing but her payment is less then she would be paying for a similar unit if she was renting. She also gets the tax benefits of owning and the appreciation of a property in LA. It needed some repairs/upgrades so we got the seller to credit her with money to do the repairs.

Lee Ripma · Answer

@Matthew Montemaro

I'll tell you that I'm an RE investor in LA and out of state and I rent so that I can live where I want to live. I invest in LA as a share of deals with partners but I don't confuse living in RE with investing in RE. I built a portfolio out of state. If you want to house hack here you can do it with a SFH that has a lot of rooms. There are 5% down conventional loans that are easier to get accepted than FHA loans so you could look into those. It's nice to live close to work in LA as the traffic reduces you quality of life quite significantly, imho.

Lee Ripma · Answer

@Matthew Montemaro

You'll hear about about it when my BP episode airs, I just finished recording. It's true that owner-occupant loans do allow lower down payments. I think you should look at your goals "gain passive income towards financial freedom" and see how you can achieve it. I don't really believe in dichotomies - you don't have to pick LA or out of state - you can do both. The first deals are the hardest, of course. I guess I don't know exactly where you are financially but I often advise looking to build equity first and then converting that equity to passive income later. So more of step one - get equity and step 2-convert to cashflow. I see something similar posted on BP frequently "I have 100k and and I want 10k/mo" well you can't take 100k and get 10k a month unless you know of an investment that gives you a 120% cash on cash return. You're going to need to take intermediate steps to grow that 100k into 1M and then get 10% cash on cash returns.

Ali Boone · Answer

It depends on what you mean by "loan options". The only definite perk of owner-occupied is a lower interest rate, but it's really not so much lower that it will make or break deals... especially not when you're comparing to what you'd be buying at that lower interest rate. i.e. if the numbers on a househack are terrible, which they will be in LA, there's no advantage to that lower interest rate if you're still in the hole. The one variable with the loan options that would be up for debate would be the option of having the lower down payment on an owner-occupied property. But, since that lower down payment would be less than 20%, then you have a PMI issue that comes into play and hits against your cash flow. So then that's not a huge advantage either. As far as how to get started somewhere like LA, and with that level of capital, everyone I know buys out-of-state because a) that amount of capital can actually buy you something elsewhere and b) you can cash flow elsewhere and in the case of the loan options, c) there's a good chance that 20% down payment on an out-of-state property wouldn't be a heck of a lot more than a 5% FHA down payment in LA.

Matthew Montemaro · Answer

@Lee Ripma

Thank you for giving your input. It's incredibly helpful as I look to step into the game. I agree with your mindset o investing/living here in LA. When you built a portfolio out of state, (I've been desiring to do so myself), how did you get started? I'd be so curious to hear based on your expertise. My goal is to utilize my capital in an up and coming market to gain passive income towards financial freedom.

Purchasing "out of state" to invest is not where the favorable loan options are; that is where I get confused. Any advice or further conversation is much appreciated.

Matthew Montemaro · Answer

@Ali Boone Thank you for getting back to me! I guess I don't have to househack, as nothing I can afford in LA is in the vicinity of where I work, and barely anyone approves FHA loans her, but the way I understand it, is that the bank gives you much better loan options if you purchase to own, as opposed to purchasing to purely invest? I truly want to get started, and have about 40k to do so, but it's difficult here. Any suggestions?

Ali Boone · Answer

Do you have to househack? Do you mean that you need to househack to get the better loan options? Versus buying straight investment properties.

House Hacking: Los Angeles/Out-Of-State?

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