All Forum Posts by: Jon Schwartz

 Have you considered finding a duplex in a neighborhood you like? I have a family (small, just me and a wife and our 2-year-old), and last year I discovered we could actually afford to live in my wife's dream neighborhood by househacking a duplex there. Now we pay less each month than our tenant, we're building equity, and the SFRs that surround us are selling for absurd prices.

 I think Southern California is a good market to purchase real estate right now. There are too many people, not enough houses, and only so much land. The fundamentals are strong!

The bigger question, Alex, is what are your goals? If you have income from a good job, you should definitely invest in your local market here to here the equity growth that comes from principal paydown and appreciation. Buying and a househacking a duplex with supercharge that growth. On the other hand, if you're in a position where you need some extra cashflow today, you should look to a cheaper out-of-state market. Your assets there won't appreciate as well, but you'll be getting some cashflow today.

What're you goals, bro?

Best,

Jon

Bridget,

Welcome to the coolest real estate market in America!

First question: do you have a job? If you have income from outside of real estate, you should definitely pursue a househack in Los Angeles. Folks on this website love to poopoo Los Angeles because it's an appreciation market that doesn't offer cashflow as easily, but the truth is, wealth is built in equity! You're far better off buying a nice asset in an appreciating LA submarket than you are buying duplexes in some podunk Midwestern market. That's not a popular opinion on this site, but most investors on this site A) don't live in Los Angeles and B) aren't financially capable of entering a market like ours.

So if you don't require additional cashflow right now, don't buy for cashflow. Buy for equity growth. Down the road, you can convert your LA assets into out-of-state assets that cashflow (but don't appreciate well) and quit your job. That's my strategy.

I'm currently househacking a duplex in Hancock Park. I love it. On net, I pay less to live here than my tenant downstairs, and the principal paydown is supercharged over owning a regular house. So I'm not only paying less each month to live here, but my net worth climbs $2000 each month because of the principal paydown.

And I haven't even gotten to appreciation! Appreciation is something you hope for in St. Louis or Cleveland or Plymouth. In an international gateway city with a severe housing shortage, appreciation is real. The longterm average for LA is 6.7% annually; that's going back to 1975, meaning we're counting the five recessions that have occurred since then. Obviously, actual appreciation isn't a constant and value does decline at times, but in the long run, appreciation has built an incredible amount of wealth in this city.

As far as your specific numbers go, it's really just a math problem. Putting 20% down will reduce your monthly mortgage cost and produce cashflow more quickly. However, if a more expensive building produces more rental income, it might be worth the added monthly cost of putting just 10% down. I'm sure there are scenarios where your net out-of-pocket each month at 10% down in a nicer neighborhood is in line with 20% down in a worse neighborhood.

And as for timing, I wouldn't be in a rush to buy this year. The single family housing market is crazy hot; I don't like that at all. The multifamily market is pretty hot, too, though there's soooo much uncertainty right now. The eviction moratorium, high unemployment, federal stimulus up in the air... I don't think you should buy a house now, and I would only buy a multifamily to househack if it was perfectly located and net cheaper than you current rent or mortgage. Otherwise, bide your time, no rush.

I'm curious about where you've been looking. I spent January, February, and March driving through South LA to understand the neighborhoods and scope out properties. I was looking for a fourplex as a straight investment property. Cashflow in that part of the city isn't hard to find. But, that said, my duplex in Hancock Park is ideal: we can move out at any time and the property will cashflow -- not a lot, but it'll cover it's own expenses while my equity builds and builds. So where do you want to live and what are the B/C neighborhoods you've checked out?

All the best,

Jon

David, welcome to the party!

In broad strokes, it's a fine plan! Here are a few of my thoughts:

Regarding the cash-out refinance, ADUs aren't appraising for more than $50K in value these days. They're being appraised as an amenity, like a swimming pool or a deck, and most appraisers peg the amenity value at $50K. So, your ARV with the ADU will be whatever the prevailing ARV is plus $50K, no more. Make sure your numbers still work with that in mind!

Last year, I bought and renovated a 1920s duplex, which I'm now living in. Most of the plumbing and electrical had been updated, but there was some funky stuff to replace, especially as regards the electrical. Plumbing and electrical should definitely be done by pros. The rest is up to your appetite. Do you think you could figure out drywalling? If you can drywall, paint, and do floors, then you could hire subcontractors to install new piping and run new electrical. You'll be living in a bit of a shell for a few months, but then you can really lean into your own sweat equity and not rely on a contractor.

If you do hire a contractor, there are ways to protect yourself from being taken advantage of. David Greene's "Long-Distance Investing" has a lot of great tips -- even if working with a local contractor!

For the ADU, I think you'll need a contractor. That's a big operation. I've heard $100K is a more reasonable budget. I can recommend some ADU contractors if you'd like to ask them some question. Message me!

Best,

Jon

@Jordan Calaway, thanks for sharing the lessons learned!

What's next for you in real estate?

Miho, how long ago did you call? New legislation passed in January allowing ADUs on multifamily properties.

The fund from which Trump is pulling that $300/week has enough money for 3-5 weeks, depending on your news source. Big help!

The federal tax payroll suspension is just that: a suspension. It's not a cut. Those taxes are still due at some point.

Just chiming in!

Maybe I'm too conservative, but I feel like now's not the right time to do that. It's as likely as not that home prices will fall in 2021. If it's a squeeze, it's not for right now.

Good luck! 

 Jerry, the "rules" that are all over this website are for appreciation-poor, cashflow-rich markets in the Midwest. CA is a different ballpark. For that reason, Midwesterners on this site like to poopoo investing in CA.

$350K is more than enough for a down payment on a good investment in the Bay Area. My suggestion to you is to start with a househack. You'll get a better mortgage on an owner-occupied property, you'll build equity more quickly, and you'll find yourself in a few years with a lot of net worth and options.

Good luck!

Jon

Phillip,

Househacking a duplex and experiencing negative cashflow is not bad! I'm doing that right now.

You have to compare your net monthly cost to what you're paying now on rent on your current mortgage. If you're paying $700/month now to rent an apartment and you can instead own a duplex for net $700/month, then you're doing great!

A portion of your mortgage payment every month is going toward principal paydown. Every dollar of principal that gets paid down is a dollar added to your net worth.

If you're in a situation in which your new monthly cost is the same but your net worth is growing every month, you're ahead!

That's my situation. I'm living in a 3/3 in a duplex. On net, I'm paying less that my renters pay for their units, which is a 3/2. And I get all the benefit of the principle paydown.

When you're househacking, since your cost of living is part of the equation, you have to look at it holistically!

Good luck!

Jon