House Hack SFR or do Airbnb out of state?

Question

I'm in the Orange County, CA area and thinking of either house hacking a single family house or just rent for now and put my capital into an Airbnb/investment property out of state. I'm 24 with around ~70K to invest and make ~120K/yr from my job. Based on this, I'd estimate I can only qualify for a ~$500K house, which doesn't go very far in CA. There are some older houses in Long Beach area that I could get and house hack, but my mortgage payment would still be roughly $2K/mo after rental income from renting out a room. I realize there is inherent risk in that with misc. expenses/repairs and other items that inevitably pop up with homeownership. My plan would be to house hack for a year, then move out and rent out the whole place. Additionally, I could offset some of my taxable income with deductions from home ownership.

Alternatively, I could rent locally for around $1200/mo and put my capital toward an Airbnb/investment property out of state. Specifically, I'd look at the Tempe, AZ market as I'm familiar with the area. The barrier to entry in AZ is obviously much less than CA. I'd assume I'd have to put 20% down if this is solely an investment property, which still should be ok. I'm unsure if I do go this route if it would affect my ability to qualify for first time homebuyer incentives and if that's worth considering.

I've been thinking about this for a while, but have gotten cold feet with the recent uncertainty in the market and this being my first property. I'm hoping to take action this coming year but don't know where to start. Curious to hear what would you do in my situation? Any advice is greatly appreciated!

Paul Welden · Answer

@Dylan S.

With $70k to invest in real estate, I would recommend to keep $10k-$15k as a reserve, which means you would have available $55k-$60k for down payment & closing costs.

$60k as a 20% down payment puts your max purchase price at $300k, but factoring in closing costs possibly costing 2% of the purchase price, you would have $54k for down payment, making your max purchase price $270k.

This may get you a 1-2 bedroom condo in Tempe. As a non-owner occupant borrower for a condo, you may need a 25% down payment.

If you feel you need to invest now, maybe consider crowd funding real estate opportunities for non-accredited investors.

Hope this helps!

Timur Salikov · Answer

House hack. Get 3% down FHA loan and get the most expensive house you can / with the most amount of bedrooms and bathrooms. With your income you can probably quality for 800k or more. The 20-30K you will spend on the down payment will be gained on appreciation within 6 months. Most likely in 5-8 years you can refinance and pull 200k out in equity to fund more deals. I used FHA 3% in LA to buy 455K duplex around 2015. In 2022 it was was worth 700k and I was able to pull out 80k. I can only imagine the application you will get on a nice house in OC for 8-900k. If you want even a better deal, you can try hustling and see if you can get a property off market. Send out handwritten postcards saying this is your dream neighborhood and you wanna buy their house.

David Liu · Answer

Love this response from Paul. It's pretty conservative which is what you want for your 1st property.

I agree his analysis.

To me it looks like house-hacking is the better route for you. I househack in the SF bay area and it's been great.

House hacking allows you to understand property management & real estate investing finances, kind of like training wheels.

If you have further questions on house-hacking in california, let me know.

Justine Phillipson · Answer

I personally would not recommend vacation rentals, especially in the Phoenix area where there is a significant decline in bookings and struggling to turn a profit. Additionally, new laws keep getting passed that are not in the owner's favor. At least if you house-hack, you will be building appreciation and have more control. Southern California appreciates like crazy.

Normally I would recommend buying out of state and doing long-term rentals, but in this current market it's hard to have rentals cash-flow. It's still a great option if you can find the right deal, but it just might take a few years before you start seeing a decent profit.

Nicholas L. · Answer

@Dylan S.

well, these are 2 very different options.

I'm generally supportive of house hacking, but just curious - is there something that makes you think you'd be interested in, and successful at, a short term rental in Arizona?

and before you conclude yourself how much you'd qualify for, talk to a few different loan officers or brokers and ask.

Osazee Edebiri · Answer

Yes, I am feeling this response too.

At this point, I think it is important to secure your nest egg expenses first. House Hacking allows you to do that and take advantage of the homes future performance at a ridiculously low down payment.

One way you could look at this and run estimates on what the gains will be in the future, which performs better? Also how much money do you expect to make from the airbnb in Arizona? Is it more income than you pay in monthly rent $1200/mo in the future? If you are not at least more than your rent for the airbnb, that might cause one to think twice.

Nate Meeker · Answer

@Dylan S. - why do 20% down when you could do 10% or less and assume a loan?

Dan Guenther · Answer

@Dylan S. - Congrats on the early start in real estate! I'd recommend that you continue to talk to lenders and grow your network of real estate professional. A common misconception is that you need 20-25% down for non-owner occupied investment loan products. There are lenders out there that are offering 10% down investment loans with favorable terms.

I'd also recommended taking some time to write down your goals long and short term. House hacking and operating an Airbnb are two different beasts. If you are currently renting then look into the multiple ways house hacking could benefit (loan paydown, tax benefits, depreciation, appreciation, savings on rent etc.). With AirBnB on the other hand, you are operating a hospitality business which comes with a whole different set of challenges and operation requirements. If you do choose to go the AirBnB route make sure you are buying a property that has multiple exit strategies (renting by the room, medium term furnished, group home etc.) and not solely dependent on AirBnB.

Good luck on your journey!

Parker Robertson · Answer

I'm currently house-hacking in a HCOL city and it is a great way to start in my opinion. I bought my property when I was about your age and have been living in it for a little over a year and a half now and plan on purchasing an MFH with a 3% down payment and house-hacking that in the coming months.

I have looked into putting my money into STR and MTR but you just can't beat the effectiveness of house hacking, especially in our situation. As a high-income earner at a young age, the biggest hurdle I faced was not the monthly payment, but getting a big enough down payment for any property, let alone an investment property. That is why I recommend house hacking for your first go at it.

If you have any questions about house-hacking, feel free to reach out to me!

Timur Salikov · Answer

Someone can correct me if I'm wrong, but I'm gonna guess an Airbnb in Arizona will probably be a wash. After paying the manager and upkeep, you wont make a profit. Just a lot of hassle for little gain.

House Hack SFR or do Airbnb out of state?

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