Hi all, So I'm starting to get into real estate investing and have come across a problem that I'm sure many of you have had. Basically, whether to buy a house to live in and rent rooms out of or to buy a property somewhere and rent the entire thing out while living somewhere else. Here are some details-I currently live in Los Angeles, California (Pasadena area) and am renting an apartment. I like the area and would love to own a home around here, but as you know the costs can be prohibitively high. I was so excited about the prospect of getting a house here and living in the area that I decided to go get approved for a bank loan and ended up figuring out that I can afford something in the $700k range with is barely enough to get something decent here. Since then I've been looking at deals with my real estate agent and have figured something odd out...The cash ROI here is AWFUL, and by awful I mean negative negative negative. A 2 bedroom, 2 bathroom house might go for around $650k or so here and the average rents are around $1k/room or $2.2k for the full house. Doing the math and best case I'm down $1.5k/month with losses for the next 10 years (WOW). Total ROI is not positive either for that kind of deal!So I'm just thinking, holy shit this is awful. Why would anybody buy a house around here? Am I missing something?So now I'm starting to wonder, should I approach this from a different angle and instead buy an out of state property in a place that actually cashflows with renters. I really do want to buy/live in a house, but I'm not going to make a decision based on what looks shiny to me at the moment. And unfortunately buying a house here just looks like that kind of shiny stone...Does anybody have experience with this or pointers you could give me? I'm really trying to figure all of this out! Thank you!

@Fay Chen I'm honestly thinking of renting out a townhome in the area seeing if I can sublet/airbnb a room. I've never done it before, but I think it might be a good way to get some "house-hacking" experience without actually committing to the purchase. I'll let you know how that goes! @Ben Dao Yea, it definitely sounds weird, but I understand that's just because I haven't done it yet. Feeling weird about it is no reason for me to not explore and learn it!

House-hack or buy investment property and rent?

Pete Fiannaca

Wholesaler · Henrietta, NY · Member since 2016 · 58 posts · 27 votes

10y

I do not envy your position. It's so hard to be in a Denver or San Diego type market where homes are untouchable. Even if you could get into a modest 2 bed home, your rent income isn't going to help a long ways against your PITI. If you're looking at out of state, western NY is my home and has been on the rise for a few years now. Buffalo, Ny is garnering national attention for being an up-and-coming city (revitalization projects everywhere) and Rochester is making some waves too. I just bought a 3 bed, single family home that I'm renting for $1350/Month. Purchase price... $72,500 I know NY might be a long ways away, but I'd dive into the news and see what cities in your area are maybe being redeveloped or receiving grant money from the state/Feds to develop infrastructure. Good luck!

2 Reply

Michael Totman

Real Estate Agent · Berlin, MA · Member since 2013 · 130 posts · 95 votes

10y

Hi Jama, please don't take this the wrong way but based on what you wrote, if you needed a bank to help you figure out what you could afford then I think you have some more personal work to do before you try investing.

Those numbers do sound terrible and stay far away from a rental that won't cash flow. I personally don't recommend buying anything you can't drive to and see on a regular basis without impacting your life too much so maybe venture a little farther from your neighborhood, but not necessarily across country to other states, and see what's out there.

Sometimes we find out through research that we can't always have all our goals right now, but at least you've started down the path and will find something that works for you soon!

1 Reply

Nicole C.

Realtor and Investor · North Hollywood, CA · Member since 2015 · 49 posts · 25 votes

10y

I do also believe it is your area choice. Yes Pasadena is expensive but if you widen your search a bit you will have more luck. If you span to even areas such as Monrovia, la Canada, tujunga and also San Dimas along the 210 you may have a little more luck. I know Burbank is nice aswell. I would also consider short sales and foreclosures and even creative financing and the will to rehab. If u get a ugly duckling for a cheaper price get a rehab loan you are winning. Some times the gold is in the work it takes

2 Reply

Kocsen Chung

Investor · Rochester, NY · Member since 2016 · 18 posts · 9 votes

10y

My advice is simple.

You are about to be making an investment. So don't get personally attached. If the numbers don't work out then it's simply not worth it.

I feel like you are trying to find an excuse to buy that expensive airport food because you are stuck in the airport.

Having said that I don't want to discourage you, expand your search and find a good deal.

2 Reply

Ciprian L.

Real Estate Agent · Burbank, CA · Member since 2012 · 271 posts · 79 votes

10y

@Jama Mohamed I had the same questions 5 years ago and I chose the out of state option.

2 years ago I decided to buy a duplex here in Burbank and house hack, I'm much happier with the duplex than the out of state investments.

You can make money with both strategies.

1 Reply

Penny ClarkPro Member

Sacramento, CA · Member since 2014 · 513 posts · 319 votes

10y

@Jama Mohamed, If I were you, I'd seriously consider house hacking first. Even if the area you are in is expensive, by living in your first rental and renting part of it out accomplishes three things:

- You are putting equity into your own future rental and providing yourself with a place to live (no more lining someone else's pockets with your rent money!)

- You reduce your mortgage, utility payments by half or more by renting out a room or two

- You get your feet wet learning to be a landlord by setting limits, enforcing rules, etc.

Moreover, if the home is a fixer and you are handy, you can value add to it by doing improvements while living there. There are ways if you are creative enough to add cash flow. For example, a friend of mine who bought a home in a pricey Fair Oaks neighborhood increased her cash flow by renting out her RV access driveway. Another friend I have built two one bedroom cottages behind her SFR because she had a deep lot and zoning laws allowed it. She recently acquired another home and now has three rentals on one lot!

The good thing about being in a pricier area where housing is limited is that you can usually count on appreciation

1 Reply

Jama Mohamed

OP

Los Angeles, CA · Member since 2016 · 16 posts · 4 votes

10y

Thank you all for the feedback and advice!

@Michael Totman Thank you for the honest comment. I completely agree with you that I really need to understand the playing field better. Before going for the bank, I did have some rough estimates and ideas of what I could afford, but I wasn't sure of some of the specifics and wanted a better idea. I've started looking at areas further out, but the situation still looks pretty unfavorable.

@Nicole C. I did think about house-hacking, but it's weird because it still looks like a lot of the deals listed are bad even assuming I were able to rent out rooms. Even if it would give me 5% total ROI, that is not worth it considering I could just invest in something else.

1 Reply

Kocsen Chung

Investor · Rochester, NY · Member since 2016 · 18 posts · 9 votes

10y

@Jama Mohamed. Yes. A ton of people are making bad desicions. You'd be surprised at the amount of education , or lack thereof on this subject there is.

Expand your search and something I always like to do is to run the numbers on everything you find. Even if it's probably really bad. It'll make you better at noticing if a deal is great or not at all. And then it'll be clear when you find the one.

Pm me with a few deals you have found and I'll give you my two cents !

1 Reply

Aaron Mazzrillo

Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes

10y

Where the market is right now in SoCal it is no longer a cash flow game. You missed that boat. It was moored to the dock from 2009-2011, but that ship has sailed. Now it is a capture the equity game. You buy as low as you can and either flip it, or hold it for 1-2 years, hopefully enjoy some appreciation, then flip it and cash out the captured equity.

That does not mean you pay market value and hope it goes up. You buy well below market value, but you're not going to get that working with your agent.

5 Reply

Peter C.

Investor · Felton, CA · Member since 2016 · 37 posts · 14 votes

10y

@Jama MohamedOne question you can think about is are you open to living in a cheaper area, or are you set on staying in your current neighborhood? I am starting out in a pricey market too. We were able to find a house in the outskirts (25 minutes from Santa Cruz) at a low enough price to put our expenses for the home well below what we would be paying in rent.

Further East on the 210, as suggested by @Nicole C. , could be a possibility.

We are currently working on the house as we live in it. This makes sense for us financially; I do have past experience being a handyman. It is definitely slow and tedious living in an ongoing rehab. Dust, noise, and a big pile of work always staring you in the face have become very normal for us. It is a lot of extra work, but I feel very fortunate as I watch my friends being exposed to rent increases to the tune of 5% and even higher per year.

1 Reply

Ciprian L.

Real Estate Agent · Burbank, CA · Member since 2012 · 271 posts · 79 votes

10y

Spend some time here reading the forums and listening to the podcasts, you might see some deals where you didn't see them before.

Also attend as many meetups as you can and talk with other investor.

0 Reply

Jama Mohamed

OP

Los Angeles, CA · Member since 2016 · 16 posts · 4 votes

10y

@Kocsen Chung Thank you for the offer! I'll reach out to you soon :)

@Aaron Mazzrillo Yup, it seems like that is the case. It looks like a lot of the properties are being sold by people who are flipping.

0 Reply

Brian C.

Investor · Aptos, CA · Member since 2015 · 87 posts · 38 votes

10y

If your an owner occupant the interest payed on your loan is deductible..so make sure you factor that in to your calculations. Also, Im pretty sure the appreciation in s.cal has outperformed the cash flow received in places like upstate NY..even if you have some negative cash flow in Pasadena.

Good luck

0 Reply

Andrew Cornstubble

Rental Property Investor · Sedan, KS · Member since 2016 · 125 posts · 92 votes

10y

I'm new to the game as well, but I do have a rental property next door and I'll tell you, even that is too close.

I find living with other peopke to be difficult. Roomates can be fun, but it can also turn best friends i to mortal enemies.

If I were in your shoes I would buy the rental property. Even if you have to rent a home yourself. If you van make the numbers work out any kind of profit not having to share your home I would go that route. In any case good luck to you.

2 Reply

David Eiges

Real Estate Investor · Pasadena, CA · Member since 2015 · 33 posts · 9 votes

10y

Jama, I think I'm in a very similar boat as you as I'm in Pasadena, haven't bought anything yet, and evaluating different strategies to enter the market. First and foremost, my understanding is that the overall real estate market is expensive right now. I've been listening to the bigger pockets podcasts every day and many of their interviewees got their starts in the 2008-2012 time frame, so that seemed like a golden opportunity. I think this is also reflected in the general economy/stock/real estate prices. Some real estate in Los Angeles is returning to 2006 prices so to me, that's an indicator that prices are high. Because of that I'm trying to do as much information gathering as possible and peruse for opportunities, but at the same time I don't feel particularly rushed because I don't think that it's a prime buyer's market right now and I want to make sure that when I do buy a property it will be at a price/income point that will give me a headstart on parlaying that first investment into additional properties. Anyways, as I've been exploring there are definitely better monthly rent/price ratios 1-2 hours outside of LA (riverside, Bakersfield, etc.) for cash flow. Probably around 1% in Riverside and 1.5% in Bakersfield for some multi-family units. I was thinking a lot about investing out-of-state but I'd rather be able to get to my property easily, at least to start.

You're going to get better appreciation in the LA market but at the expense of cash flow. In my case, I think I'd rather have cash flow to start as it would help me get the next property after my first. That being said, I think more wealth can be gained in the long-run from the appreciation...I think that for myself, my best strategy would not be to wait for appreciation growth but instead to seek cash-flow somewhere that I can drive to.

1 Reply

David Faulkner

Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes

10y

My vote is for house hacking, but as Aaron eluded to only if/when you find a great deal, and you won't likely get that by working with the realtor. Realtors are in the business of selling retail priced homes to retail buyers, which is not what you want to be. Yes, the market is hot now so caution is warranted, an yes there are and will be short term market fluctuations, which is why you need to find a great deal below market to insulate you to some degree from these fluctuations.

You asked are you missing something? Yes, you are missing the appreciation, both forced and market appreciation, and appreciation in both price and rent growth, and we are not talking this year or last year, we are talking about a 40+ year track record of strong appreciation. Things that appreciate tend to be expensive and cash flow less on day 1; it is a result of persistently limited supply coupled with high demand, but supply and demand cuts both ways: that which is difficult to buy in the short term tends to be easy to sell or rent in the long term, and the opposite is also true.

ROI should be defined as TOTAL Return on TOTAL Investment annualized over the ENTIRE life cycle of the investment. Cash flow is but a small slice of that total return, it is the "icing on the cake" :)

1 Reply

Gene HackerPro Member

Flipper/Rehabber · Lake Isabella, CA · Member since 2011 · 969 posts · 488 votes

10y

I am not sure LA will have "better appreciation" than other areas which are still well below the previous peak. It is reasonable that areas which have not yet reached the previous peak levels might have more potential for appreciation compared to areas which are pushing new highs...all else being equal

One possibility is to look for areas which historically have had appreciation but later in the cycle.

That said, most areas are well off the bottom and the easy fruit is long gone. There are deals to be had but you are likely correct that it will likely be harder than it was in 2010 and 2011. In markets like California which have proven to be very "boom and bust", timing is very important and shouldn't be ignored.

0 Reply

Jama Mohamed

OP

Los Angeles, CA · Member since 2016 · 16 posts · 4 votes

10y

@Kocsen Chung

Since I can't PM, I figured this might be a good place to list the deal info. Please correct me if I'm wrong in doing so!

#1 (1007 Del Rey AV, Pasadena 91107)

4BD/3BA, 1 "office", detached garage. 2k house on 7k lot in Pasadena (mid-range part, good neighborhood). The house is in extremely poor condition and for sale by owner who obviously did not care about it. Comps show around $700k for 3BD/2BA version in the same neighborhood, since practically no houses have >3 bedrooms here, let alone "5". The larger houses go for $900k-$1.1M.

(Property)

- Purchase price: $695,000

- Closing Cost: $10,000

- Total Cost: $705,000

(Loan)

- Down: $76,450 (11%)

- Mortgage: $2,778 (3.5%, 30-year)

- PMI: $223

- Taxes: $655 (1.13%)

- Insurance: $123

- Total monthly loan expenses: $3,779

(Rehab)

- Rehab Cost: $80,000 (walls, floors, windows, kitchen, bathrooms, etc etc)

- Time to rehab: 4 months

- Total rehab expenses: $15,116+$80,000 = $95,116

- ROI (low): 12% (($900k/($705k+$96k)) - 1)

- ROI (high): 25% (($1M/($705k+$96k)) - 1)

Looks like a decent deal, but I personally wouldn't do it considering that I would need to have a lot of experience to rehab it properly. Am I correct in thinking this is a deal?

0 Reply

David Faulkner

Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes

10y

Originally posted by @Gene Hacker:

I am not sure LA will have "better appreciation" than other areas which are still well below the previous peak. It is reasonable that areas which have not yet reached the previous peak levels might have more potential for appreciation compared to areas which are pushing new highs...all else being equal

One possibility is to look for areas which historically have had appreciation but later in the cycle.

That said, most areas are well off the bottom and the easy fruit is long gone. There are deals to be had but you are likely correct that it will likely be harder than it was in 2010 and 2011. In markets like California which have proven to be very "boom and bust", timing is very important and shouldn't be ignored.

Some good points here. When I am talking appreciation, I'm generally focused on the long term, (10+ years out) and when it comes to long term appreciation in LA, it's track record is quite clear. Gene makes a good point in that CA is a very volatile "boom and bust" market, and this volatility should not be ignored. The trick is getting in such that you can stay in; an investor in this market needs to be sure they can make it to the long term with their investment before they can see the long term appreciation. There are many ways and combination of ways to do this, some better than others ... one is good timing as Gene mentions, another is buying below market and forcing appreciation, one is luck, another is putting a lot down, etc.

Where I disagree is the assessment of "better appreciation" in the short term (1-3 years) and being able to predict that. Predicting the market that will have the best appreciation over the next few years is akin to going into a strawberry field in the fall and trying to pick out the plant that will produce the biggest strawberry next summer. Anything can happen in the short term. I don't think that comparing to the last peaks will be especially helpful either ... the last peaks were a real estate bubble and are therefore not a sound basis of comparison IMO.

1 Reply

Jama Mohamed

OP

Los Angeles, CA · Member since 2016 · 16 posts · 4 votes

10y

@David Faulkner

Very true! Speaking about appreciation in California, just looking at all of the trend graphs of prices and rent vs homes, it seems like the market has significantly slowed down (at least in the Pasadena area). Some of the graphs almost look flat in terms of market appreciation and now that we're back at or slightly above the old market peak, the projections are scary.

The rental market is increasing quickly over here which means that it'll be more advantageous to have cashflowing properties rather than buy and hope for further appreciation. At least that's what I'll be looking for, even though those deals don't seem to exist :(

0 Reply

Abe Gonzales

Engineer · San Jose, CA · Member since 2016 · 62 posts · 9 votes

10y

While the level of cost for average housing in your area does not allow average wage/salaried earner to afford one, there were already many suggestions for entry in the market.

The other side of the coin, is that, just maybe, there are many ways to increase your living income without necessarily living in extreme frugality, nor living extravagantly. This income boost should let you "catch up" the trending curve, making RE decisions under your control and not the other way around. Notice that I didn't ask you what job do you currently have. Although, it might be easier for many BPers to help out certain ways in how to boost your income.

PM me to discuss these possibilities, and there are many of them.

2 Reply

Jama Mohamed

OP

Los Angeles, CA · Member since 2016 · 16 posts · 4 votes

10y

@Abe Gonzales

Yes! It's true that it's important to make RE decisions based on the deal and not to let the availability of cash control it. I need to remind myself this time and time over, so thank you for reiterating. But I believe that most of the problem in my situation is caused by a lack of understanding and me being green.

I really do need to update my profile and get more involved with the community, so I will make that a priority. Without getting too much into details, both my income and "disposable" income are in the 6-figures which is why I began to think towards RE investing as a way to grow my wealth even further. But it seems like I really do need to spend much much much more time learning less I make any bad decisions.

0 Reply

Richard Bastar

Riverside, CA · Member since 2015 · 47 posts · 11 votes

10y

Jama,

I'm in the same boat as you. I am just learning and studying, while trying to look at and evaluate deals out here. Continue to study and learn in the meantime. Come out to OC or the IE and hit a meet up with me and a few others on this thread...it's been priceless.

Later

0 Reply

Fay Chen

Investor · Bothell, WA · Member since 2015 · 214 posts · 104 votes

10y

I chose to buy investment properties while I save money. I sub-rent a small bedroom in an beat-up apartment close to DTLA and take the bus to work. It only costs me $800/mon for rent $40/mon for gas. My name is not on any contract, and I can leave whenever I want. So if I find a good place, I can move out any time.

I owned a condo in Pasadena before. When I sold it, I made money. But I don't like the feeling of having to commit to an owner-occupied property that lacks exit options. Now I have a lot of options: I can buy an investment property anywhere, I can buy an owner-occupied and househack close to work, or I can buy an "owner-occupied" property and rent it out instead.

1 Reply

Jama Mohamed

OP

Los Angeles, CA · Member since 2016 · 16 posts · 4 votes

10y

@Richard Bastar

Definitely! I missed the meetup in Pasadena last week, but I'm hoping to go to the others around LA.

@Fay Chen

Wow, $800/mo in DTLA is quite a steal! Yes I feel the same way about not having good exit options- I'm already looking around for places to rent and keeping my eyes open looking for interesting deals. It feels so much more liberating when you're not limiting yourself to house-hacking!

0 Reply

House-hack or buy investment property and rent?

House-hack or buy investment property and rent?

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