BRRRR or House Hack?

Question

Hello everyone, I recently moved to LA and I am working in Downtown Los Angeles. I am looking to buy my first property and I am really undecided if I should use my savings (~$130k) to buy a BRRRR property in the near cities or if should put that towards a down payment and house hack a property closer to my office location? Would be great to hear some thoughts.

House hacking could be a great way to get material savings as it would eliminate or materially reduce my rent/ “living costs”, while creating equity in the process. But on the other hand I would be locking up a good amount of my capital.

For the BRRRR it would be great to get some cash flow and recap my money in the near term, but I am a bit concern of buying my first property in a relatively fairway market (as prices in the surroundings of greater LA are pretty high).

I am really on the fence and it would be great to get some thoughts or hear about someone’s experience.

Thanks,

Pedro

Mack Owens · Answer

Pedro,

I have to agree with @Bill O'Donnell

Specifically responding to your concern of tying up your capital while house hacking; while you would be putting that money down initially there is no reason in the future you could not make use of it and recycle those dollars into another property. I believe that the house hack could be your best option especially in a market where rent is so high.

Jon Schwartz · Answer

Pedro,

Some good suggestions here, but there're all broad and from out-of-staters. Not the most helpful. Especially those who said, "Why not do both?!" Uh, because money doesn't grow on trees, fellas.

I don't know many people who BRRRR in LA and I think it's because homes are so valuable that it's difficult to find a BRRRR that will cashflow after refinance.

To throw some numbers on the board: the median home price in LA right now is around $800K. If you executed a "perfect" BRRRR, you'd be in for $600K and refinance all of that out. At a 3.5% rate, the mortgage payment would be $2694. Property tax would amount to $847/month. So even before accounting for insurance and maintenance, the BRRRR'd house costs $3541/month. Of course, houses do rent for $3500 and more in LA, so I'm sure BRRRR opportunities do exist, but they're probably more difficult to make work in this market.

At any rate, if you're BRRRRing, you'll want to see what's on the wholesale market. I'll shoot you some wholesalers' info.

Househacking is great because it reduces your cost of living, but you're right that it ties up a lot of capital.

Here's an idea: BRRRR a househack... kinda. Maybe hone your search to duplexes (or larger, if the budget works) that are very distressed. At the very least, you'll be able to fully renovate your unit and the building's exterior. If the building's vacant, renovate the whole thing. Then, do a rate refinance (as opposed to a cash-out refinance, which usually has a higher rate) to get rid of any PMI. Then, open a HELOC on the remaining eligible equity. You won't get all (or even most, probably) of your money out, but you'll be enjoying the low cost of living and get at least some back out.

Does that make sense?

Best,

Jon

Jeremy Davis · Answer

@Pedro Cardoso

Font mean to be rude, but you will more than likely EVER find a property in the downtown area or LA proper that you can Brrrr.

Even house hacking will be hard. Remember, you will need to find a home that rent equals roughly 1% or more of purchase price. If you can find a duplex or a primary at $300k that could work at $3000 a month in rent, but good luck finding that property at that price in Los Angeles. How do I know? I just left Los Angeles after 38 years for more realistic markets.

Good luck

Randall Weatherall · Answer

Keep your options open and go with whatever works; I'm about to start a house hack in Nov. and I hate the lifestyle change, but my mortgage is paid free and clear and I'll have help for the work to do on it to sell in a few years.  Getting it about $20k below the current appraisal in a hot area so I'll go and do some work while there and get out of the PMI early, then sell and roll that into a different set of investments, all the while using my extra income (by not paying for my house) to continue with little SFR one-offs when they pop up and make sense.

Real estate is very fluid, friend; stay open to options.

Jeremy Wirths · Answer

I second the house hack if you are able to. Get as many doors as you can. Depending on your comfort level you could even rent out bedroom(s) in the unit you are living in to further increase your cash flow and decrease your living expenses.

Bill O'Donnell · Answer

@Pedro Cardoso

I think a small multi family house hack is the best first step. If you buy an outdated one you can learn about rehabbing. Build equity, learn to be a landlord, and in a year or two you will have excess equity that may be available. Reduced living expenses can allow more savings.

Just my 2 cents

Steven Foster Wilson · Answer

Why not do both? My first deal was a duplex on OSU campus in Columbus OH. I rented it out to my friends for dirt cheap while I renovated. (For 1 week they didn't have a bathroom). At the end of it I had different groups of students move in, increased the rent from $2500 to $4500 and was able to cash out refinance and move onto the next deal!

- The key is to find properties where you can add bedrooms & bathrooms, or at bare minimum update the kitchen & bath

- Also keep in mind what area will have the highest rental rate!

Jonathan Styer · Answer

@Pedro Cardoso why choose one or the other? Analyze deals until you find one that works for you. Don’t pigeon hole yourself into one type of deal or the other but keep your eye out for both and when you find a great one jump on it. Your first deal is always an important one as recovering from a first deal gone wrong is much more difficult than if your 20th one goes wrong. Good luck!

Pedro Cardoso · Answer

Thank you everyone.