Is House Hacking in Los Angeles Feasible?

[Nina Marie]

I'm a newbie who is interested in house hacking in the Los Angeles area but I'm not sure if it is feasible or not (hoping to put in offers in October). I checked out the Bigger Pockets calculator but based on my inputs I get a very negative cash flow (-$4k to $6k per month). I'm hoping this is just because I am messing up on my inputs so I'd like to get some other opinions.

Here are my parameters:

I'm a first time home buyer and projected to have $160k - $180k allocated by October for down payment and closing costs with an additional $20k - $40k allocated for repairs. Would like the unit I live in to be a 2 bed + 1 bath and my unit's "rent" to be $2k -$2.5k per month. No more than 2-3 units total. If this is feasible what kind of purchase price should I be looking for?

For those familiar with the LA area, I am open to living in the valley and as south as Inglewood, but no further east than Burbank

[Jon Schwartz]

Originally posted by @Nina Marie:

I'm a newbie who is interested in house hacking in the Los Angeles area but I'm not sure if it is feasible or not (hoping to put in offers in October). I checked out the Bigger Pockets calculator but based on my inputs I get a very negative cash flow (-$4k to $6k per month). I'm hoping this is just because I am messing up on my inputs so I'd like to get some other opinions.

Here are my parameters:

I'm a first time home buyer and projected to have $160k - $180k allocated by October for down payment and closing costs with an additional $20k - $40k allocated for repairs. Would like the unit I live in to be a 2 bed + 1 bath and my unit's "rent" to be $2k -$2.5k per month. No more than 2-3 units total. If this is feasible what kind of purchase price should I be looking for?

For those familiar with the LA area, I am open to living in the valley and as south as Inglewood, but no further east than Burbank

Nina,

Los Angeles house hacker and realtor here.

I think this is in the realm of doable, but you might have to get more specific with your plan. Let's reverse engineer your numbers and see where we get.

The minimum down payment for a conventional loan for a duplex is currently 15%. Add 2% for closing costs, and $180K can buy you a duplex priced at $1,058,823.

 If you bought a duplex at this price, your total monthly cost -- including mortgage, taxes, insurance, expenses for your rental, and a vacancy allowance -- would be about $5380. You'd need to rent your second unit for $3000/month to get your net monthly cost down to $2400, and that's unlikely to happen. In the areas of the city you're considering, a $1M duplex is unlikely to be more than a 2/1 and a 1/1, and the 1/1 won't rent for $3K if the duplex costs only $1M.

However! Let's say you rent your second unit for $1500/month; that's a totally achievable rent for a decent 1/1 in LA. That would bring your net monthly cost to $3900 -- but you're also getting $1600 of principal paydown each month. So your monthly expense is $3900, but $1600 of that comes back to you in the form of equity in your property. I subtract principal paydown from the monthly net to get what I call your "rent equivalent." This is the amount of money that, like rent, leaves your pocket and never returns. In this case, your "rent equivalent" is $2300. Score!

Or we can shift your budget to better achieve your goals. You suggested $180K for the down payment/closing costs and $40K for the reno. Let's put $135K toward the down payment/closing costs and $85K toward the reno. This would allow you to buy an $800K property in disrepair and put $85K toward renovating it. In this scenario, were you to rent the second unit for $1500, your net monthly cost would be $2600 and your "rent equivalent" would be $1400. Double score!

Finally, you may have to let go of living in a 2/1 if you really want to house hack in your area of choice. If you can tolerate a 1/1, I think you'll definitely find a duplex of 1/1's in your price range that will come pretty danged close to your cashflow goals. Remember: a house hack isn't a forever home!

I hope these perspectives help!

Best,

Jon