Buy Home from Relatives (700k) in Bay Area? House Hack Elsewhere?

Question

Hi There! In FI community for some time (save over half of income), but first time real estate investor/never bought a home.

My question: Is the following a good deal for house hacking? My gut is saying no, but I'd love your two cents since I'm so new at this.

I rent from relatives in the Bay Area (Richmond, CA). They are selling a 3br, 2ba with a fully separate ADU on a large lot (9k). Appraised at 820k. House was built in the 40s; not yet inspected. Lived here (in this house) for ten years and repairs have been minor, however in the past year, there have been a lot of repairs (plumbing, dry rot, etc. I think maintenance has been deferred). ADU is not permitted, nor is an additional bed/bath in the main house.

They're offering to sell to me under market at 700k (600k from lender, 100k 'no interest' family loan--terms yet to be defined). While I can qualify for 600k, this is a HUGE investment and I worry it will tie up all of my money. Hypothetically, I grow my net worth 120k upon taking ownership.

They currently rent one room as well as the ADU, so there are three of us on the property. In order to make the numbers start to work, I'd need to rent out the third bedroom and raise all rents (let's say 1k + 900k for the upper house) and 1.6k for the ADU, adding up to 3.5k assuming full tenancy. That may cover PITI but certainly not reserves. My goal is to live for 'free' and ideally cash flow (which I know is really unlikely in the Bay).

My worry list:

- I couldn't cover PITI on my own for long, if it came down to it

- Wildfire smoke beginning to be an ongoing reality in the Bay

- COVID eviction challenges (in the case a tenant loses a job and can no longer pay)

- Old house; potential major repairs coming down the pipes

- Don't love the idea of three people working from home in the main house

- Concerned about flight out of the Bay Area and potential impact on housing market

If I say no to this opportunity, my plan would be to house-hack in Portland, OR with SFR rent by room or duplex.

Thanks in advance for your advice - any and all thoughts welcome!

Andrew Powers · Answer

It sounds like you have a great deal on your hands, well under priced and a 100k family loan. That's awesome! Get answers to the challenges to help make a decision: -Get an inspection done (only a few hundred) -really self analyze yourself, understand your goals and see the big picture. There's pros and cons to every location and deal and circumstance, it's a matter of deciding based on your own goals and risk aversion. Getting answers will help understand if your gut feeling is real or just worry since it may be currently overwhelming. Also if you decide house hacking is not the right move for this house, can you consider a different strategy (ie flip?). -Have multiple exit strategies. Think in extremes... WORST case if something goes wrong, you have 120k in equity. If you need to sell the house, you probably won't lose even if housing market goes down in that area. We don't have the full picture of the situation but hopefully this helps. Good luck with your decision!

Jonathan Pflueger · Answer

@Dawn Albert What are your other options? I 100% agree with @Andrew Powers, you need to really evaluate your goals, expectations, and risk tolerance levels. With the information you have given it sounds like you cannot afford a house in the Bay Area unless it is similar to a deal like this, and believe me there are not a lot of deals like this. When you don't have much you have to sacrifice in order to get ahead. The more ahead you get the less you will need to sacrifice (or sacrifices won't necessarily feel like sacrifices) and more options will open up. All of the reasons you list on your "worry list" can be mitigated and just come with the territory of owning rental properties. Our fear in investing usually comes from a lack of education - with the right education you know your risk tolerance and how to get where you need to be. You gotta start somewhere, don't pass up a potentially good opportunity because it may be inconvenient or hard, not a great way to start or end up. Best of luck.

Ori Skloot · Answer

This seems like a GREAT deal to me. I would whatever you can to make it happen. It's not easy breaking into the Bay Area market and your family is offering you a wonderful opportunity. I would do your due diligence and then go for it if things look good!

Brian Garlington · Answer

Unsaid in your post is how you or anyone else would handle the unpermitted ADU and bedroom.You decide not to buy the place...does this alienate you from your relatives?You buy the place and decide to house hack.... all it takes is one disgruntled tenant to do a public records search and easily finds out you are renting out a non permitted room or ADU and they can make life very difficult.