Starting Out
Market News & Data
General Info
Real Estate Strategies
Landlording & Rental Properties
Real Estate Professionals
Financial, Tax, & Legal
Real Estate Classifieds
Reviews & Feedback
Updated over 3 years ago, 06/07/2021
Purchase A Home in CA or Invest Out-of-State?!
I'm currently paying 3k/month for a one bedroom apartment in the Bay Area. I'm seeking advice on what would be a better investment option/smarter financial decision: to buy a home in the Bay Area, or to continue renting and use that money to buy investment properties out of state. Purchasing a home here would require use of nearly all of my saved capital for a down payment, and would increase my rent to about 5-6k. The train of thought with this option is that I am currently spending 3k/month on rent in someone else's pocket, money which could be going towards an asset that belongs to me with the benefit of principal pay down and appreciation, and I could still invest OOS it would just take a longer time (2-3years) to save the capital again. The other option would be to continue renting and to begin investing OOS this year, and with the money I have saved I could in fact purchase multiple properties in a different state (which I would intend to BRRR/hold as rental properties). Any advice/thoughts/perspectives are appreciated!
- Realtor
- Oakland, CA and a Real Estate Investor with Multi-Family Units and a Self Storage Facility
- 2,389
- Votes |
- 2,350
- Posts
Why not do both?
Hope that helps and good luck!
Wanted to share my story with you since it's very applicable.
2016 I bought a duplex in southern California, house hacked for 440k. Rents brought in 2200$ while I lived there, and mortgage was 2800$. When I moved out rents are 3200$, and mortgage is still the same (I can refinance and bring it down to 1800$ now, get rid of PMI). It was appraised last year at 605k (went up 150k+ in those 4 years)
from 2016-2020 I bought 4 rental properties out of state. 3 in different cities in Ohio, 1 in Kansas city, MO. They all cash-flow a couple hundred after all expenses and I refinanced them all recently to 15 year loans. They appraised 10-30k above what I got them (~100k range).
2021 I bought a 5bd/5ba in Hayward (bay area) for 880k. I don't have enough for 20% down, so just used FHA loan 3.5%, paying killer PMI puts me at 4.7k/month mortgage including taxes/insurance etc. I rent 1bd/1ba w/kitchen for 1500$, rent 1bd/1ba w/kitchen for 1000$ (old lady on social security, can definitely bump up rent), the garage is being converted and will be done by March 2021 and I expect to rent for minimum 1500$. I might live in the converted garage and rent out the "main house" 3bd/2ba w/ kitchen, living room, family room for 2500$+.
Let's say I live in the newly converted garage: 2500$ (main house) + 1500$ (1bd/1ba w/kitchen) + 1000$ (1bd/1ba w/ kitchen, old lady on social security). = 5000$ - 4700$ (mortgage payment) = +300$ cash flow/month to live in the bay area. The previous tenants have been grandfathered in, and I'm confident I could get higher rents. The main house estimate is also conservative as the place has been deep-cleaned and freshly painted (going on right now).
If I want to live in the main house master bedroom I can get more cash flow since I would get more from renting the garage to someone else.
It took me several months to find this deal, but they're out there. I closed last month, during the midst of the pandemic, in the super-competitive bay area with a not-very competitive FHA loan.
#1 Market Trends & Data Contributor
Derrick Are they all living on the same space or having different entry ?
Originally posted by @Carlos Ptriawan:
Derrick Are they all living on the same space or having different entry ?
All have separate entry. 3bd/2ba main house with entry on left side. 1bd/1ba w/ own separate kitchen on right side (bottom), 1bd/1ba w/own separate kitchen right side (upstairs). Garage entrance on right side (before both 1bd/1ba units). Large security gate on each right and left side prior to their access for own private entrances
The advantage of buying a property to live in vs an out-of-state rental (for someone who lives in an expensive market like the Bay Area) is that you may be able to put only 3.5% down on a property of higher value, rent out the bedrooms/in-law unit, other side of a duplex, etc. to help cover a good chunk of your mortgage if not 100% of it (depending on many factors). This means, you could possibly save thousands/month vs buying your first property out of state and making only +/- $200/month. Keep in mind that investment properties require 20%-25% down payment.
@Derrick Dill - that's a great purchase and even better plan! That's the way to do it in bay area (if one is able to house hack). Congratulations!!
#1 Market Trends & Data Contributor
Yea I found sometimes Hayward present unique opportunity / setup like that, but only in that area/San Leandro. Not sure why.
As for someone that mention to buy owner occupied duplex, I run your number, with price per unit of $550K and 3.5% down Your mortgage plus PMI is between $3K-$4K. You can rent this unit maximum at 2.7K. You still have negative cash flow. If you just buy a decent house/condo in the east or north for $500-$600k, your mortgage is only $1.8-2.5K without people living next to you.
The only way OO duplex may work, according to my calculation, is only if the default cap rate is equal to 7%.
Hi @Krystin Aversa,
I went through the same questioning. Bought a SFH (rental) in Indianapolis. Then bought a property (residence) in CA.
I still considered myself a newbie, but those experiences brought me some clarity, as well as some challenges that I don't see discussed very often.
The first thing that everyone mentions is "house hack", but there seems to be a lot of confusion on the meaning of that. If you buy a multi unit property, let say 2 units for the example. You can live in one and rent the other. You can use the rent from the second as income in your DTI for any future loan. If you buy a single unit, with several bedrooms and bathrooms and you rent them, you can't include any of those rents in your income for the DTI, because it's your primary residence and it's not possible. I still don't understand it but that's how it is.
Same if you keep renting the place you live in, with roommates / co tenants / sub tenants etc... anytime you will go to a lender they will include the total rent on the lease in the Debt of your DTI, no matter how many people are on the lease or how many people are actually sharing this monthly rent. Example if you are 3 roommates on a lease for a 3 bedroom, total rent of $4,500, you each pay $1,500, debt added in the calculation of your DTI is $4,500, not $1500. Because if they default, you have to pay for it. Or some logic similar to that.
Same if you buy your primary residence with someone. It doesn't matter, the debt in your DTI will include the full PITI, not half of it.
Common Bay Area / SF tech compensations often include base salary + stocks grants vesting quarterly / yearly. But only base salary is used as income. Stocks are just ignored plain and simple. Even if it's reported on your W2. And even for base salary you will likely need 2 to 3 years minimum of history, in the same company or at least similar job profile / company.
Income from a rental property will be acknowledged by most lenders only once it shows up on at least 2 consecutive tax returns. And even then they will only use 60 to 80% of it as income. But the mortgage you have on it is counted fully in the debt from day one of course.
Rehab cost on your primary residence is probably tax deductible (gonna learn that soon). On a rental property, it's not (at least it wasn't for me).
Having a ton of equity in your home in CA or in a rental could let you borrow against it with an HELOC. Except not when the economy is not good, like now with Covid... plenty of lenders stopped their HELOC programs...
https://www.chase.com/personal...
https://www.wellsfargo.com/equ...
etc.
Buying an apartment (not a SFH) in SF would very likely be under a TIC (Tenants In Common) agreement, not a condo. While it might not seem like a very different situation than a condo, the reality is only a couple of banks would lend money for those properties. Meaning way higher interest rates and conditions. And 10-15% at least. And only for your primary residence.
When you buy your place (aka primary residence), if not TIC, there are plenty of very low down payment options but for investment properties it's easily 25% down or more (was asked 35% down minimum by some lenders). Interest rates are also usually significantly higher.
If you're a US resident but not a US citizen there is a whole other layer of complications on top of all that but it seems like you were born here so that should not be a problem for you.
Learned all that the hard way :)
So if that can help
Nick
#1 Market Trends & Data Contributor
House hack like Derrick mentioned definitely a possibility. In fact, I know few Airbnb arbitrage that generates income by reselling a unit. Back in 2000, Few a landlords rent several houses with 4-5 bedroom houses for $2K and renting out each room for $800-$1000/mo. So it's common in Bay Area.
However OO duplex is not so common.
With the rising price in Bay Area, even tech engineers also feeling the pressure. Especially if you have small kids so they've to find a good school district and neighborhood. The average standard salary is $125K but with this salary, if only one parent is working, you could only afford a C class not-so-nice house in South Bay, although you may get a condo/decent B homes in North Bay/East bay. To really work comfortably, both parents need to work and produce at least $250K to have good DTI to afford a nice $1.2-$1.4 million house in A class neighborhood.
There's now a trend that citizen is moving out, especially retirees, they move either OOS or to new developed towns like Brentwood and Mt House. Or even modesto/manteca.
One trick that I found to "hedge" againts Bay Area craziness is to just keep buying house. If not, the wage growth will not be catching up with future expenses.
Regarding rental income: The fanny mae regulation is they recognized income rent from the appraisal assestment with 0.75 multipler.
@Derrick Dill
Hi Derrick, thank you for sharing your experience! That sounds like an amazing house hack, and it’s very encouraging to hear your success. Were these units set up as you described prior to purchase, or did you have to modify the home so that each unit had its own kitchen and entrance?
@Obie Gutierrez
Hi Obie, thanks for your input! Also, regarding the FHA loan, my understanding is that once you achieve 22% equity, you can refinance into a conventional loan and no longer pay MIP. We are currently looking at our options regarding the FHA vs conventional loan routes, and I do have to say, it appears 5% conventional loans have the advantage of PMI automatically falling off once 22% equity is achieved (without having to refinance), as well as the fact that there is no up-front premium (1.75% of the loan amount for FHA loans, which can be substantial, particularly when looking at properties in the Bay Area). However, the monthly MIP for FHA loans is .85% of the loan amount, while the monthly PMI for conventional loans can be up to 2.25% of the loan. A lot to consider, and a lot of numbers to run!
Originally posted by @Krystin Aversa:
@Obie Gutierrez
Hi Obie, thanks for your input! Also, regarding the FHA loan, my understanding is that once you achieve 22% equity, you can refinance into a conventional loan and no longer pay MIP. We are currently looking at our options regarding the FHA vs conventional loan routes, and I do have to say, it appears 5% conventional loans have the advantage of PMI automatically falling off once 22% equity is achieved (without having to refinance), as well as the fact that there is no up-front premium (1.75% of the loan amount for FHA loans, which can be substantial, particularly when looking at properties in the Bay Area). However, the monthly MIP for FHA loans is .85% of the loan amount, while the monthly PMI for conventional loans can be up to 2.25% of the loan. A lot to consider, and a lot of numbers to run!
Thanks for the information! I wasn't aware of the upfront premium for the FHA on top of the MIP, so it looks like I have a lot more research to do!
@Krystin Aversa there is a lot of good information and experience in the answers you received. Personally, I am buy and hold guy in the Bay Area, but I understand the pull of OOS investing. I am not going to touch on these topics directly as I think it all has been covered. What I would suggest is that you look at the economic atmosphere from a macro perspective. We are in very unique period of time. Interest rates are historically very low and many economist believe that inflation is coming. What does that mean? Historically investments in real assets are a hedge against inflation. Meaning, the value of real investments go up as inflation goes up. Additionally, interest rates traditionally rise with inflation.
Therefore, if you believe that printing money will lead to inflation and that the Fed cannot keep interest rates low forever, then logic would say that interest rates will go up and the price of properties will rise. The dynamics get a little more complicated for larger rental properties, but in your case of a personal residence, or even a duplex/triplex I think these assumptions hold true.
Of course, if you believe that unemployment will stay high, but all of the printed money will create inflation we could potentially be going into a stagflation scenario. Yes, stagflation traditionally is created by a supply side shock. However, the effects of covid could be creating supply issues in ways we don't understand yet. As an example the semiconductor supply issue is now hitting auto manufacturers, but that could easily stretch out to other consumer electronics. Who knows where else we could start to see supply issues. Obviously we see that with covid vaccines... does that lead to supply issues for other drugs because manufacturing has been shifted? IDK
Either way,I would just look for a property in a good location in the Bay Area. I have to believe that interest rates are f'ing low. If they go down in a few years, you can always refi down. If they go up you are safe. Don't get something in the hood, hoping that the area will get better. If you decide to go back to the East Coast in 5 to 10 years, you should be in a good position to sell.
Originally posted by @Krystin Aversa:
@Derrick Dill
Hi Derrick, thank you for sharing your experience! That sounds like an amazing house hack, and it’s very encouraging to hear your success. Were these units set up as you described prior to purchase, or did you have to modify the home so that each unit had its own kitchen and entrance?
The units were set-up like this prior to my purchase. FHA actually wouldn't allow the units to be separated, so I had to put a door to connect the units since it's technically single-family.
That's encouraging to hear! I'm currently looking to purchase my first Multi-family and use it as a house hack. Sometimes seeing the high prices of the homes in my area can be discouraging. But I know there are good deals out there, just got to find the one that will work for me! Thank you for sharing.