San Diego House Hack vs. Out Of State Investing

[Dillon C Morgan]

Hello BP! I hope everyone is doing well & staying healthy this fine Monday night!

I am writing this post to hopefully get some tips and opinions on my situation. Also, it might help someone in the same boat, somewhere down the line. 


I have been super interested in real estate for a few years now but it was never the right time. This year, I finally feel like I am in a place financially to make something happen. My goal is to buy some type of real estate in 2021. 

For the past 6-8 months or so, my goal for 2021 was to do a house hack here in San Diego. I have been keeping my eye on the multi-family market here, and was hoping to get into a triplex/fourplex for around 900k-1.1M using my FHA. Well, as I started to talking to lenders I became aware of the self sufficiency rule, and pretty much every 3-4 unit property is a no-go now. So, that leaves me with only one option - house hack a duplex, which are going for around $850k, which is hard for me to stomach considering you can find a 3-4 unit for $100-150k more. (anyone know a way around the rule? Beside putting more money down?)

Fast forward to a few weeks ago, (after finding the news about duplex as the only option) I started going down the rabbit hole - out of state investing in Midwest. I spent hours researching LLCs, finding property managers, and cash flow vs. appreciation. 


It seems like everyone I talk to has a different point of view. Some people are on the cash flow side - "you can go play craps in Vegas for much less work if you want to gamble". And some people are on the appreciation side. Anyway, I write all this to get peoples point of view and maybe some tips from people have been in the same boat? (I know their is probably not a right or wrong answer and it depends on the situation, but any help/opinions are much appreciated)


Here is the pros/cons list of each that I have compiled: (feel free to check my work haha)

SD House Hack Pros:
- FHA low money down (not that big of a loss even if the value goes down)
- can manage myself
- can later refinance out of PMI once equity is built
 
SD House Hack Cons:
- rents will most likely not cover the PITI, when moving out
- not living for free, still paying monthly (but at least mortgage and not rent)
- California landlord laws (covid)
- makes getting financing for out of state rentals harder if done



Out of State Rentals Pros:
- immediate cash flow, can potentially get enough units to support mortgage in CA
- market less volatile 
- better laws

Out of State Rentals Cons:
- a lot more work, need to start a whole new business




Some bonus questions to get your brain firing:
1. Anyway around the self sufficiency rule? (seller carry?)
2. Is something like BRRR strategy possible in San Diego?
3. Is it worth looking at SFH's and maybe adding an ADU?




Thank in advance for any help!

[Dan H.]

Some comments

• Brrrr is definitely possible in San Diego but it is very challenging to extract the full investment.  
  ADUs typically add a value substantially less than the hands off costs of building the ADU. This implies that a hands off ADU addition typically start with a negative position. The initial cash flow goes to recovering this initial negative position. A hands off ADU addition is typically one of the worse real estate investments.
  relying on property appreciation in the short term is risky (akin to gambling), but long term San Diego historically has been as sure as the sun rising.  Research the statistics on 10 year holds.   What you will see when is that the appreciation in every 10 years window varies from modest to outstanding with a lot more being outstanding than modest.  
  there is a difference between initial cash flow and actual cash flow.  Actual cash flow is the cash flow over the hold period. Historically San Diego has outstanding actual cash flow in tha absence of extracting value.  
  you should be able to find rents on a duplex that easily cover PITI.
• If you go off market, you can find quads that meet sustainability. We just bought a quad at investor (non OO) LTV that the primary unit covers PITI. off market take more effort to find, but realizing the possibilities that option can provide may make it worth pursuing.
  
• The RE Market is an efficient market.  This implies that the price is based on many variables but the two primary variables are expected return and the expected risk.  The low appreciating markets are such because they typically have expected low return and/or high risk.  
  

Good luck