west san jose duplex. breakeven cash flow, but worth it?

Question

recently sold our first home. and considering now investing in multi home somewhere around south bay area. we have found one duplex in west san jose area and we didn't buy, but definitely considered. it was sold for 1.05K at the end. 2 units. in case there's something similar deal, I can share my spreadsheet. but important numbers are like..

downpayment 500K

loan 550K

interest rate: 4%

rental $4700

total expenses including tax - $1955

after all, cash flow is -$115.

we have 1 mil in cash, and 800K loan would be doable. how would you invest with that money?

1. condo in palo alto?

2. 3 bed house in sunnyvale, mountain view, los gatos, etc?

3. 2 duplex in san jose, and another rental for our family where school is good. And let 2 duplex build equity by themselves?

4. 1 duplex in san jose for rental, and 1 house at san jose cambrian area for our family?

5. anything else?

We were getting convinced that we will buy one duplex at least, but after we running those numbers, I would like to question and hear you REI gurus from this area. Thank you!

Account Closed · Answer

you know the market is crazy when you have $1M in cash and are considering living in one side of a duplex

Arlen Chou · Answer

@Jin Kim I have 2 four plexes in Mountain View and a lite industrial building in Milpitas and 4 doors in Oakland. I am not clear if you already have kids or if you are planning to have kids. If you are young and DINK's (double income no kids), I would look to get in the way of BART and look for a small multi-family in Milpitas or San Jose. That is based upon the assumption your jobs are in the South Bay or On the Pen. If you are more adventurous, I would look for a duplex or triplex in Oakland. If you already have kids and you have $1.8m available, I would look for my primary home in a good school district: Palo Alto, Los Altos, Mountain View, Cupertino, etc. Keep in mind nice move in ready homes in good school districts are still being sold on a cash bases in the Bay Area. You could live outside of a nice district and go the private route, but those schools are well into the tens of thousands of dollars per year. You can still get a 3/2 in Milpitas for under a million...Good hunting to you,Arlen

Arlen Chou · Answer

@Jin Kim I think @Tony Moll answered your question about interest rates for owner occupied vs investment rates. You would definitely save some money on the interest rate front with living in the property. You also get a substantial tax credit if you live in the building vs investment property. The only disadvantage in an owner occupied four plex and down is the living near your tenants. That can be mitigated if you get a property manager to run interference for you.From a cash flow perspective you obviously get no cash flow from buying a SFR and living in it. You have 7 figures in cash with a strong W2, you should be able to find a small multifamily in a nice neighborhood and live in 1 unit. You will get the most interest and tax benefits from this simple strategy.Are you and your wife open to a duplex or triplex rehab project that could take a few months? You could buy a fixer, continue to live where you are now and then move into it after it is done. Obviously there are dangers with this type of play. However, I personally believe forced appreciation is the way to go...If your are SERIOUSLY interested in something like this PM me. I am not an agent and I don't have any "skin in the game", but there are a few properties out there that could work for somebody that has cash and time.-Arlen

Jin Kim · Answer

Hi Arlen,Thanks for your comment earlier. How about staying in Mt view rental house and buying a multi home somewhere in san jose, and save some for another either investment or for our own home later. What are the disadvantages when it's owner occupant multi home? How much more tax and how much more mortgage rate? My spreadsheet (buying a house vs buying a MFH) shows me that (rental + own 1 multi home) is still better than (1 SFR) in cash flow. Thank you!

Assaf Furman · Answer

@Jin Kim I thought about suggesting to buy a SFR off-market that's been rezoned for multi, but running the numbers I realized the costs to convert SFR to MFR are too high, and it could take a long time to do it.

Jin Kim · Answer

@Assaf Furman you mean empty lots at multi unit zone? building a new multi home? Sorry if I misunderstood

Assaf Furman · Answer

@Jin Kim Gotcha. I'd look for a fourplex with a 3/2 main unit. If I wanted to be more creative, I'd look for a residential multi-unit zoned areas and try to sift through it for lots which currently have anything other than a multi unit on it. I believe agents have the access for this kind of information.

Ed LeGrand · Answer

How about $700k towards an out of state 6% to 8% cap rate and then $300k towards an upscale home in Morgan Hill (or even Sacramento)?

Jin Kim · Answer

@Assaf Furman thank you. We are still working on spreadsheet between owner occupant and investment. And also still not 100% sure between just 1 single family home for our family and including investment properties in the portfolio. I also would like to hear personal preference of other people even if that doesn't apply to our family. I'd appreciate any idea only from investment perspective as well. Thank you BP community!

Assaf Furman · Answer

@Jin KimAs you can see from the comments above there is no one answer, especially when your own dwelling preferences are involved. You began with the question of how to invest a certain amount and continued with asking about living in that investment property since you're also considering moving with your family (or at least it appears that way).In my opinion you should begin with separating the two: Where to live and how to invest. Figure out your goals for each, what are the ramifications for each scenario, and you may end up realizing you can achieve those goals by living in your property. Then again, you may not and that's OK, you'll just have to find an investment property (or vehicle) in addition to your home.