How to be cash positive using an FHA 203k in LA

[Steve Karp]

I own properties out of state since the cost is considerably less than LA. In fact I rent. So I'm a double agent. :-) I am looking at multi units in LA with the intent of using an FHA 203k to do the deal. What I'm finding here is sales prices barely work when using all cash (ROI, CashOnCash, 2% CAP Rate WooHoo!). I get that LA is more the land of property value appreciation vs monthly cash flow. OK. I'll accept a neutral cash flow in exchange for that appreciation. When I run a sales price through the spreadsheet calculated as an FHA (3.5% down) the numbers are very negative. As a FHA I would occupy one unit for 1 year. That's fine, I accept that. That also gives me the opportunity to rehab a unit while the other is rented out.

What have the LA investors done to handle a negative cash flow that justifies buying at these prices? An example would be a 2 unit bldg., sales price $600k, lets say the front unit is a 3/2 that rents for $2200 and back unit is a 1/1 for $1400.  Factor in property tax, insurance, maintenance, cap ex and vacancy.    I'm more interested in the long term math than the year or two of me occupying a unit so for arguments sake, you can consider that both units are rented at market rate.