Should I use VA to house hack in San Diego?

Question

Hello BP,

I’ve been a long time reader but have been hesitant to post. I am in the navy and have recently moved to San Diego. After working with Navy federal credit union, I was able to get approved for ~600k(1-2 unit SFR), 30yr foxed,4.5%interest, 0%down, and 2.2% VA funding fee which is wrapped into the loan.

I want to take advantage of the current low interest rate and house hack in San Diego but it’s been nearly imposible to find a break even cashflow deal. My goal to purchase a duplex, rent out one unit and live in the other. I’ve analyzed dozens of properties and only a few even come close to break even. (Note: the breakeven cashflow is based on both units being rented out)

My questions are, should I even be looking for breakeven cashflow deals?  Maybe im too conservative when running my analysis and overlooking good opportunities? What would you do in my situation? Thank you ahead of time for the inputs.

Meng

Chace Fraser · Answer

Hey @Meng Long , welcome to BP! This is a question that is asked all the time and here's my take:

If you are using a low down payment, it's not really realistic to expect to be cash flow positive. When an investor is looking at being cash flow positive, they are typically putting down 20-25%. If you are in a high demand metro area, it's simply not realistic to expect to be cash flow positive if you are putting down 0-10%.

Now if that is all the capital you have, that is what it is....is it better to keep renting than to buy? Typically it is better to buy. Better to build your own equity through the debt pay down, enjoy the tax benefits of ownership, and garner the equity of an appreciating asset. You just can't expect to cash flow on an initial purchase with a low down payment. Now with time and rent growth, what could be a negative cash flow property might very well become a cash flow king, but that takes patience.

Another way to increase cash flow would be renting out rooms in the unit you live in, either Airbnb or longer term. And as Coach Carson puts it "even if your house hack reduced your payment from $1,200 to $600 per month, would that not be a win? I think so"

Good luck!

Lanny K. · Answer

Hi Meng,Wise choice to post your scenario here to solicit expert advise!  Given your primary commitment is to the Navy, you should carefully consider this investment and be 100% sure you buy it right.  To that end, given the possibility of getting orders within the next few years and owning an investment property in a down market.  In that scenario your investment could be at risk if you aren't able to make it cashflow after paying for all expenses including property management.

As a former US Marine, active real estate investor, licensed CA agent and property manager I'm able to speak your language and can help you avoid extremely costly mistakes.  Feel free to PM me if you'd like to discuss this further.

At the very least, just remember a real estate investment is only worth what it rents for.

Yours in Service,Lanny

Ellis Hammond · Answer

@Meng Long think about it this way when looking at deals...

if you are willing to pay the rest of the mortgage, considering you are buying a duplex, then most likely the renter after you will also be willing to pay that rent. But also take into consideration though that if you aren't living in San Diego three years from now then you who will manage the property? that will significantly cut into your cash flow if you have to hire PM.

I still think the VA loan is something to take advantage of but signs do show that the SD market is slowing down and SD is a cyclical market historically, meaning what goes up will come down. ultimately, if you are buying for the long run and plan to keep this place for 20+ years then don't worry about cycles, just buy smart.

Feel free to send me properties you are looking at and Id be happy to help you run some #'s or connect you to a agent i trust to help you get into the right property.

Nick Kravchuk · Answer

@Meng Long I would recommend buying a single family home that needs some cosmetic work to live in as your primary residence, using your VA loan.  Live in it for a year to meet the primary residence rule, make the cosmetic repairs to force equity, then look into refinancing out of your VA loan into a conventional loan, so you can use your VA loan again.  I work with a lot of VA clients, and I myself have used this method to accumulate properties here in San Diego. Please feel free to PM and I can tell you the areas where I feel have the most ROI using this method and potential for appreciation in San Diego.

Michinori Kaneko · Answer

don't forget the tax benefit and the appreciation.  I assume you can still take the full interest expense as a deduction to your income, so effectively you're saving money by not paying taxes (you're not collecting rent for yourself, but you are getting tax deductions for it!) and also the appreciation (hopefully) should be nice in the SD area.  Remember a 1% appreciation in your property is actually multiple times more return for you depending on how much you put down. If you only put down 25%, that's 4% return on investment.  If you put down 10%, then it's 10% ROI for the same 1% appreciation on your property!

Ellis Hammond · Answer

@Meng Long @Chace Fraser hit it on the head.

Some follow up questions to better help you though...

When you say cash flow, what are you looking for? Bc technically you will have to live in one of the units. What is max “rent” you are willing to pay yourself?

You won’t be able to find a duplex for one unit to cover the mortgage but could possibly have a scenario where you pay yourself an affordable rent.

What part of town or parts of town could you live in?

Do you have capital to put down more than 0%? Would that increase your purchase price?

David Wong · Answer

Yes!!!

Nicole A. · Answer

I think when it's a property that you're living in yourself, you can look at it with different parameters. Even if you're not cash-flowing, you are going to have a significant decrease in your mortgage! Someone is going to be paying a good chunk of your mortgage (indirectly since they pay you, not the lender obviously). That's awesome.

Now, looking ahead into the future if you don't plan to live there after one-year, those numbers might cause issues. But if you'll be living there several years, it could a great thing.

Just be sure that you can afford the mortgage on your own even if you have no tenants. What a bank will approve you for and what is best for your monthly budget are two very different things. You don't want to be house poor!

Meng Long · Answer

Ellis,

The max rent I'm willing to pay is $2000 /month but the cash flow calculation is based on renting out both units. I don't really have a restriction on the location but I'd prefer a location less than 1hr from the Coronado base. I have about 50k worth of capital and the bank is offering a rate buy down from 4.5% to 3.875% for 3.25 points. Ultimately, I am looking for a deal that is cash flow neutral in case the navy moves me elsewhere.

Should I use VA to house hack in San Diego?

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