Need help from my SoCal investors

[Vincent Ludegna]

Hello BP squad!

I'm looking to do a house hack here in Southern California's LA area this year, but I was hoping I could pick your brains first. Just to give you an idea of what I'm trying to do, I'd ideally like to purchase a duplex (at the least), live in one unit while I rent out the other. I plan to purchase this property on a FHA loan and my budget is about $350k on the low end, and $450 on the high end. I've listed a few questions below that have by rattling around in my head. Any advice you could provide would be greatly appreciated!

1. Do you recommend any specific cities near LA to buy a small multi-family property where the numbers make sense?

2. What is a realistic cash-on-cash return and CAP rate number for SoCal's market? Should I even be concerned about the CAP rate for such a small property?

3. Is it realistic to get a $100 - $200 in cash flow in this area without any major rehabs?

[Daniel Gutierrez]

Hi Vincent. You're head is in the right place but you might be looking in the wrong area. Finding any duplex in LA for between $350 and $450K will likely be very difficult. Moreover, being that you are going to house hack, you're going to want to live in an area that both works for you and appeals to you. There are very few area which are generally thought as desirable in LA that you'll be able to find anything in that price range. 

You'll see most duplexes trading at a cap between 3.5 and 5% but you can find a 6 Cap if you get lucky. Your best bet for getting a great Cap and cash-flowing is finding a value-add property in a area that is in the process of gentrification and put in some sweat equity to grow the value and justify those higher rents so you can achieve the cash flow you're looking for.   

Lastly, remember that with an FHA loan (lower down payment) it will be harder to cash flow since you're going to have a higher monthly mortgage payment + mortgage insurance. You're cash-on-cash is likely to be higher is you do a FHA (low down payment) but you'll need to make sure the financials work on a monthly and annual basis. Don't forget to give yourself a buffer in case unexpected expenses come up.