FHA Househack Appreciation vs. Out of State Cashflow

[Andrew S.]

Hey guys, 

I live in LA where appreciation is great but cashflow is not so good. I'm open to either house hack in LA (appreciation should be solid) or invest out of state for cashflow. From a financial perspective, how do I determine if I should pursue appreciation in LA first vs. cashflow out of state first? 

Also, would purchasing an out of state rental property eliminate my option to be approved for an FHA loan on a primary residence in LA later on? (in case I later choose to BRRR or househack in LA)?

Some helpful tips on how to think through a strategy and take the first steps would be awesome!

Thank you!

[Eric Carr]

What's up Andrew, I'm a broker/investor in LA and Out Of State

Right now the price to rent ratio in LA isn't the best. You are correct about looking at it from an appreciation standpoint. I think in 10 years, prices today will look like a deal. I've done videos on the subject. 

You can buy OOS now and use an FHA loan later in CA -to answer that question. As long as you Owner Occupy, you can use FHA for approved properties. FHA for a BRRR might be harder to do. FHA has certain requirements to the condition of the property.

You have to make the decision, but here are some things to think about to help you through this.

Know that we are at ATH's in LA. Who knows when things will contract again before taking off higher, or what it will look like. Or if rents will contract with it. No one knows. So you've got to look at your situation. Some questions to ask yourself

Are you buying SFH to live in and rent rooms? You'll receive rental income and tax benefits, gain experience, and possibly see lower entry costs and lower risk. You could sell later and trade up or roll into multi

Buying multi family? If you live in one unit, you'll have the benefits mentioned above - on rented portions, and a larger asset. Make sure you can handle rent fluctuations, vacancies, repairs. Eventually you might move out and rent the entire thing 

If it's purely a rental, you could buy and might break even, but can you handle a 10% rent contraction? Not saying it's going to happen but it's good to build in tolerance or at least know you can handle it if it were to happen. 

If you need to buy using FHA, and owner occupy, your finances are already strained - in the context of such a big purchase - and with a large PI and MI, can you afford to build solid reserves?

I have purchased property that had "negative cash flow" in the past, the timing was right, I believed in the area, and had a plan. It has worked out extremely well. I'm not saying to do that or not do that now, just understand the circumstances and know your goals. This is a long term game for me, decide your strategy. 

Also be aware of RSO. There are around 118,000 "Rent Controlled" buildings in LA. I own some. They can be great, just have a plan. 

Also know that with prices so high, an FHA loan in LA right now is going to result in high principle, high interest, and mortgage insurance - this can make your idea to buy here, now, using FHA, become very expensive. Again who knows if we will see a major drop in prices.

OOS, you may or may not see the appreciation you see in LA, but you could have a solid duplex making you a few hundred bucks each month, and you get the tax benefits. You could go this route to save for a place here and either offset your living costs once you do buy here, or use the cashflow to continue building a portfolio. Is the RIO on OOS worth it to you? Factor in the tax benefits. 

Long term, I think CA wins, but you have to know that you will likely be anywhere from breaking even, not including tax benefits, at this time, to being in the negative if you go FHA at this time.

Short term, I think OOS will produce better returns right off. As far as appreciation goes, depends on where you buy and what happens in the future, but LA would be a safer bet for me

If you find a place in LA that fits your budget, you love it, and the math works, go get it. maybe you'll find a SFH with an ADU - or opportunity to add one. A lot of markets in transition here, and just a matter of time before more are also

DM me if you'd like to talk more. I grew up poor, no financial education, and I've learned to be creative to get things. Legally creative! Making money, saving, and strategizing

There is absolutely a way to do this. I think a lot of people see the math, the numbers, the graphs, whatever, and they say "no way".  Like others, I like to find way to figure out how.