Looking to get into real estate investing

[Sergio Serra]

Hi everybody!

Very excited to join this amazing community. I have been living in Irvine for a year and I am looking to buy a duplex or triplex towards the end of 2020, so that I can house hack (I am currently renting). Since my job gives me relatively good flexibility, I am wondering where in this area (greater Los Angeles) for me it would make the most sense to buy. I believe Irvine is not as good as LA, since my goals are the following ones:

- YoY appreciation.

- Positive monthly cash flow.  

- Not looking for a strict Cash on Cash return, but anything above 7-8% would be ideal.

Specifically, I would like to loan and put down 3.5% by living in one of the units for a year and then possibly replicate. I believe my buying power would be around $700-750K for this first purchase (meaning, I would like to put down a max of $30K). I am still in the process to engage with the lender, but wanted to understand your opinion on whether it makes more sense for me to look into LA or stick with greater LA. As I mentioned, I am now in Irvine, but would like to move to LA. However, given my above goals I am wondering if you believe any other area around to be worth more. Please, keep in mind I am single and can move around.

Finally, I would love to get any suggestion above the best books/readings to get me started with this super interesting investing journey.

Thanks,

Sergio

[Jon Schwartz]

Originally posted by @Sergio Serra:

Hi everybody!

Very excited to join this amazing community. I have been living in Irvine for a year and I am looking to buy a duplex or triplex towards the end of 2020, so that I can house hack (I am currently renting). Since my job gives me relatively good flexibility, I am wondering where in this area (greater Los Angeles) for me it would make the most sense to buy. I believe Irvine is not as good as LA, since my goals are the following ones:

- YoY appreciation.

- Positive monthly cash flow.  

- Not looking for a strict Cash on Cash return, but anything above 7-8% would be ideal.

Specifically, I would like to loan and put down 3.5% by living in one of the units for a year and then possibly replicate. I believe my buying power would be around $700-750K for this first purchase (meaning, I would like to put down a max of $30K). I am still in the process to engage with the lender, but wanted to understand your opinion on whether it makes more sense for me to look into LA or stick with greater LA. As I mentioned, I am now in Irvine, but would like to move to LA. However, given my above goals I am wondering if you believe any other area around to be worth more. Please, keep in mind I am single and can move around.

Finally, I would love to get any suggestion above the best books/readings to get me started with this super interesting investing journey.

Thanks,

Sergio

Sergio,

Welcome to the playground! Let me commend you on your motivation to househack!

I'm househacking a duplex just below Hollywood (with my beautiful wife and daughter, so I don't have the flexibility you have) and also studying to become an agent so that I can help others househack for a living. I'd love to help you get started on your journey!

Couple thoughts on your post:

First thing's first: since you'll be living in this investment, location is really important. I'd sacrifice a little of the gains if it means living where I want to live. In terms of LA vs. Irvine, I'd decide where you want to live, then find the investment in that market. I'm sure both markets are tough, but a good deal can be found. I'm very familiar with LA and less familiar with Irvine, but what you want to consider when comparing the two markets are: price-to-rent ratio of multifamilies, appreciation prospects for the market and submarket you choose, and how rent control laws will affect your investment. Does Irvine have rent control?

I think it's smart that you prioritize appreciation over cash-on-cash return. LA is an appreciation market. You won't get as much cashflow, but when you househack a multifamily, you're in control of a large, appreciating asset in an international city. It's a different proposition than, say, buying a duplex in Cleveland -- and it's a much better builder of wealth.

Buying with a small, 3.5% down payment will also eat into your cashflow. But, you'll be benefitting from appreciation on 100% of the asset. That's the magic of leverage.

As far as your 7-8% cash-on-cash expectation, I don't think you'll find that in a househack in LA or Irvine. What's most likely in these markets is that a househack will pay for a large chunk of the mortgage, but not all of it. You then weight that against your current cost of living. For example, let's say you rent $1200/month now to rent a one-bedroom. Perhaps you find a triplex of one-bedrooms to househack, and when you subtract your income from the mortgage, you end up paying $1500/month. By one metric, your cost of living has just gone up $300/month. However, your triplex tenants are now paying down the principal on the loan, probably to the tune of $1500-2000/month. AND, your building is appreciating by hundreds or thousands of dollars every month. So while you're out-of-pocket has gone up, your net worth is growing faster every month.

Does all of this make sense?

Best,

Jon