House Hack Markets in California

[Cole Britting]

Where are the best markets to house hack in California?

I've heard people saying there are a lot of great places in Cali for house hacking that aren't necessarily as expensive as the normal LA, San Francisco, San Diego, etc. I don't need to be guaranteed in finding a place that is cash flow positive, but I'd like my tenants to pay most of my PITI if that is possible. I also am fine renting out rooms in a SFR, so I am not set on multifamily.

Any suggestions?

[Dan H.]

In my opinion you are not concentrating on the appropriate financials.  San Fran, LA, OC (I added OC - great city with much better roads than LA), San Diego are among the most desirable locations to live in the US (it all depends on what you value, but many people value what those cities offer).  It costs a lot to live in these fine locations.  My market is San Diego.  We have lower wages compared to housing price than those other fine cities.  The poor wage versus housing price ratio in San Diego is referred to as the "Sunshine Tax".

If you can live in any of those cities at a discount, then you have done great.  

It is my opinion your goal should be to live there with a complete initial cost less than what you would be charged to rent an equivalent unit.  By complete cost, I am including vacancy, cap ex, maintenance, miscellaneous charges minus rent and equity pay down. 

Now you are living in a great location at a discount.  You may be thinking not much return, but those 4 cities have outstanding historical appreciation.  The rent and properties have gone up over the long term for decades.  

The rent appreciation implies that each year the amount you pay to live there versus a rented unit continues to decrease.  What you would pay to rent a unit is likely to be increasing (more savings) and what you collect in rent should be increasing (more money coming in).  More savings and more money coming in; not a bad arrangement.

The historical property appreciation of those cities is outstanding. If you purchase with a 96.5% LTV FHA loan, the average return from appreciation (not including closing costs) has been over 100% for that first year. That is the average return (all these markets have experienced some depreciation cycles in the last 50 years but they have been fairly short so realize average does not imply every year will be average - there will be better and there will be worse years).

House hacking is a good strategy in most markets.   But in the cities that you listed it could be the only way to live in those fine cities and own RE in those cities.  Those cities have historically produced outstanding return for RE investments.  

House hacking may present the best option to ever own property in those fine cities.  If those cities are where you want to live, house hacking is ideal. 

Good luck