House Hack in LA or STR in MKE?

[Steve B.]

My wife and I are currently considering two different strategies and would like to get some insight from people who have experience. Neither of us have ever purchase real estate.

1. We have enough to make a small down payment on a SFH in Los Angeles. Target home has to have a detached garage, 3 bedrooms (min), 1.5 bath (min). Once purchased the plan is to convert a bed / bath into a mother in law suite that would go up as STR. Assuming moderate success on AirBnB, that would get us to about what we are paying in rent, maybe a little better off (at least we are paying a mortgage and not rent at this point). Second part of the plan is to convert the garage under the new ADU laws in Los Angeles that streamline conversion of a SFH to a duplex. At that point we would have an additional short term or a long term rental unit. Fully developed, we could be close to covering the entire mortgage within 2 years of purchase and padding our savings to look for additional opportunities.

2. We could use the money to purchase an out of state duplex in MKE. We chose MKE for practical reasons and the market for STR seems tenable. Practically, my wife's family lives there and we could call on them in an emergency. Marketwise, I've got an agent in the area who says he has clients bringing in between $25 - 30K gross annually with STR duplexes (prices in MKE on AirBnB look to support the claim).

There are pros and cons to each, here's what I thought of (what didn't we think of?):

1. Pros: We get to manage the day to day which saves on property management and probably makes a better experience for STR guests. - Significant tax savings of owning a primary residence with a sizable mortgage. - Year round tenancy vs STR market with harsh winter - No more rent!

1. Cons: Is LA in a crazy RE bubble? - Max leverage means a small decline in LA housing prices wipes out equity. - Lack of diversification, for the cost of option 1. we could probably get 2 - 3 investment properties in less expensive markets. - Earthquakes - If STR doesn't work, we're on the hook for a big monthly payment. - VERY hard to find a house that fits...

2. Pros: significantly lower monthly obligation, mortgage is 1/4 -1/3 that of option 1. - No earthquakes - Own a place close to wife's family. - Could significantly add to our monthly savings quickly - Option to convert to long term rental and still make 1.5 -2% of purchase price. - Easier to find a house that fits within the numbers.

2. Cons: Not there to manage STR's (I give this con a lot of weight) - Winter... i hate winter, plus rental rates go down. - Buying a house from across the country is slightly uncomfortable for me (mostly irrational fear). - Having to front all of the upgrades at time of purchase, including furniture, is expensive (spending a lot of money on stuff that wouldn't be necessary for a long term rental).

1. Neighborhoods include: Jefferson Park, Leimert Part, West Adams, el sereno

2. Neighborhoods include: Washington Heights, River West, Walkers Point,

If you read this whole post you are awesome. If you put some thought into it and provide advice you are very awesome.

Thanks!