5-Year Bay Area Real Estate Investing Strategy for a 24 year Old

[Michael Hyun]

Hello Bigger Pockets! 

I live in the Bay Area and I'm looking to move out of my parent's place soon. I've saved about 2 years of wages, roughly 120k, and for my first step into real estate investing, I've been thinking about house hacking in the Bay Area. Before starting this discussion, I want to share my main goal after 20 hypothetical years of REI:

1. Have a net income of $10,000 per month from rental properties.

With the context of this goal in mind, I'm thinking about starting off my REI journey by house hacking in the Bay Area. I've been looking for a SFR around the 750k-950k range, 3b+/2ba+, and at least 1400sqft+. The reason I'm looking for a 1400sqft+ SFR is because I am looking for SFRs that have an "extra room" that I can convert into an extra bedroom. The perfect property would have this feature as well as a garage conversion opportunity. I know at this price range, I'm not going to find anything in Cupertino or Sunnyvale, but maybe someplace like Newark or East San Jose.

If I bought a home at 900k (the mortgage would be something like $4500), and was able to "add a bedroom", then I could rent 3 bedrooms out for roughly $1200 each (rough estimate). My total rent would be $4500-3600 = $900 per month. I hope to live there roughly two/three years, at which time I feel like I'd most likely get married and buy another home with my spouse, and rent out my room to someone else, leaving me with both the home I first purchased (which would now break-even or even possibly cashflow) and the house that I live in with my spouse (most likely not cashflowing). 

Yes, this is not a cashflowing property, this is a capital gains play. If things go well, my first home purchase could increase in equity by $100k in 5 years (how long would this take if I spent my initial 120k on OOS rental properties?..), which I can EITHER (a) 1031 exchange into actual cashflowing properties somewhere else. (somewhere that actually cashflows). (b) Take out a HELOC to put a downpayment on another bay area home along with the money that I saved in the three years after moving out of the first home.

Worst case scenario, my property doesn't increase in value, but at least it's not negatively cashflowing. Now before anyone says that a capital gains play is a roll of the dice, I'd say I'm young and willing to take the risk, especially after seeing the bay area growth trend in the past 50 years.

So that is my 5-year plan as of now, I'd love to get some feedback or start a conversation around this strategy, to see what other people's 5 year strategies look like. Please let me know what you think!@Account Closed

[Johnny Hoang]

@Michael Hyun

Hey Michael,

Fellow San Jose house hacker myself!

I bought a property close to the Evergreen area for 950K so I wouldn’t count yourself out of San Jose just yet!

My PITI works out to be right around 5500 with a 5% down and 3.8% interest. ( Keep in mind this was pre-covid when the jumbos / first and second loan options were a lot more favorable)

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My house was originally a 4 bed 3 bath and then I converted the garage into a 1 bed 1 bath and also converted my living room into a separate unit as well into another 1 bed 1 bath.

I rent out my garage conversion for $1650, my living room conversion for 1500, then the 3 bedroom inside my house for 800 each and I live in the master.

My total rents are 5450 but after my tax write offs for interest payments and in home office tax deduction etc, I get a little cash flow. Then I move out next year to purchase another owner occupied loan, and rent out my master for 800-900 then that’s when I can see a nice little return. I’ve done this twice in San Jose and plan to do it every 2 years or so to help me build my Bay Area portfolio in the Bay Area with low cash outlay / owner occupied loans.

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