LA Real Estate Investing Strategy Discussion

[Mylen Tansingco]

Hi Everyone!  Here's the research I gathered during quarantine to potentially apply to an investment property.  Have you done something similar?  Is there anything else to look out for?   Is this strategy incorrect?  It'll be my first investment property.  I am very new to this.  But excited to start!

Objective: Purchase a duplex in Los Angeles/Greater LA. Property ideally has room for additional ADU build.

Lifestyle check: I plan to live on the property and rent out the other units. Ideally place the new ADU on airbnb.

Step 1: Apply for the FHA Loan for 3.5% down.

Step 2: Get MCC Tax Credit in place before closing. 

Step 3: Do light remodels to increase property value. Add an ADU to turn duplex into a triplex.

Step 4: Reappraise property.

Step 5: Ideally property value has increased due to additional ADU, remodeling and appreciation (considering it's LA).

Step 6: Turn FHA into a conventional loan in order to get 20% in home equity and get rid of the PMI.

Step 7: Continue to live in one unit, rent out another, airbnb the new ADU.

Other notes:

-I own 1 business that is WFM so I plan to do a lot of tax write offs on the property.

-If a separate property is under my husbands name (not mine), am I still able to apply for an FHA loan?

-I'm also finding it incredibly difficult to find a multifamily unit in LA that provides at least a 10% cash-on-cash return.  Should I stop trying to find this in LA and stick to the above strategy?

Thanks for your feedback!  

[Jon Schwartz]

@Mylen Tansingco, I love your strategy and story! I'm househacking a duplex now; I have a C Corp and my wife has an LLC. We didn't go FHA because we weren't eligible, but househacking a duplex is absolutely the way to go. In fact, I'm becoming an agent in order to help homebuyers realize the value of buying a duplex. I can't represent you in a purchase, but I would looooove to help you go over the numbers and find a great property. It'll be practice for me for the future.

It looks like @Nabil Suleiman answered your questions about FHA loans.

The MCC Tax Credit has very low income and purchase ceilings because it's intended for low- and moderate-income families. Additionally, it's eligible for single-family residences, not two- through four-units. More information is here: https://www.calhfa.ca.gov/homeownership/programs/archive/2019/20190501/mcc-05-01.pdf

I did some math to figure out how much appreciation you'd need to force to refinance into a conventional loan with 80% LTV. For this to happen, you'd need the property to appraise for about 21% more than the original purchase price. So if you bought a $800K duplex with 3.5% down, you'd need to raise the value of the property to $965K to have 20% equity and qualify for that conventional loan. Does that make sense?

A light remodel isn't going to increase the value by 21%. Will adding an ADU? It's really tough to say because ADUs don't appraise reliably. There aren't enough comps for appraisers to rely on yet, and some banks are still slow to come around to the value of ADUs.

I'm wondering if a better strategy isn't to use your ADU money for down payment and buy a duplex that maximizes rental income from the other unit. For example, let's say you and your husband want to live in a 2-bed, 1-bath. Maybe the smarter play is to find a duplex with a 2/1 on one side and a 3/2 or larger on the other side. Renting out the larger unit will cover the PMI and then some! Or maybe you should be shopping for a small triplex...

In fact, I just did another math problem: let's say you spend your whole pot of money on a 3.5% down payment. You don't build an ADU. Assuming you get a loan at 4% (which you will or better) and the building appreciates at 4% per year (which it will in LA -- or better!), you'll naturally reach 20% equity in the building in about 3 years and a month. Then you can refinance out of the PMI. I think the better play is to max out the FHA down payment and buy a triplex or fourplex for more rental income.

As Nabil alluded to, you won't get a 10% cash-on-cash on any property in Los Angeles. You can find cashflowing duplexes, triplexes, and fourplexes (I've found them), but they're in pretty rough neighborhoods. The goal with househacking a duplex is to drastically reduce your monthly payment while you live there, then enjoy great cashflow when you move out (and market rents are grown considerably). Plus, instead of selling one house to buy the next, you can refinance the duplex to buy the next!

Anyway, I'd love to continue figuring this out with you. Feel free to message me if you'd like to discuss specific numbers, etc. I love this stuff!